The pool of Asia-Pacific investment capital available to be tapped by property asset managers is set to swell significantly in coming years, says Niel Thassim, Hong Kong-based Asia-Pacific managing director for Asia-Pacific at RREEF, Deutsche Bank's real-estate investment-management arm.
The firm – which has narrowed its asset focus to property and its client focus to four markets – increasingly plans to tap the huge and growing potential of Australian superannuation funds, emerging Asia pension funds, Chinese insurance companies and Japanese pension schemes.
Before the global financial crisis, one in 10 property investment dollars globally came from Asia, says Thassim, but now that figure is four in 10, and interest in Asia is rising from RREEF clients in Europe and North America.
“Historically, cross-border real estate investment activity was characterised by European and US investment capital being deployed into the Asia region, but we're seeing a rebalancing of that,” he says. “A lot of Asian capital is now going offshore – both within the region and to Europe and the US.”
In addition to continuing its cross-border property investment activities, RREEF is looking at onshore opportunities in the mainland China market. “How we proceed and what form any onshore initiatives will take will be determined through close collaboration with our clients, and will depend on the market’s development and the types of investment sources available – private wealth, institutions, etcetera,” says Thassim.
One move RREEF is considering is joining the growing ranks of managers raising renminbi-denominated funds. Doing so would require an identified pipeline of assets as well as distribution in place, says Thassim, and under its newly appointed head of China, Mark Cho, the firm is speaking with potential onshore partners to work with on both of these fronts.
Moreover, RREEF sees significant potential in Chinese insurance capital, with insurance firms there set to become more dominant players both in domestic and offshore property in coming years, says Thassim.
Last year, Chinese insurers were approved to buy domestic real estate for investment purposes, whereas previously they could only buy it for self-use. And that approval was only clarified this year. The China Insurance Regulatory Commission announced in late July that Chinese insurance companies are allowed to invest a maximum of 3% of total assets in property-related financial products – such as real estate funds – bringing the total maximum allowable investment in property to 10% of total assets.
How long before a decent amount of capital starts flowing into such real estate will depend both on market pricing and on how insurance firms go about making such investments, says Thassim. Insurers are now looking at whether they want to partner established fund managers or manage the portfolios in-house, he adds. Either way, they are most likely to buy into the commercial property market, as they will want to obtain the rental yield.
Australia also offers significant opportunities for sourcing client capital, says Thassim. The country’s superannuation market is expected to grow by 10% annually, taking it from $1.2 trillion to about $3 trillion in next 10 years, he notes.
Given that super funds allocate about 10% of their portfolios to real estate, and given the forecast growth, Thassim calculates that $60 billion more will go offshore in next 10 years, although some say super funds tend to be cautious about investing in China.
Still, says Thassim, “the pension funds and consulting market in Australia is very sophisticated and has a strong desire to go offshore with fund managers that have strong track records for global investing".
By contrast, the Japan pension fund market, one of the largest such pools of pension capital in the world, allocates less than 1% of its assets to real estate. That's a far cry from Australia’s super funds’ property allocation, and from the typical 6-8% of other normalised markets.
Over the medium term, there will therefore be appetite to diversify into higher-yielding assets, and away from government bonds, and equities may be considered too volatile, says Thassim. There are $2.7 trillion of assets in the Japanese pension market, so an increase of even just 2-3% would be a big jump in available capital, he adds.