Asian property holds growing appeal for Abu Dhabi investment Authority (Adia), with China and India especially compelling markets, noted Tom Arnold, global head of real estate at the huge sovereign wealth fund.

Adia has $62 billion of its estimated $828 billion in property, according to a June report by Indosuez Wealth Management, and its exposure to emerging markets seems set to rise further. 

“We have always had a strong focus on emerging markets, and Asia in particular, but this has been increasing in recent years,” said Arnold, speaking to AsianInvestor last month. A group of senior team members visited China and India in recent months to meet existing and prospective partners, he added.

“The demographics, rapid development of capital markets and growing middle class are highly compelling [in China and India],” Arnold said. “We are very positive about these two markets.” 

Tom Arnold

From 40-odd employees in 2009, when most of the fund’s real estate investments were externally managed, Arnold’s team now boasts more than 200 professionals. 

Arnold declined to give any specifics on the real estate portfolio size, allocation or growth rate.

Adia's growing focus on Asian property comes alongside rising interest among fund managers and other big asset owners, such as Canadian public pension funds, and reflects the growing maturity of the region's real estate markets.

REGIONAL STRATEGY

Arnold, who took over from Bill Schwab on June 1, has noted that Adia places a lot of emphasis on partnerships when investing in real estate globally. In January this year for instance, the fund teamed up with India’s Housing Development Finance Corporation for a $500 million investment platform to build affordable housing across India.

As for Greater China, Adia opened an office in Hong Kong in 2016, a move widely seen as aimed at enhancing its access to the region. 

In China, the focus remains on logistics and selective opportunities in the residential space.

Arnold noted that the country is a unique combination of markets, ranging from highly developed, major tier-one cities to regional centres that are much less developed in respect of their real estate sectors.

The Greater Bay development in South China, for instance, comprises major cities such as Guangzhou and Shenzhen, as well as Hong Kong and Macau. The region is host to several major infrastructure projects aimed at improving interconnectivity between its major hubs.

Guangzhou

For Adia, that may mean investing more in retail assets such as shopping malls in one country, while focusing on logistics in another to support the supply chain for fast-growing cities, he added.

“One of the value creation opportunities for us is to enter a less mature market and work with local partners to understand what it needs to become a more developed market,” Arnold noted. “This means looking closely at the priorities of the local government and, where possible, seeking ways to align with those.”

Meanwhile, Adia’s overall exposure to emerging markets has been rising in recent years, said Arnold. “We are very active investors in a wide range of countries from Asia to Latin America, including important markets like Brazil, Chile and Mexico.”

Of course, the Middle East-based fund is also very active in North America, which remains the core component of a globally diversified portfolio for large institutional investors, including Adia. “It is, after all, the world’s largest and deepest real estate market, and that isn’t going to change,” noted Arnold.

UK STILL ON RADAR

Adia also continues to be interested in the UK, despite all the noise generated by its vote to leave the European Union.

“Brexit has created uncertainty but uncertainty is not always a bad thing. From a long-term perspective, we are very positive about London and the opportunities in the UK more broadly,” Arnold said.

The UK is due to leave the European Union on March 29, 2019, but an agreement on how this will happen is proving elusive. As it stands, the transition period for the departure to take place would run until December 31, 2020. But British prime minister Theresa May suggested this week that the government could consider extending the transition period to the end of 2021.

The uncertainty swirling around Brexit has taken a toll on residential property prices in the UK, which logged their lowest annual growth rate for five years in July, according to the country’s Office of National Statistics.

Arnold said Adia’s long-term perspective allowed it to be a counter-cyclical investor, with ambiguity in markets offering points of entry. “We are also very comfortable with complexity, because we have the experience internally to understand and manage it effectively,” he added.

As for the broad approach of the fund towards property investing, Arnold said the overarching focus has always been multi-generational. “When we invest, we look at not just what the world looks like today but also how it may look in the future.”

Adia’s longer-term investment horizon makes the SWF a valuable source of patient capital for companies undertaking very long-term strategic initiatives. “The projects we invest in are designed to accommodate, as much as possible, how people will live, commute and work in the future,” Arnold said.