Asian investors are increasing allocations to US, as global investors’ flows to the sector exceed pre-pandemic levels. But the allocation mix is shifting to accommodate Covid-19’s effects.

Only domestic investors were ahead of their Asian counterparts as the largest groups to invest in US property in the second quarter of this year, allocating $2.6 billion, up 49% on the same period a year earlier, according to Real Capital Analytics (RCA). Canadian investors allocated $2.5 billion and those from Europe invested $1.1 billion.

One consequence of the pandemic has been the relative outperformance of non-central city locations. Pricing in the office sector has followed the disparate trends in deal activity. In the year to July, the RCA suburban office price index jumped 11.7%, while the CBD office index fell 4.6%.

Where prices have fallen in the US office sector, investors are looking to capitalise: "We expect the office market in the US will recover stronger and faster than people anticipated," Henry Chin, head of research, Asia Pacific, for CBRE in Hong Kong told AsianInvestor in April.

In August, the real estate investment firm reported that the 12 largest US office markets had started to bounce back, although occupancy and lease rates were slow to recover.

Others, however, are rethinking their investment strategy entirely and re-allocating away from offices to the residential and retail sectors.

“Most definitely we are looking to increase our residential allocations compared to offices. Working from home has accelerated people’s wishes to upgrade to a much bigger home,” the head of Asia for a large European insurance company, who asked not to be named, told AsianInvestor, adding that in the US, people were looking to buy second homes too, in the wake of the pandemic.

The apartment sector led as the repository of the most investor capital in the US property sector in July, constituting 35% of total commercial real estate investment, according to RCA.

IN-STORE ATTRACTIVE

As an example of an overseas investor with a US focus at the moment, Chin said that GIC was targeting US retail and had been actively acquiring Reits since last spring.

“Not all shopping will go to online. The Reit market has dislocated. [GIC] is positioning for a US Reits market recovery," Chin told AsianInvestor in April.

In March, GIC doubled down on US retail real estate by investing in a $470 million joint venture with several US partners, including RPT, a Reit that owns shopping malls in the US.

AustralianSuper also told AsianInvestor that it was looking at US shopping malls as, in its view, while the rising e-commerce trend might kill off some malls, a good number will likely survive and even thrive.

DEAL SHORTAGE

The evidence is that global investors’ flows to the US are recovering fast, with some Asia investors now complaining of a shortage of available opportunities. Compared to pre-pandemic levels total investor flows into US real estate are up 14% for the second quarter (average between 2015 and 2019).

Global investors put $145 billion into the US in the second quarter of 2021, up 176% on the same period a year earlier. That compares to a 30% increase, to $74 billion, in EMEA and a 11% increase, to $40 billion, in Asia Pacific, according to RCA. Both industrial and apartment sectors registered their strongest second quarter ever.

Joseph Lee, co-chief executive and president of Seoul-based real estate fund manager Igis Asset Management, said that the firm had been actively searching for office deals in the US this year, but was continuing to lose out to domestic buyers. Earlier this year, it spent $480m for 49% of an office building in Washington.

The competition from US investors is no surprise, as domestic money dominates the sector; on average, 86% of flows into US real estate funds comes from domestic investors, according to Preqin, a financial data and information provider on the alternative assets market.

In spite of this, however, Lee said he was about to close a deal for four logistics properties currently under construction in different parts of the country, though mainly on the east coast. He said one of the properties in the portfolio, which is costing more than $300m, is near New York city but declined to give further details. While roughly half of the deals he sees are for completed buildings, he said he preferred the higher premium available for developing properties. Typically, these deals provide around 0.5% more yield, he said.

NORTH ASIAN INTEREST

Spencer Park, a Hong Kong-based counsel at law firm Dechert, who focuses on Korean asset managers and securities banks, said high prices for office and logistics assets were encouraging investors to look to alternative sectors such as retail, as pressure from investors to deploy dry powder continued to grow.

“We have only seen or heard interest in the US. We have heard little from our clients about deals in Europe,” he said.

Korean investors were the second largest group from Asia in the first six months of this year, allocating $890m to US property, after Singapore investors, with $1.48bn, according to RCA.

Michinobu Suzuki, head of Japan for Nuveen in Tokyo, said he had recently seen more demand from Japanese equity and debt investors for US real estate, compared to Europe or Asia Pacific, even though returns from FX hedges were better in Europe than the US.

“US [property] assets are becoming more attractive currently. Industrial and multifamily have captured the strong flow and interest from Japanese institutional investors. There are still some concerns with regard to retail, but we have started to see a gradual increase in recovery expectations for offices.”

This article has been edited to clarify that CBRE's comments were made in April, and that new findings were made in August.