Global institutional investors are under-exposed to Asia Pacific commercial property but have been increasing their commitments and are likely to keep doing so, according to a new data survey.

Asia-Pacific strategies made headway in the last year, representing 18.4% of total real estate assets under management (AUM) in 2018 – an increase from 16.9% reported the year before. European and North American strategies continued to take the lion’s share of total real estate AUM, making up 35.3% and 34.8% of the total respectively.

The data stems from the latest Fund Manager Survey, which was released this week. The study was compiled from three regional real estate investor associations – Anrev (Asia-Pacific), INREV (Europe) and NCREIF (US), and is based on the responses of 173 managers representing total real estate assets under management of $3.2 trillion as of end-2018.

Robert Johnson, Asia Pacific real estate portfolio manager at JP Morgan Asset Management, said he believes that the Asia-Pacific share of global real estate AUM will keep rising. 

“First, global institutional investors are structurally underexposed and underallocated to Asia real estate,” Johnson told AsianInvestor. “If institutional investors were simply to come up to neutral – meaning adjusting their allocations to give a more equal weighting to Asia Pacific – that alone would be a significant driver for inflows.” 

In addition, Johnson said the region is still enjoying strong economic growth, which will keep expanding its middle class, raise consumption and encourage urbanisation. Those trends will raise the appeal of regional real estate with investors.

Robert Johnson

 

“These dynamics are essentially dual tailwinds, in that they will help Asia Pacific real estate continue to become a more investable asset class as well as spur the demand for more real estate,” he said.

INVESTMENT VEHICLES REQUIRED

Positive investor sentiment towards Asia Pacific real estate aligns with a survey published by ANREV, INREV and PREA in January 2019. It reported that over half (57%) of global institutional investors intended to increase their allocations to Asia Pacific real estate in the next two years.

Johnson said this desire makes sense. “If you’re a US pension fund that is diversified regionally within US real estate, you’re not as exposed to varying market cycles as you would be with a multi-country Asia Pacific real estate allocation,” he said.

“So you’re achieving another layer of diversification by spreading out your exposure geographically. We believe this drive towards global core real estate allocations will continue.”

At Anrev, chief executive Alan Dalgleish agreed with the potential for Asia-Pacific’s increased share of global AUM. However, he cautioned that the current lack of suitable investment vehicles could be a hindrance for matching the demand from investors.

Signs of this bottleneck may be emerging already, with Asia having witnessed an overall drop in regional transaction volumes during the first quarter of 2019.

“The weight of capital arguably already outweighs the means for it to be invested,” Dalgleish told AsianInvestor, pointing out that the rising demand will soon stimulate the creation of new types of investment products.

“For example, we should see the launches of more funds with a Pan-Asia or sector-specific focus; for new locations to mature, such as Tier 2 versus Tier 1 in China; and for new property sectors to mature, for instance non-traditional alternatives like student housing,” he said.

LOCAL DOMINATION

The ANREV survey noted that the largest property managers operating in Asia Pacific real estate markets are headquartered in Singapore. CapitaLand had the most assets under management (AUM), with $55.9 billion at the end of 2018. The runner-up was logistics specialist GLP with AUM of $36.3 billion, while Mapletree ranked third with $28.3 billion.

While the largest real estate investors are homegrown, and Anrev's Dalgleish believes that domestic investors in each market will likely continue to dominate property investment. In the case of Australia, 94% of the capital raised for Australia funds comes from local investors, while Japanese investors continue to be the main investors in private Reits in Japan.

Another report from Anrev, Inrev and NCREIF, the 2019 Capital Raising Survey, calculated that North American investors contributed $2.9 billion of the total capital for Asia Pacific focused non-listed real estate funds, or 25.5%. European investors offered $2.4 billion, or 21.8%. Over half the AUM was sourced from regional investors. 

However, Dalgleish noted that local property investors are likely to diversify more into regional and global property markets. That will create space for other asset owners and fund managers to gain access to these countries, something they are likely to try and do as Asian real estate’s proportion of the global market rises.

Alan Dalgleish

“There is more capital coming into different strategies in the region from outside. For example, pan-Asia core [low risk, low yield strategy] is a new product attracting a lot of foreign investors, which in contrast is not really a relevant product for Japanese or Australian investors,” Dalgleish said.

Additionally, JP Morgan Asset Management’s Johnson said that more Asia Pacific institutional investors are likely to be created in the coming years, and they will seek to invest funds into regional real estate in order to secure risk-adjusted long-term returns.

“As some of these newer institutions are formed in the region, whether it is sovereign wealth funds or collective retirement systems or government programmes, they are seeking out real estate for diversification,” Johnson said. “As the Asia Pacific region organically produces new institutional capital owners, those entrants will contribute to real estate demand.”