Allianz was late to committing to KaiLong’s second China real estate fund but by flexing its financial clout, the German insurance giant is making sure its tardy investment carries full influence nonetheless.
This week, it committed $175 million to the Shanghai-headquartered real estate investment manager’s Greater China Real Estate Fund II, a closed-ended fund being raised for value-add office investments in China and Hong Kong.
For that, Allianz Real Estate, the German insurer’s real estate asset and investment manager, will take a 35 percent share in the fund. Other institutional investors will make up the rest of the limited partner pool in the commingled fund, for which KaiLong is ultimately targeting $500 million.
Rushabh Desai, chief executive for Asia-Pacific at Allianz Real Estate, explained that by the time Allianz came into the picture and underwrote the fund, KaiLong had already raised capital for a first close. The conflict of interest with two competing KaiLong vehicles with the same strategy ruled out the possibility for a separate account mandate for the firm’s strategy. Instead, a cornerstone investment became the solution.
“Our need for investments control is why we have a 35 percent stake, that obviously gives us a place in the fund’s advisory board and gives us some lead power on the asset mix. That gives us more comfort from a governance standpoint,” Desai said.
He mentioned the cornerstone investment provides Allianz with the terms to make the commingled fund attractive. One of these will be the option to deploy further capital more strategically through co-investments.
“We get the most favourable terms and fees as a cornerstone investor. We also get enough governance rights that we can veto some of the decisions. Typically, most of the decisions are made by super majorities. When we are a meaningful stake, we can veto certain things and have control over the asset mix,” Desai said.
Allianz’s real estate investments have shown a preference for more controlling investments through club deals, separate accounts, or joint ventures with operators. Direct deals have also transpired, as was the case in July with the all-cash purchase of a Beijing office asset from KaiLong, which was in partnership with investment bank Goldman Sachs.
Desai emphasized that the commitment to KaiLong’s fund is more focused than some of Allianz’s previous commingled fund investments, which have been more pan-Asian and diversified and nature. KaiLong’s strategy focuses on conversion and repositioning of small to medium sized assets in China and Hong Kong.
“A lot of the other managers’ focus on bigger deals and bigger transactions than this type. We think the fund is a good way for us to get exposure to such a value-add and niche strategy,” said Desai.
He said Allianz uses commingled real estate funds to invest in strategies with specific skillsets, are of a smaller scale, or sit within very specialized sectors. As the in-house capabilities have increased, the scope of these strategies has shrunken.
“We are open to investing in commingled funds. But we now have a big team on the ground here in Asia with specialists where we can explore a lot of deals ourselves. We will have to see whether the fund manager can bring something to the table that we do not already have. If we can justify that, then we are happy to invest in funds,” Desai said.
Allianz Real Estate’s Asia private real estate strategy focuses on four overarching macrotrends: the change of demographics in Asia Pacific, the urbanization of cities, the rise of the middle class, and the advance of data and technology.
The insurer has a target of 10 percent of real estate investments to be allocated to Asia Pacific. That share was only 4 percent as of June 30 2018 out of a total real estate asset base of €60.1 billion, yet an increase from 3.75 percent by end-2017.