APG Asset Management, which manages €474 billion ($586 billion) of Dutch pension money, has around 10% of its overall portfolio in property, making it one of the biggest holders of such assets.
Of that figure, some €5 billion is invested in Asia Pacific, and overseen by Graeme Torre, APG’s regional head of private real estate, and his six-strong team. He joined the Dutch firm in December from Invesco Real Estate, where he was managing director for Asia Pacific. Before that he worked as head of Asia Pacific real estate at Henderson Global Investors.
Last month Hong Kong-based Torre spoke to AsianInvestor about how the region's property markets have become more institutionalised and described his team’s investment approach.
Q Real estate is often very tightly held in Asia, making it hard to access assets. How do you cope with this?
It’s easier now. I’ve covered the Asian markets since the mid-1990s and as a fund manager since 1998, and I’d say it’s far easier to access real estate in Asia Pacific than it used to be. Part of the reason for that is there’s a greater level of institutional and foreign ownership in the regional market these days.
Previously the sector did tend to be very locally owned and controlled throughout the region. Aside from in Australia, it generally used to be local owners holding the majority of the stock; most were family- or government-owned entities. It was always hard to find a visible pipeline of investment opportunities as an independent or foreign investor.
Now much of that has changed, with the advent of the managed real estate fund over the past 20-plus years and of Reits [real estate investment trusts] over the past 17 years, and with the construction of new assets throughout the region.
However, it’s not all plain sailing. There are different ownership requirements and restrictions in various countries for foreigners. On some of the best deals you must still partner with local players. It’s never a straightforward exercise to obtain access to local property assets.
In general I’d say that although it's not necessarily straight, the route to shared ownership and exit in most markets is now a relatively well-lit path.
Q Can you give an example of how deals can be affected in the region?
It’s not unusual for real estate deals in Asia to be influenced by major shareholders, such as large family organisations or individual tycoons. That’s an issue we come across quite regularly.
That’s why for any institution investing here, local market knowledge and networks are essential for ease of execution, deal sourcing and exiting. That’s one reason why APG established an Asia office some time ago. It pays to be close to the assets, market participants and news flow.
Q APG’s global real asset head, Patrick Kanters, was quoted earlier this year as saying the firm’s property allocation globally could grow to 15% from around 10% currently. Presumably the expectation is that the Asia-Pacific part of the portfolio will grow at the same pace?
Or maybe even faster. Our regional allocation model will determine where additional allocations are made. Roughly 12% of the global real estate portfolio [is currently in Asia Pacific].
Q But your return expectations for Asian real estate are presumably now lower than in the past?
Yes. I can remember in 2000 looking at a retail podium acquisition in Shanghai, and the income yield was between 14% and 15%. I doubt you could get more than 4% or 4.5% for that these days.
Investors from Europe, US and the Middle East used to see Asia as a high-risk, high-return opportunity. They wanted to see 20%-plus annual returns on an IRR [internal rate of return] basis. They would use leverage and might have invested in development projects or non-performing loans, for example. That approach laid the foundations for a lot of volatility in the past decade or two, and in 2008 an awful lot of value was removed.
Today, however, both regional and foreign investors still want allocations to Asia because it is such a significant part of the global real estate market. They started looking for yield [again] back in 2010-2011 onwards.
Since then, a lot of income-based investments have been made with far lower risk and lower returns [than in the past]. As soon as investors became comfortable with this approach to Asian real estate, we’ve seen cap[italisation] rates [expected rates of income on property] compress and, as you would predict in a rational market, rental growth improved. Cap rates in Asia are now comparable in many markets with those in European and US markets.
Asia as an institutional investment destination for real estate is now undeniable. There has been more real estate capital flowing into Asia over the past few years than into the other regions. It’s a mix of increasing transparency, falling risk, backed by strong economic growth and weight of capital that has made it an obvious destination for institutional investors looking for solid yield and growth outlook – more so than the other regions.
A feature on investing into Asia-Pacific real estate will appear in the upcoming April/May issue of AsianInvestor magazine.