Asian investors prioritize excess return over diversification

Multiple organizations believe they have a limited window to generate higher returns but more time to meet geographical allocation targets.

Asian investors are prioritizing returns over diversification in the short term when they are making real estate investment decisions.

Toh: wants to prioritize investing where his organization sees value

“For the real estate team, our focus is on total return. So we will still be driven by where the best returns are regardless of which region it is,” said Kian Sin Toh, head of real estate at Asia-Pacific life insurance group AIA, during the closing investors panel at the 2023 PERE Asia Summit in Singapore last week. Despite having a target to allocate a third of its real estate portfolio to each region, the firm plans to focus on Europe and the US in the early part of 2023 depending on “where the recovery comes through.”

The insurer was underweighted in Europe last year partly due to the war in Ukraine, according to Toh. This year, however, the investor expected to be less active in Asia at least through mid-year because of limited price dislocation in the region compared to the US and Europe. “I think we do want to prioritize where we see value,” he noted.

Yoshi Kiguchi, chief investment officer at Pension Fund of Japanese Corporations, also believes finding excess returns in private real estate is more important than diversification as the latter can be managed at the overall portfolio level.

“Even if it is a specific fund to focus on South Korea, it is okay as long as we believe that we can have excess return from investing in South Korea,” Kiguchi said. “We can control our exposure on the country through listed equity, fixed income or other alternatives.” Currently, the pension fund has 90 percent of its portfolio invested in alternatives and 35 percent of that was allocated to illiquid assets such as infrastructure and real estate.

Meanwhile, South Korea’s ABL Life Insurance has also shifted to focus on creating higher returns in the short term despite recognizing the need for portfolio diversification down the road. “We need to be prompt and quick about these assets right now,” said Jiroo Eoh, head of ABL’s alternative investment department. “We want to be flexible with those sectors if the return is right.”

At the same time, Toh believes that diversification is not difficult to achieve for long-term institutional investors. “In AIA, we invest across a much longer period with a much longer horizon. And at different points in time, different countries would come up. At one point, we were looking a lot into China and then we saw opportunities in Japan, where we put quite a bit of money into for this year. Going forward, it could be Korea or Australia, we would just follow where opportunities come up.”