Asian pensions and sovereign wealth funds’ allocations to real assets increased sharply last year, with a strong push into property forecast for this year, notes Principal Global Investors.
According to the US asset manager's annual global survey of 700 institutional investors with a combined $27 trillion in AUM, 43% of global pensions are invested in real assets now, from 5% a decade ago, and this is forecast to surge to 55% by the end of this year.
Although the survey did not break out regional numbers, Andrea Muller, Asia CEO of Principal Global Investors, says that the shift towards real assets, including real estate and infrastructure, is significant amongst Asian pensions, sovereign wealth funds and government pensions.
“The most interesting phenomenon is the shift into real estate, and we’re clearly seeing this from Asian investors,” Muller tells AsianInvestor.
Malaysia’s Employees Provident Fund (EPF) saw its income from real estate and infrastructure shoot up over 200% to RM227.19 million ($72.5 million) in the first quarter this year, a period when it allocated $1.3 billion to real estate, equities and bonds.
Other notable property investors are EPF in Thailand, the Hong Kong Monetary Authority, and dozens of Korean, Chinese and Singaporean pension funds.
Similarly, wealthy individuals in Asia are also buying property, mostly in Europe and the US. “Asian investors view real estate assets in the West as undervalued, there have been significant investments in projects in the US and Europe,” says Muller, pointing to investment in commercial real estate, debt, Reits and commercial mortgage-backed securities.
“Real estate will remain attractive [for Asian institutions],” Muller says, noting that the third round of quantitative easing in the US “seems to have caused a real snap back in the housing market”. However, it's unclear what would happen if the US Fed “stops subsidising bond-buying”.
“Is there enough growth so that housing market [rebound in the US] will continue? Or as interest rates rise, will the housing market slow? There is some uncertainty there,” she adds. “But we think real assets will continue to be attractive going forward.”
The survey also outlined how risk appetite amongst Asian retail investors continues to evolve. US and European pension funds lost significant amounts of cash in the last financial crisis and have since taken a more cautious approach, leading to an uptick in demand for income-focused funds, the survey finds.
However, Asian pension plans face a different situation. The growing size of local pensions and sovereign wealth funds means they can't continue to invest in their home countries.
“They’re being forced to diversify and forced to go into riskier assets,” Muller says. In addition to real estate, Asian investors are eying global equities, emerging market equities, emerging market government bonds and alternative credit strategies.
But scepticism over emerging markets is growing. Two years ago, investors piled into developing nations, but now the more common question is whether they should continue to be overweight emerging markets, suggests Muller.
While some emerging markets, notably Brazil, Russia and South Africa, were hit by falling commodity prices last year, Asian emerging markets fared better, she points out.
PGI is also noticeably upbeat about China, albeit amid expected volatility. Similarly sovereign wealth funds and government pension funds that have received qualified foreign institutional investor (QFII) quotas are prepared to stomach the volatility as they see China as a long-term growth story.
PGI is a subsidiary of Des Moines, Iowa-based Principal Finance Group. Total AUM is $292.4 billion, with between $10-12 billion invested in Asia.