Allianz’s Desai: ‘India is higher risk but hopefully higher return’

The Asia-Pacific chief executive of the insurer's real estate business says there is still a yield arbitrage between China and India logistics.

With its latest logistics deal, Allianz Real Estate has further expanded its presence in Asia-Pacific, with around 25 percent of its portfolio in the region allocated to what has become a key targeted sector for the organization.

After committing to logistics in Australia, Japan and China, the German insurer’s latest foray is in India, where it has formed a joint venture partnership with the pan-Asia logistics specialist e-Shang Redwood. The 50:50 partnership, announced late last month, sees Allianz and ESR each commit an initial 100 million. The partnership is targeting a total investment of $1 billion, including leverage. The JV will focus on developing institutional grade logistics and industrial facilities in key Indian cities, including repositioning of assets.

India and China are the two growth economies in Asia where Allianz has been active making investments in logistics and other sectors. In the latter countries, the investor acquired in November a 50 percent stake in a portfolio of core logistics assets in China owned by Gaw Capital Partners.

While both countries are at different stages of the development of the logistics industry, Rushabh Desai, Asia-Pacific chief executive at Allianz Real Estate, said Indian logistics currently provides an arbitrage in terms of the yield.

Logistics yields in China, he said, are currently hovering around 5 to 5.5 percent while in India the range is between 8 to 9 percent.

“Currency plays an impact but the arbitrage, purely on a yield basis, between India and China is still there,” he noted.

“China’s logistics market is institutionalized and there are large established players. There is a well-connected supply chain that has already been established,” he added. “India is just at the start of that cycle, so from a risk-reward perspective, India is higher risk but hopefully higher return.”

The $67.5 billion real estate investment and asset manager of the German insurer Allianz has joined a growing list of institutional investors, including Canada Pension Plan Investment Board and Ivanhoe Cambridge that have announced sizeable commitments to Indian logistics in the past year, given the e-commerce boom, favorable regulatory environment and adoption of a unified Goods & Services Tax. And most of these investments are pursuing a similar strategy of developing logistics assets.

Desai agreed the market has become competitive, but said the key to success is getting access to land parcels to develop assets and the ability to lease them quickly. He believes the first 200 million tranche should be committed within 12 to 18 months, given ESR’s pipeline.

However, apart from deployment, there are also other potential challenges facing Indian investments.

The lack of enough exit channels for investors, once their investments reach their end of life, is one.

“Today, there is no logistics REIT in India,” Desai agreed. “But hopefully in the years to come there will be a public market. And we also feel Indian logistics will see private institutional investors pursue core and stabilized logistics assets in the future.”

The rupee’s slide against the US dollar could also impact the net returns generated by foreign investors after factoring in hedging costs. Even though the rupee has now started to recover in value, it still remains around 10 percent down against the US dollar.

“The Indian rupee has depreciated a fair bit this year, but it tends to depreciate in spurts,” Desai said, explaining his view on currency-related risks. “If you look at the long-term 10 to 20-year average, you will find that the Indian rupee roughly depreciates 3 to 3.5 percent vis-a-vis the dollar. We do factor in this depreciation and it is part of our underwriting, but what plays to our advantage is our long-term view on investments.”