The property investment arm of German insurer Allianz is on a major expansion drive in Asia, with plans to double its allocation to the region and extend its lending business to institutional investors there.
In an interview with AsianInvestor, Rushabh Desai, the Asia-Pacific chief executive of Allianz Real Estate, outlined the firm’s strategy in the face of falling real estate yields (see graph below), amid high investment demand for property and real assets generally in the region.
“Over the next three to four years it would make sense for us to move from a 5% to a 10% allocation to Asia Pacific,” Desai said.
That would mean adding at least €2 billion in regional investments, assuming Allianz RE’s global portfolio continues to grow. Last year, the firm made €1.1 billion of new equity commitments in Asia, he noted.
Allianz RE had €56 billion ($69 billion) in assets as of the end of 2017, comprising €40 billion of investments made on behalf of its parent insurer and a €16 billion lending book. Asia Pacific contributed €1.8 billion of that in real estate equity terms, accounting for 4.5% of the global equity investment total.
Desai, who joined Allianz RE in September 2016, quadrupled the firm’s Asia headcount to eight from two last year — all based in Singapore —with a view to building its regional exposure.
This year Allianz RE aims to localise transaction support and risk-management activities. “Asia is not a homogeneous region, so you need experts on the ground in the local markets," Desai added.
The firm's plans reflect a broader investment trend: transaction volumes for income-producing Asia-Pacific properties rose by 10% to $161.4 billion last year, even as overall global transaction volumes remained flat at $877.2 billion, according to Real Capital Analytics. Investment into development sites in Asia grew even faster, by 41% to $644.9 billion.
Western institutional investors are motivated to raise their exposure to Asian property — and to real assets in general — in order to achieve higher yields and greater diversification in their portfolios.
Global insurance companies have an additional incentive: to match local assets to the local liabilities of their growing Asian businesses.
Rob Johnson, managing director on the Asia-Pacific real estate team at JP Morgan Asset Management, told AsianInvestor: “A number of European insurers are accessing [Asian property assets] as they seek comparable growth with their existing books of business in the region.”
LENDING BUSINESS PLANS
Allianz RE does not yet offer property debt financing in Asia, Desai said, but it is considering setting up a lending franchise in the region, expanding its existing business from Europe and the US. The firm operates chiefly in the long-tenor, fixed-rate space, offering up to 60% loan-to-value financing to institutional investors against quality assets, he noted.
Australia would be an obvious choice for expanding such a business, Desai added, since it is one of the region’s most institutionalised markets and there is a gap in the market for non-bank lending. As such, it offers attractive risk-adjusted, long-tenor lending opportunities, he said.
“However, we have to be careful here,” Desai cautioned. “Commercial real estate valuations are at an all-time high, although backed by a supply-demand imbalance, especially in Sydney and Melbourne."
Even so, extending Allianz RE's financing business to Australia would be just the start of a broader, region-wide push, he said. “In the next 12-18 months we would aim to have a conclusive way ahead [as to our approach to expanding the lending business to Asia Pacific]. After Australia, we might want to explore other markets in the region.”
ASIA ALLOCATION APPROACH
Allianz RE started investing capital in Asia Pacific by allocating to commingled funds — mainly pan-regional strategies but also global funds with Asian exposure.
More recently the firm has been looking more at co-investments and direct investments, said Desai. “They provide a little more control over the assets. We can underwrite the assets and understand the risks better.”
He cited the deal his firm did with Singaporean conglomerate Keppel Corporation last year. In August Allianz RE finalised a co-investment with Keppel to acquire Shanghai's Hongkou Soho, an office and retail development, for $525 million.
Allianz RE last year also started investing in country-specific and sector funds. For example, it set up a platform with Indian developer Shapoorji Pallonji to buy local office assets and invested in TH Real Estate’s outlet mall fund in China and ESR’s logistics fund in Japan.
“While we will continue to do co-investments,” Desai said, “we are now looking more and more at direct strategies like clubs and joint ventures with like-minded investors.” Having more control over investments is particularly important when valuations are high, as they are now, he added.