Asia Pacific asset owners have far lower overall allocations to property than their global peers and their own targets, but are keen to expand aggressively in 2021 after five years of strong returns, according to a new property survey released on Friday (December 11).

The eighth annual Institutional Real Estate Allocations Monitor survey noted that Asia Pacific institutions report being both the most under-invested in real estate and having the most assertive plans to raise their target allocation plans. Investors from the region said their average allocation to real estate was 400 basis points (bp) lower (at 7.5%) than their target allocation of 11.5% this year, and are raising this target another 60bp to 12.1% for 2021.

That planned increase compares to a 40bp rise among European, Middle East and African (Emea) institutions and 10bp for Americas-based ones. Global investors are forecasting to further raise their target real estate allocation by 30bp over the next 12 months.

Institutions' target allocation (by location of respondent)

The annual study was conducted by Hodes Weill & Associates and Cornell University’s Baker Program. It was based on responses from 212 institutional investors with aggregate assets under management of $12.6 trillion and real estate holdings totalling about $1.3 trillion. Ten percent of respondents hailed from Asia Pacific.
 
Regional investor respondents have greatly shifted their property appetite to higher return, opportunistic investment strategies to take advantage of potential price dislocations as a result of the Covid-19 pandemic. All-told, 73% Asia Pacific investors said they were focusing on opportunistic investments, a big increase on the 40% recorded in 2019.  

That amount sits just behind the 75% of Americas-based institutions and well ahead of the 62% of Emea-based investors looking to do so. That compares to respective totals of 65% and 51% in 2019.

However, these Asia Pacific institutions are increasingly seeking such opportunities within the region rather than elsewhere. The study noted that this region’s institutions were the least open-minded when it comes to investing outside of their domestic region, with their willingness to invest into strategies elsewhere dropping by 10%.

North America remains the most appealing overall destination for global investor allocations, followed by continental Europe.

PROPERTY APPEAL

The overall attraction of investors to real estate continues to rise and returns relatively compelling, despite a dip. 

Asia Pacific institutions experienced a 77 basis points (bp) drop in their returns to 8.3% in 2019. However, this was better than their target return for the year of 7.6%.

For 2020 Asia Pacific institutions have a target return of 7.9%, a level that lies well below the 9.2% average annual return they have enjoyed over the past five years. 

Overall investment returns for all investors fell 30bp to 8.5% in 2019, better than institutions' average target return of 8.3%.

The latest survey also included a “Conviction Index”, which measures institutions’ view of real estate as an investment opportunity from a risk-return standpoint, increased from 5.7 to 5.9.

The Conviction Index for Asia Pacific institutions in Asia-Pacific rose by 0.7 points to 5.5, the widest margin of the three geographic areas. “This is notable, as conviction in this region had decreased in 2019, thought to be the result of on-going geopolitical risk and the strengthening of the US dollar,” noted the report on the study.

It added that the rise in 2020 “may be explained by Asia Pacific investors’ continued rebalancing of portfolios from bonds to alternatives, in addition to relatively stable real estate performance in the region, despite Covid-19”.

Overall, Emea institutions had the most confidence in the asset class, reporting a Conviction Index of 6.1, while those of Americas investors rose from 5.8 to 5.9.

The growing importance of environmental, social and governance (ESG) considerations has also continued to penetration the real estate asset class, according to the survey. It noted that 47% of global respondents said they have a formal ESG policy, up 14% since Hodes Weill began asking respondents about ESG in 2015.

The study noted that the interest in ESG was strongest in Emea, where 63% of institutions said ESG plays a role in their investment decisions in property, while 50% of Asia Pacific respondents and a mere 22% of Americas respondents said the same. The total for Asia Pacific institutions was a rise on the 45% recorded in 2019, but lower than the 57% total of 2018.