US asset managers Nuveen and PGIM are developing open-ended funds focused on Asian real estate to tap rising global investor demand for core property in the region, with the former firm poised to launch its strategy any day now.
In another indication of this rising trend, BlackRock would not rule out launching its own open-ended vehicle, said John Saunders, the US-based fund giant’s Asia-Pacific head of real estate. The firm already runs mandates and closed-ended property strategies in the region, where it has a 50-strong real estate team.
Open-ended products represent “the new mainstream” in terms of property strategies in Asia, said Graeme Torre, Asia-Pacific head of private real estate at Dutch pension manager APG Asset Management. There is no reason why they can’t reach several billion dollars in assets, like their closed-ended peers, he noted.
Nuveen’s upcoming Asia Pacific Cities Fund (APCF) will be run by Louise Kavanagh, who joined in November as Asia-Pacific real estate head of funds management.
The firm, which has $109 billion of its $970 billion in assets under management invested in property, will also be adding an assistant fund manager for the strategy shortly, spokesman Stewart Lewack told AsianInvestor by email. The regional real estate headcount will expand in line with growth of products, including APCF, he added.
In addition, Nuveen is moving to enter into a service agreement with a local investment manager in Korea to establish resources on the ground immediately in Seoul in the core and core-plus space.
Seoul is one of 17 Asian cities that Nuveen has identified as being best positioned for structural growth, with others including Tokyo, Sydney, Brisbane, Beijing, Shanghai and Singapore.
Lewack said the launch was imminent but could not provide a precise date, and he declined to say how much it aimed to raise in terms of assets.
In Asia, core income-producing property – buildings in prime markets, such as office and retail, with an established income stream – these days offer an internal rate of return of 7% to 10%, Kavanagh had told AsianInvestor in March.
Meanwhile, PGIM, the investment management arm of US life insurer Prudential, declined to comment on the plans for its own forthcoming Asia property fund. PGIM Real Estate has $7.1 billion invested in Asia Pacific of its global AUM of $69.6 billion.
OPEN VS CLOSED-ENDED
Institutional investors wanting to gain indirect exposure to Asian real estate have typically allocated to pan-regional closed-ended funds (see graph below), but the landscape is changing. More open-ended products are cropping up as institutional demand increases, highlighting how Asian property markets are maturing in terms of liquidity and transparency.
Closed-ended vehicles are well suited to illiquid assets because they generally impose long lock-ups. But open-ended funds are more flexible when it comes to capital inputs and withdrawals, thereby allowing easier switching of managers. They also permit investors to invest on an even longer-term basis.
However, core Asia property funds still face a shortage of real estate stock in the region, said Benedict Lai, Asia research manager at UK-based Savills Investment Management. Hence most of these products focus above all on Asia’s two most advanced property markets, Australia and Japan.
M&G Investments launched the first open-ended core Asia property strategy in 2006; the next wave only arrived in 2014, led by Invesco, with other products coming from firms such as JP Morgan Asset Management, Morgan Stanley and Singapore’s SC Capital.
The forthcoming Nuveen and PGIM products would seem to represent the next wave of such strategies.
ASIAN PROPERTY DEMAND RISING
Certainly demand for Asian property is on the rise among global investors.
Whereas a decade or so earlier, Asia was seen by real estate allocators largely as a destination for opportunistic investments, it is now viewed increasingly as a key property investment destination, said APG’s Torre. He sees Asia Pacific as likely to grow as a proportion of his institution’s global real estate allocation.
Moreover, the property investment arm of German insurer Allianz is eyeing doubling its 5% allocation to the region to 10% in the next few years. Allianz Real Estate uses external property funds but also wants to increase its direct investment in the region, said Asia-Pacific CEO Rushabh Desai. Indeed, it quadrupled its regional headcount to eight last year, as reported by AsianInvestor.
Asset managers, too, such as Aberdeen Standard, Savills Investment Management and Schroders, have been building up property teams in Asia in the past couple of years in anticipation of greater demand from Western investors.
Real estate investors are focusing more on Asia with a view to greater portfolio diversification and yield, said industry experts. For instance, the US real estate cycle is quite mature and has provided very decent returns, whereas some Asian economies are more mid-cycle following the 2008 global financial crisis, said Rob Johnson, managing director on the Asia-Pacific real estate team at JP Morgan Asset Management.
Property also tends to be a good inflation hedge, he added, and that is increasingly becoming a consideration.
Then there’s the positive macroeconomic backdrop in Asia, noted APG’s Torre: “Asia has been an obvious destination for institutional investors looking for solid yield and a strong growth outlook.”
An extended feature on investment in Asian real estate appears in the latest (April/May) issue of AsianInvestor magazine.