Investors are becoming increasingly interested in Asia’s core markets as they look to diversify their overall property portfolios and shift their focus from the US and Europe, according to Benett Theseira, head of Asia-Pacific at PGIM Real Estate.
“While it seems like a lot of players are jumping on to the bandwagon, it is very early days in the core open-ended fund industry in Asia. It’s just $4 billion to 5 billion of capital raised in the last few years, which is a drop in the ocean given the investable stock of real estate available in Asia,” he said.
“From an investor’s perspective, most of the large institutions in Europe and the US are under-allocated in Asia,” added Eduard Wehry, head of business development, Asia Pacific at PGIM Real Estate. “They have been focusing much more on the recovery play in Europe and the US after the global financial crisis, but now with the troubles in Europe and well-recovered markets in the US, it means these investors are back to looking at Asia.”
Asian markets have now matured, and there are now enough cities with core stock, quality assets and quality tenants, creating a strong and consistent income stream that comes alongside greater transparency and liquidity in the markets, Wehry noted.
Theseira said the open-ended fund structure in Asia appeals to international investors, as it provides the ability to hold assets long-term and through cycles: “Investors are not under pressure to invest through a constrained investment period, or sell assets because of fund life when it is not the best time. That flexibility allows them to shift their strategy and allocation to different markets and sectors as cycles change.”
The fund route is attractive to international investors that are not adequately staffed to have an extensive direct program in Asia, said Wehry.
Said Theseira: “Asia is not an easy marketplace. It is one region of many countries, languages, tax structures, legal systems, and to be well versed in each of these, you need to be present in those countries. A fly-in-and-out approach increases risks of mistakes and we have seen this happen over the years.”
As these open-ended core funds continue to grow, such expansion will benefit the entire real estate industry in Asia, according to Wehry.
“With several open-ended core funds in the market, a great benefit for Asia would be the creation eventually of a credible regional index, similar to the NFI-ODCE-index (Open End Diversified Core Equity) in the US,” he said. “The improved transparency would typically lead to more institutional capital flow into the Asian real estate markets and be beneficial to the overall real estate industry in Asia.”