Merrill braves crisis with $2.6 billion Asia property fund

HONG KONG (Reuters) - Merrill Lynch MER.N has raised a $2.65 billion fund to invest in Asian real estate, tapping global investors despite global financial turmoil and falling property markets.

Merrill's fund is among the biggest to be raised for Asia property this year, though slightly smaller than a $3 billion fund unveiled by LaSalle Investment Management in August and a $3.9 billion fund raised by MGPA, a firm partly owned by Macquarie Bank (MQG.AX).

Due to equities plummeting recently, some investors are suffering the "denominator effect" -- where percentage allocations to other asset classes, such as property, tend to rise too high. That means some investors are expected to sell property, putting more assets in the market.

Merrill Lynch's Asian Real Estate Opportunity Fund would mainly invest in Japan, China, India and South Korea, but would also consider Southeast Asia and Australia, the bank, which is being taken over by Bank of America (BAC.N), said in a statement on Tuesday.

"We see exceptional opportunities in Asian real estate over the medium and longer term," said Tim Grady, head of Asia commercial real estate at Merrill Lynch.

Investors in the fund included pension funds, endowments, foundations and private individuals from North America, Europe and the Middle East.

Property fund managers are eager to invest in Asia now because they believe developers, especially in China and India, will offer plum deals because they are starved of funding.

But nervous investors are getting picky. They prefer funds that reduce risks by being active in several markets, and which are run by managers with strong track records, who are least likely to go out of business.

"They're really focusing on the strength of the sponsors," said an executive at a global property fund manager, who asked not to be identified.

"Last year there seemed a lot of interest in country-specific funds, but we're seeing people shy away from that."

PLANS GO AHEAD

Citigroup (C.N) is raising a multi-billion dollar follow-up to a $1.3 billion Asia fund, which it has been spending mostly in China and India.

And JPMorgan (JPM.N) plans to invest more than $1 billion in Asian property over the next three years.

"Our strategy hasn't changed," said Bryan Southergill, the head for Asia property at JPMorgan's special opportunities group.

"We've been anticipating a correction across asset prices and rents in most Asian markets," he said. "Secondly, we invest JPMorgan's own capital and our balance sheet remains very strong."

Bargain Chinese property projects will probably be up for grabs in coming months as developers scramble to survive falling home sales and a funding crunch.

When Beijing upped the ante in a fight against property speculation at the end of last year by ruling that buyers of second homes must pay 40 percent in equity, apartment sales and prices slid in the southern cities of Guangzhou and Shenzhen.

Developers, already squeezed by a land appreciation tax and a clampdown on bank lending, then found that capital market turmoil closed off share and debt issuance.

Many property firms have slashed prices by as much as 30 percent and are looking for foreign partners to complete projects.

The situation is similar in India, where a property boom fizzled into a price drop of a third this year in some cities, and analysts expect the same in 2009.

(Editing by Anne Marie Roantree and Anshuman Daga)