High equity market valuations and a poor outlook for fixed income is forcing institutional investors to look at real assets and real estate above all, says the CIO of Asia Capital Reinsurance Group, Don Guo.
“We are increasingly looking at real estate [in the US and Europe]," Guo told AsianInvestor. It comes on the back of a BlackRock survey released last week that found 96% of institutional investors had allocated to real estate, 66% to infrastructure and 29% to commodities.
The past three years have seen Asia-Pacific based investors increase allocations to real assets at a faster pace than the global average. The survey found a 50% rise in allocations to real estate (compared to a global average of 32%), a 43% increase to infrastructure (32%) and a 39% rise to commodities (36%).
Respondents based in Asia-Pacific have a higher median allocation (18% of their portfolio) to real assets than peers in EMEA (12%) and North America (6%).
The survey suggests that gap will widen. Over the next 18 months, 60% of Asia-Pacific respondents plan to invest more in real estate, while half expect to raise holdings in infrastructure and a third in commodities.
Guo noted that, for him, the focus for real estate investing had shifted from capital gains to yield. He said that Asia Capital Reinsurance Group had taken profits from non-agency US mortgage backed securities last year and shifted to the core asset side, including US office.
The CIO noted he was increasingly looking at Europe, where he said some distressed situations offered the prospect of capital gains. He suggested yields of 8-9% were relatively attractive compared with Asian fixed income.
The CIO is not looking at Asian property given the high proportion of Asian bonds in the group's overall portfolio. “It's better to diversify outside of Asia,” he argued. Further, he suggested core Asian real estate was very expensive.
A prime office costs survey published by property services firm CBRE this week found that Asia is home to seven of the world’s 10 most expensive markets, up from six a year ago.
In all, 61% of Asia-Pacific-based respondents to the BlackRock survey said they were interested in pursuing core real estate strategies, compared with 45% in EMEA and 48% in North America.
Almost half (46%) of Asia-Pacific respondents see investment in real assets as having a significant impact on portfolio diversification over the next 18 months, compared with 23% and 16% of respondents in EMEA and North America, respectively.
“We do look at infrastructure,” added Guo, while noting that long minimum lock-up periods in the asset class – 10 to 20 years – were longer than Asia Capital Reinsurance Group’s liabilities.
Matching long-duration liabilities was a bigger driver for increasing allocations to infrastructure than real estate, BlackRock's survey found. Macro-environmental considerations and increasing returns were the leading factors driving increased allocations to real assets, it added.
Countries were trying to stimulate infrastructure investment in order to spur economic growth, said Jim Barry, global head of BlackRock’s infrastructure investment group.
Over two-fifths (43%) of survey respondents who had increased their allocation to infrastructure over the past three years invested in assets located in Asia-Pacific. In contrast, 32% had done so in EMEA and 24% in North America-based assets.
The most attractive targets for infrastructure investment over the next 18 months were brownfield (existing) assets in developed markets (51% of investors were interested), followed by brownfield assets in emerging markets (45%), greenfield assets in emerging markets (23%) and greenfield assets in developed markets (23%).
Asia-Pacific-based investors rely more on in-house teams to evaluate investment opportunities, with 51% of Asia-Pacific respondents to BlackRock's survey having an in-house real-assets team, compared with 36% for EMEA and 17% for North America. Further, 34% of Asia-Pacific respondents plan to increase the number of employees dedicated to real assets over the next 18 months.
*The Ascent of Real Assets – gauging growth and goals of institutional portfolios was based on a survey of 201 executives at institutional investment firms, including 41 across 10 Asia-Pacific countries. The survey was conducted for BlackRock by the Economist Intelligence Unit.