Asian institutions are generally less familiar with property investing than their peers in Europe or the US. But the dizzyingly fast expansion of their asset bases, particularly in northernmost nations, has provided plenty of impetus to catch up.
Korea’s National Pension Service (NPS) had W533 trillion (around $460 billion) in investable assets at the end of 2015, and this is expected to peak at W2.43 quadrillion ($2.16 trillion) by 2043. Japan’s Government Pension Investment Fund already has $1.1 trillion under management, while China’s Anbang insurance has AUM of $116 billion.
While their assets have soared, regular returns have not. Ten-year bond yields in China, Korea or Japan stand at 3%, 2.15% and 0.03%, respectively. So investors are looking to other assets, and property fits the bill, though it does pose rising risks, given high valuations and global uncertainty, as reported.
Korea’s Public Officials Benefit Association (Poba) is a good example of moves into real estate. The pension fund has $7.2 billion in assets and expects to receive another $1 billion in assets each year until 2020. It has been investing aggressively into alternatives for a decade, to the point that 47% of its AUM is in alternative assets, and 29% of the total in real estate.
Jang Dong-Hun, CIO of Poba (pictured left), told AsianInvestor the fund was aiming for a return of at least 5% through alternatives. “Real estate has generally been more stable [than other alternative asset classes] and has outperformed more.”
Poba intends to invest half of this year's new assets into alternatives, particularly looking outside commercial investments and at residential property and infrastructure, via blind fund mandates.
Bigger players like to have at least 4.5% allocated to real estate via developers or directly as owners, said the chief investment officer of an Asian insurance company. Moreover, smaller operators lacking the scale to invest on their own behalf are looking for co-mingling opportunities.
Typically asset owners target returns of around 7% to 10%, and property funds have been able to offer this. Depending on their focus, a closed-end fund typically offers annualised returns of 8% to 10%. The premium more than makes up for a lack of liquidity.
Aisling Keane, head of alternative solutions for Asia Pacific at State Street, estimated that Asian asset owners could increase their allocation to real estate from well above the typical figure of 6%. “It’s feasible this could end up at 10% to 15%, depending on good returns.”
China’s Anbang is one of the most active players in the space. In September the insurer bought a portfolio of 16 US hotels from private equity giant Blackstone for $6.5 billion. This comes after its failed $14 billion tilt at Starwood Hotels & Resorts in March.
Moreover, there were reports just last weekend of a meeting between Wu Xiaohui, Anbang's chairman, and Jared Kushner, Donald Trump’s son-in-law, about a project to redevelop a building at 666 Fifth Avenue in New York.
Similarly, Ping An Life has 22.7% invested into alternatives and intends to boost its exposure to international assets and real estate.
Korean institutions are also proving aggressive. Flagship retirement fund NPS had already allocated 10.4% of its AUM to alternatives as of August and aims to raise this to 11.9% by the end of 2017. This includes chunky property co-investments.
Asset managers are also approaching smaller pension providers in Seoul, such as Korea Teachers’ Pension Fund and National Credit Union Federation.
“Over the past two or three years we’ve seen smaller institutions hunting for real estate investments, but their difficulty [has] been to find and co-invest into deals with managers,” said Lau Cheng-Soon, managing director for Asia Pacific at Invesco Real Estate.
He said these asset owners tended to go for smaller deal sizes, where competition is fiercer, but were often slow to pull the trigger on investments. “It takes them time to understand the deals of markets half a world away, and sometimes opportunities slip to those that act quicker.”
A gradual evolution
As smaller Asian institutions look to property assets, they tend to follow a gradual evolution in their approach.
Initially, they invest into listed assets, such as real estate investment trusts, mortgage-backed securities or a stock portfolio of property companies or bonds. They will then typically move to put money into closed-end funds as limited partners. Assuming those investments go well, they consider more aggressive moves, such as open-ended funds, co-investing or even directly buying properties themselves.
Initial investments often have a distinct home-region bias, but as investors look outside their home market they tend to look at large, tier-one cities, particularly in geographies they aren’t familiar with. In the US, Asia asset owners typically look first to New York, while London is the favoured destination in Europe.
In Asia, the Hong Kong and Singapore real estate markets hold appeal, although they are volatile, Australia’s property market flourished on the back of institutional and retail investor attention before hitting a bubble that burst this year, while Tokyo has seen a rise in investor appeal.
Asset owners have typically focused on commercial buildings first, particularly those in core parts of cities, as they boast better rents and higher certainty of continuous occupancy. Shopping malls are also popular purchases.
At this stage, most interest remains in closed funds and co-investing, although demand is starting to rise for open-ended property funds.
However, Keane notes such vehicles pose certain issues. “It’s more challenging in terms of liquidity and the setup around the gates once you operate as a fully open real estate fund,” she said.