Asian institutional investors are expected to invest $500 billion in global real estate markets by the year 2020, as they increase their real estate allocations and assets under management.
PERE has obtained exclusive access to a report published by CBRE, which outlines evolving cross-border and outbound real estate investment strategies of Asian capital.
The report projected Asian property investment volumes to increase by $240 billion over the next six years, up from the $260 billion recorded in the year 2014. Chinese institutional investors followed by the Japanese and South Koreans represent the bulk of this capital.
These projections are based on the assumption that the average allocation of Asian institutions towards real estate would increase from 2 percent to 3 percent during this period. Correspondingly, their total AUM is expected to grow by 5 percent to $18.6 trillion in 2020.
Close to 60 percent of the estimated $240 billion of new capital is expected to be deployed via direct investments, a preferred strategy of many Asian institutions, especially first-time investors including the Chinese and Taiwanese insurance companies. The remainder would be invested indirectly via funds and other structures, mostly by the more experienced Asian investors.
To arrive at these estimates, the report has taken into account the planned increases in real estate allocations announced by some of the largest institutional investors in the region. GIC Private has indicated increasing its allocations from 7 percent to 13 percent; China Investment Corporation from 5 percent to 13 percent; The National Pension Service of Korea from 4 percent to 10 percent; and Malaysia’s EPF from 2.5 percent to 6 percent, although concrete timelines for this scale-up haven’t been announced.
Lower returns from fixed income bonds, and economic, demographic and regulatory changes in their own home markets have contributed to the surge of Asian capital outflows into global real estate markets in the hunt for stable long-term returns.
The report draws comparisons between the investment approach of the early adopters such as the GIC Private, Temasek and NPS; and the new entrants like the Chinese and Taiwanese insurance companies. Close to 80 percent of the direct real estate acquisitions by the new entrants was in major gateway cities such as New York, Sydney and London in the last two years, with more than 90 percent only in the office sector.
In contrast, only 54 percent of the early adopters’ investments went into these markets last year, with an increasing demand for non-gateway cities in continental Europe and sectors such as retail and industrial.
However, it is important to analyze these numbers within the global context. While it is true Asian institutional investors are beginning to ramp up their real estate investments, it is still a far cry from their global peers’ allocations to the asset class. In 2014 Asian sovereign wealth funds allocated an average 4.2 percent of their portfolio to real estate in comparison to the world average of 7 percent, the report stated. On the other hand, insurance firms and pension funds in the region currently have a much lower allocation of between 1 percent to 2 percent to real estate while the average in the developed markets is between 5 percent and 10 percent.