Asian investors have increased allocations to European commercial real estate this year, pointing to strong performance in the logistics sector and the region’s impressive ESG credentials.
Total Asian investment into European real estate in the three months to September was $2.9 billion, an increase of 18% on the same quarter in 2019, according to Real Capital Analytics. Total global investment into European real estate came to €64.4 billion, an increase of 21%.
“There are signs of a recovery broadly in property both in activity and sentiment in Europe from both a leasing and investment perspective,” Kevin Wan Lum, deputy chief investment officer (CIO) at LGIAsuper, which allocates to European real estate via external managers, told AsianInvestor, pointing to improving rates of commercial property rent collection.
One distinguishing feature of Asian allocations to Europe is their concentration on commercial sectors. Offices and industrial combined made up 86% of total investments to European property in Q3, compared with 63% for global investors as a whole, according to RCA.
“European logistics (industrial) continues to be firm from a valuation perspective [while] trading at historically high prices. Sentiment towards offices is turning in spite of occupancy remaining low as staff returning to offices has been slower to materialise, particularly in London,” said Wan Lum. The majority of the fund’s property allocations in Europe are to industrial, office, hotel and leisure and mixed use.
Troy Rieck, CIO at LGIAsuper and Energy Super, said that property development activities were likely to form a bigger share of fund returns going forward, as the fund searches for assets that should benefit in a world of low bond yields.
However, Mary Power, principal consultant and head of property at Jana Investment Advisors in Melbourne, told AsianInvestor that it was too early to call a return to European real estate by Australian superannuation funds.
“At this stage it is a bit premature given the recent combination of industry consolidation, with funds merging and getting bigger. Domestic bias is high given currency and tax leakage,” she said. She also pointed to regulator APRA’s (Australian Prudential Regulation Authority) new requirement that returns from property investments be benchmarked against a domestic index, the MSCI/Mercer Australia Core Wholesale Monthly Property Fund Index.
Investors have pointed to the strong ESG performance of the European property sector to explain its growing appeal.
Fiona Mann, responsible for ESG at LGIAsuper, told AsianInvestor that in Europe regulatory guidelines and requirements stretch back longer than in other regions. “Europe has frameworks and policy decisions that have been in place for the last 10 years,” she said. She pointed to the transparency benefits provided by policy support and the ease with which investors can select managers on the basis of clearly defined ESG performance.
In Europe, the group of listed entities reporting ESG performance in 2021 to GRESB, a global independent ESG benchmarking association in the real estate and infrastructure sectors, grew by 20% while the non-listed group grew by 25%.
“Growth [in global reporting] has been driven mainly by Europe, which saw massive growth for the second year in a row and now accounts for nearly half of the entire benchmark,” GRESB noted in its 2021 report. In the last year, assets for which information was reported for the association’s annual benchmark survey, collectively increased by $900 billion, bringing the total GRESB universe to $5.7 trillion of AUM, across 117,000 individual assets.
Mann pointed to GRESB rankings, which play a central role in LGIA super’s manager selection process. “Ranking managers on external ratings is relatively easy, but it certainly is not where we stop due diligence,” she said.
Michael Kelly, OMERS’ chief legal and corporate affairs officer, who chairs its sustainable investing committee told AsianInvestor that the plan was making good progress on reducing the emissions of its European portfolio.
By contrast some US assets contribute more to the total emissions profile of the portfolio. However, he noted that the measure evaluates emissions per unit of revenue, meaning that falls in revenue from assets – for example in rental income decline in real estate – can increase this measurement, but obscure the progress in reducing actual carbon emissions.
Kelly said that environmental efficiency standards around buildings were instrumental to the investment case, with Oxford Properties – OMERS property investment arm - prioritising the use of the US-mandated LEED (Leadership in Energy and Environmental Design) system, which claims to be the most widely used green building rating system in the world.
“We have been building some carbon neutral buildings in Canada,” Kelly said. He said that acquiring the office properties with a small emissions footprint was also an important way to ensure the emission profile of the property portfolio improved, noting that this also supported the investment case. “Tenants want those buildings,” he said.
OMERS’ latest portfolio-wide carbon emissions audit, completed in March, identified specific emissions details across its real estate portfolio and established a five-year emissions reduction goal. The real estate portfolio is managed by Oxford Properties; the five-year goal also applies to the plan’s three other asset classes - capital markets, infrastructure and private equity.