The National Pension Service of Korea (NPS) and German insurer Allianz are combining to launch Asia’s largest closed-end fund for diversified core real estate, and are looking to begin investing it into high quality office, logistics and multi-family assets in Japan, China, Singapore and Australia.
The fund, which is a 50:50 joint-venture between the partners, will have $2.3 billion in equity. When combined with leverage this will mean it has a $4.6 billion warchest to acquire core assets for “long-term hold with an appropriate balance between income returns and capital gains,” Rushabh Desai, the chief executive for Asia Pacific for Allianz Real Estate, the property investing arm of Allianz, told AsianInvestor.
Allianz Real Estate is acting as the investment manager and general partner of the fund, which will be called Allianz Real Estate Asia-Pacific Core I (AREAP Core I). The launch comes as Allianz Real Estate is merging with Pimco, another Allianz-owned affiliate, and looking to build a third-party client base, having previously invested purely on behalf of its parent insurer.
Desai claimed the new fund's broad investing remit was useful for risk mitigation. “Having a diversified portfolio of investments offers some downside protection and not only helps to navigate through the uncertainty but also position us to be ready for the recovery period," he said.
Geographically, AREAP Core I will focus on Japan, Australia, Singapore, Hong Kong and China, seeking core investment opportunities across office, logistics, multi-family and student housing sectors. Desai noted Allianz Real Estate was looking at a pipeline of projects, including a multi-family opportunity in Japan, logistics assets in China and office real estate in Singapore and Australia.
The chief aim is to find assets that can offer typically core real estate returns in Asia-Pacific, or 7% to 10% a year, he added, without clarifying whether this target was gross or net of fees.
According to a press release about the fund from Allianz, which will be released today (June 29), the AREAP Core I strategy is "to align with secular macro trends and take advantage of individual country and sector cycles to build a diversified portfolio of income-producing assets".
NPS had W698.3 trillion ($580 trillion) of global assets under management (AUM) at the end of March, while Allianz Real Estate managed $6.2 billion of assets in Asia Pacific as of the end of 2019, up from $3.4 billion at the end of 2018.
PROPERTY DEAL PLUMMET
Allianz Real Estate and NPS are launching the fund at an interesting time, with the volume of commercial real estate deals in Asia having fallen to its lowest level in almost three years. Asia Pacific commercial real estate investment volume dropped 25% in the first quarter of this year to $22 billion, according to data from CBRE.
This collapse was largely based on a mixture of the recessionary economic conditions, plus the difficulty conducting due diligence caused by lockdowns. However, most countries in Asia have managed to reduce their daily number of new coronavirus cases to very low numbers. As a result they are now easing travel restrictions and resuming business activities, albeit at different speeds.
Allianz Real Estate and NPS believe that offers an opportunity.
“The crisis has brought an unprecedented level of uncertainty,” said Desai. “This recovery will take some time. We want to be able to position ourselves to take advantage of the recovery phase."
Desai also argued the fund was well-placed to take advantage of current “tactical dislocation opportunities” as a result of the pandemic’s impact.
“The ability to invest in this environment gives you a natural competitive advantage,” he said, noting that the number of bidders is smaller and therefore there is less competition, while a combination of this and motivated sellers means investment opportunities are often more appropriately priced.
The pandemic has also caused a bifurcation in investor demand for real estate. While demand for logistic properties has stayed robust, interest in retail assets has greatly diminished, causing them to experience big drops.
Despite this, the valuation of core assets, or the highest quality commercial real estate, remains fairly resilient. “The headline price for some assets may not have moved much, but the market offers inherent value to the buyer,” said Desai.
Buyers have been able to secure downside protection such as income guarantees for 12 to 24 months, he explained.
It is possible that this fund will mark just the beginning of cooperation between Korea’s largest pension fund and Allianz. Desai said Allianz was interested in creating “a relationship with NPS on a global basis,” adding that as investments for the new fund progress, “we’ll see how the partnership works and what we can do together globally".
François Trausch, the chief executive of Allianz Real Estate, said in the press statement that Allianz view this as the “beginning of a scalable partnership between NPS and Allianz”.
While NPS could not be reached for comment, chief investment officer Ahn Hyo-Joon said in the statement that the partnership represented an opportunity to expand its exposure to quality real estate assets in the Asia Pacific region.
NPS’s decision to partner with Allianz for this fund sat squarely in line with the world’s third-largest pension fund’s strategy to increase its allocations into alternative assets. It aims to raise its total portfolio allocation into alternative assets from 12.7% today to 13% by the end of the year and 15% by 2024.
NPS's latest portfolio figures show that Asia makes up 14.2% of its global alternatives’ portfolio, while Europe comprises 18.2% and North America 33.2%.
Allianz’s rise in AUM follows a recent expansion drive and hiring spree. AsianInvestor reported in May that the German insurer had opened up branches in mainland China and Japan. It hired its first executive in Tokyo and relocated three China specialists to Shanghai from its Asia headquarters in Singapore and plans to add a fourth to focus on acquisitions.