Sovereign demand for property building fast

Institutional appetite for real estate continues to swell, with deals such as Qatar Investment Authority's purchase of Asia Square Tower 1 pointing to rising interest in Asian assets.
Sovereign demand for property building fast

Despite high real estate prices globally, most notably in prime locations such as London and New York, there is little sign of institutional investment demand for property flagging.

On the contrary, on recent evidence it appears to be accelerating, particularly among sovereign wealth funds, with interesting rising in direct deals in particular. A notable example of this trend was Qatar Investment Authority's S$3.4 billion ($2.45 billion) purchase of Asia Square Tower 1 in Singapore this month.

“Global sovereign wealth funds are looking for more physical properties, mainly projects with prime and large-sized assets, for long-term holdings,” said Ada Choi, senior research director at property services firm CBRE.

“They were more opportunistic in Asia before the financial crisis and tended to invest in real estate funds in the past due to lack of experience.” However, not many sovereign funds have a portfolio in Asia yet, she told AsianInvestor.

Graham Mackie, Asia-Pacific head of global real estate for UBS Asset Management, said he expected global investors to raise their real estate exposure to around 10-15%, from a typical average of 5%, without specifying a time frame.

Industry polls support this view. Globally, 36% of 400 senior executives from institutional investors said they were planning to add exposure to real estate in the coming 12 months, according to a survey by BNY Mellon and FT Remark released on June 8.

Meanwhile, 50% and 40% of respondents said the same of private equity and infrastructure, respectively, highlighting the strong interest in private-market assets these days.

Morever, sovereign wealth funds globally said they planned to increase their real estate allocation to 10.8% of their portfolio from 9.1% at present, according to a survey by the Asian Association for Investors in Non-listed Real Estate Vehicles, released in January.

As for the reasoning behind this, many investors are buying property as much for stable income as for capital gains, in today’s environment of meagre interest rates and returns.

“We live in a world where interest rates are very low, and likely to be lower for longer, and yet there is still inflation,” said John Saunders, head of Asia Pacific at BlackRock Real Estate.

“In that kind of scenario, people are looking for long-term high-quality cash flows which are inflation-linked – hence the interest in core buildings,” Saunders told FinanceAsia, a sister publication to AsianInvestor.

UBS’s Mackie agreed that investors would be attracted to high-quality real estate assets providing income in gateway cities such as Hong Kong, Singapore, Shanghai and Tokyo.

Indeed, Saunders said there had been strong interest from a lot of groups around the world for Asia Square Tower 1. Sovereign wealth fund Korea Investment Corporation was among the bidders, although it dropped out at least partly due to management changes in January, noted a source familiar with the matter.

Other state funds, too, have been buying property in Asia in recent years. Abu Dhabi Investment Authority acquired 50% of three Hong Kong hotels from developer New World Development in April last year for HK$18.5 billion ($2.8 billion). And China Investment Corporation paid A$2.45 billion ($1.8 billion) for Sydney-based Investa group’s property portfolios, acquired from Morgan Stanley last October.

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