Question & Answer: Frank Khoo

The global head for Asia of AXA Real Estate Investment Managers is half-way through leading the French insurer’s four-fund launch strategy in Asia. Last month, Khoo signed a memorandum of understanding with Japan’s Sumitomo Trust & Banking to launch a Tokyo office fund. He explained the tie-up to Jonathan Brasse. PERE magazine, PERE 2009.

PERE: What is the background behind the tie-up with Sumitomo Trust & Banking?
Frank Khoo:  Right from the start there was an alignment of interest. We wanted to invest in small to medium-sized offices, so did they and they were thinking of starting a fund already. We spoke with several big names, but we chose them because culturally we are similar in terms of governance, compliance and risk management.

PERE: Why do you feel this tie-up will work?
FK: This is a case of the sum of the whole being greater than the sum of the parts. When we first sat down together we realised we bring very different things to the table. We bring corporate governance, fund management expertise and a distribution network outside of Japan. They bring a great domestic name, a distribution network in Japan, asset management ability but perhaps most importantly, deal sourcing ability – Japan is a difficult market to penetrate because it is hard to access good deals. Trust banks like Sumitomo can do that – they have ¥207 billion (€1.5 billion; $2.3 billion) in real estate assets across Japan on their books to give you a picture of their existing exposure.

PERE: The office vacancy level of Tokyo is increasing. Does this worry you?
FK:  It is increasing but it is about sourcing the right asset. A lot of people set up funds focusing on Grade A offices. The concept sounds great but these buildings are mainly controlled by the big local players in Japan, like Mitsubishi Real Estate. From the execution point of view it is difficult to fulfil that strategy. Our target asset size has less volatility. True, rents don’t increase as much in the good times, but they don’t fall by much during the bad times either. Also tenants that take small to medium-sized offices tend to be more domestic-focused in their business. The credit rating of Grade A tenants is often better but another issue is you have a high concentration of risk. Finding a replacement tenant if they need to leave is extremely difficult. It’s easier with smaller space.

PERE: How do these fund plans fit with your plans for a vehicle with China’s Ping An?
FK:  Both are part of a two-part process – the deal and the vision. This is about more than just us trying to create “blockbuster” funds. This is about signing with partners we can build a long term relationship with. One of the reasons we tied up with Ping An in China, for example, was because on 1 October, Chinese insurance companies became able to invest their life policy holders’ money into real estate. It is key for us to be able to unlock that retail money.

PERE: With plans for China and Japan underway, which of your other two target countries comes next?
FK: Hopefully by the end of the year we will have something to announce in Australia. You can see how fast we have got moving in Asia in such a short period of time.