Asia property funds of funds struggle to perform

Real estate funds of funds targeting Asia Pacific fared significantly less well than those focused on other markets last year, even as capital continued to pour into Asian property and local rents continued to rise. 

It is not entirely clear why this is the case, though property investment specialists have some ideas. In any case, global real estate FoFs are looking more popular than their Asia-Pacific peers. 

Data from the Asian Association for Investors in Non-Listed Real Estate Vehicles (Anrev) and European Association for Investors in Non-Listed Real Estate Vehicles (Inrev), showed property funds of funds (FoFs) delivered average returns of 6.7% globally in 2018.

Though slightly down on the 8.4% achieved in 2017, FoFs continued to deliver positive returns regardless of style, structure, strategy or size, they said in a report. Globally, it was also the sixth consecutive year of positive performance. 

That said, Asia-Pacific FoF vehicles returned just 1.3% last year after a 12.8% gain in 2017. And that's in spite of the $160 billion that was invested in the region's property markets last year and supported capital values, according to property services firm JLL, and the strong leasing markets that continue to underpin rental growth.

Amélie Delaunay, director of research and professional standards at Anrev, told AsianInvestor that the reason for this volatility in Asian performance was varied and hard to pin down.

Currency fluctuations were one factor; another was the relative scarcity of FoF vehicles just for the Asia-Pacific region.

A London-based property fund specialist at a large asset manager felt one explanation for the lag in returns could be low yields and high fund costs, which would result in low net performance in spite of rental growth. 

Another issue could be a small sample size of strategies, the Asia investment head at a North American pension fund told AsianInvestor. “There are maybe only a handful of Asian real estate FoFs,” he said. “And Inrev/Anrev may have aggregated 2018 performance across different vintage years.”

Still, one cannot be certain about the reasons for the lag in returns without knowing how the different funds weight and select the assets in their investment strategies, said Henry Chin, head of research for Asia Pacific, Europe, the Middle East and Africa at property services firm CBRE.

Inrev/Anrev could not provide more data to clarify the situation before AsianInvestor published this article.

GLOBAL STRATEGIES SET PACE

In contrast to the poor performance of Asia FoFs, global property FoF strategies have enjoyed relatively stable, high single-digit returns each year, with the exception of 2013 to 2015.

Two reasons for this could be the wider geographical diversification that global strategies generally enjoy, and their increased scale (see figure below).

“In terms of achieving diversification, funds of funds with a global strategy are the most appealing for investors, followed by regional strategies such as those with a European or Asia-Pacific strategy,” Delaunay said. 

In light of the lumpy nature of real estate, this promise of instant diversification can be especially attractive as more institutional investors seek to venture out from their home markets in search of better risk-adjusted returns.

Investments into global real estate FoFs hit a record $9.5 billion last year, taking total assets under management in these strategies to $31.5 billion (see chart below).

Yet that represents just 1.3% of the gross asset value of all non-listed real estate vehicles worldwide, according to a joint separate survey conducted by Anrev and Inrev together with US-focused National Council of Real Estate Investment Fiduciaries.

Still, some one in five institutional investors surveyed in the latest annual Anrev/Inrev Funds of Funds Study said they plan to increase or maintain their allocations to funds of funds over the next two years.

The very biggest investors typically prefer a more direct approach to real estate. Sovereign wealth funds, for instance, are rapidly ditching the traditional limited partner approach of investing in funds for property exposure.

BUILDING TRACTION IN ASIA

There are exceptions though. Japan’s huge Government Pension Investment Fund awarded a property FoF mandate to CBRE Global Investment Partners last September for its first dedicated allocation to international real estate.

And demand for separate-account multi-manager mandates is on the rise among Asian instutional investors, Kang Puay Ju, head of real estate Asia Pacific and global head of real estate multi-manager strategies at Aberdeen Standard Investments, said. She told AsianInvestor that the fund house won just such a global mandate last year worth around $1 billion.

The downside to FoF vehicles, though, is the extra layer of fees they come with, though Kang said there is good reason for the higher cost.

“FoF or real estate multi-manager products often require a lot of screening and sourcing resources, due diligence resources and, of course, monitoring resources,” she added. “It’s hard to source and structure top-quality investments and execute effective risk management if the level of resourcing is inadequate.”