ESR Group’s 2022 Earnings Hit by Foreign Currency Headwinds

ESR Group’s 01821 2022 profit of USD 574 million disappointed with currency headwinds shaving 14% off earnings. Our main concern for ESR is that the value of its assets under management, or AUM, have declined and growth is likely slower for the next year with our base-case view now looking for interest rates to remain high through much of 2023.

We lower our fair value estimate to HKD 24.50 per share from HKD 28.50 per share. Having said that, we think that the negatives have been priced in, with a 36% decline in the group’s share price over the past six months. We expect earnings growth to stay relatively slow at 6.6% in 2023, but rebound 31.5% in 2024 on a more conducive business environment.

According to Realfin, global unlisted real estate fundraising fell 26% annually to USD 182 billion in 2022. This is 4.3% lower than the prepandemic five-year average, underscoring the near-term headwinds faced by real estate fund managers. In Asia-Pacific where ESR Group’s business is concentrated, capital raised fell to a five-year low of USD 30 billion. Although the group managed to buck the trend to raise 31% more capital compared with the previous year, we think the fund-raising environment for 2023 will become more challenging under the backdrop of increasing economic uncertainty and elevated interest rates.

Management highlighted that their business model was different from alternative asset manager peer, Blackstone, whose Blackstone Real Estate Income Trust suffered from increased redemptions. The group’s fund investors are generally made up of institutional investors who have longer investment horizons and are committed to the respective fund life (typically seven years or more). In our view, early exits by fund investors are unlikely due to the significant monetary cost involved. They will also have to do so via the secondary market, which does not affect ESR Group as it does not need to sell assets from the funds it manages to meet redemption requests.