Asian institutions eye offshore residential real estate
Asian pension funds and insurance companies are showing increasing interest in residential real estate overseas, particularly in New York and London, according to Brookfield Financial.
While institutions in this region have been investing in US and European commercial property for some time, the residential market is a new area for them, says the New York-based investment banking and commercial property brokerage firm.
“What we see is a growing appetite for both [Asian] institutional investors and developers to invest outside of Asia,” says Richard Brown, who heads the firm’s investment banking division for Asia out of Hong Kong.
The reason for the uptick in interest is that the assets of Asian pensions and insurance companies are growing fast. "There’s really no magic to it; their funds are growing at such a rate they need to invest the money outside of the region in order to meet their liabilities,” Brown says.
“With increasing wealth in most Asian markets, there is still very low penetration in life insurance, let alone in pension schemes. My expectation is the amounts that Asian pension funds and insurance companies will need to invest will increase exponentially, and [they in turn] will invest in real estate globally, not just locally, which will dramatically impact the global property markets.”
For the moment, Asian institutions remain “enamoured with office and retail sectors”, a trend that has been the case for years, with investors preferring office buildings in both London and New York, although Brown notes they have recently expanded their shopping list to include properties in Chicago, Houston, Los Angeles, San Francisco and Washington, DC.
Brookfield doesn’t expect Asian investors to begin acquiring offshore residential property immediately. The firm meets dozens of Asian sovereign wealth funds, pensions and insurers, and according to Eric Anton, managing partner of Brookfield Financial in New York, investors remain “hesitant towards making a commitment to the residential sector”.
Yet Brown argues that it’s only a matter of time until Asian insurers and pension funds, namely in China, Korea, Malaysia and Singapore, begin to put their capital to work in residential real estate abroad.
He points to China Investment Corporation (CIC), the Government of Singapore Investment Corporation (GIC) and Korea Investment Corporation (KIC) – which oversee a combined $791.3 billion – that have all separately announced plans to increase allocations to global real estate.
Gao Xiqing, vice-chairman and president of the CIC, joked in April that the sovereign wealth fund had its sights set on the White House, while GIC recently invested in the UK's Unite Group, a student housing developer.
The Chinese insurance market alone is a force to be reckoned with, after the mainland's insurance regulator passed a motion last year to allow Chinese insurers to invest in property abroad. A similar rule passed permitting mainland insurers to invest up to 10% of their AUM into private equity funds, double the limit set in 2010. Although still relatively small, Chinese national insurance firms are estimated to have about $1.2 trillion in assets.
“Residential has only just crept up on their [Chinese insurers’] menu,” Brown says. “They’re gearing up to [invest]; we haven’t seen much activity yet. But they will be a major factor, because clearly their wallet is very large and growing rapidly. Conceivably, their entering the market could have a significant impact.”
Foreign investment into Manhattan real estate totalled $3.7 billion in the first half of 2013, more than half of the $7 billion invested in New York last year.
Asian institutional money in New York totalled $1.4 billion in the first half of the year, compared with $502 million for all of 2012, while Asians invested $4.5 billion in London real estate in the same period, compared with $6 billion last year.
Brookfield Financial is owned by Brookfield Asset Management, which has $183 billion in AUM and invests in real estate, renewable power and infrastructure.