In the forthcoming June issue of PERE magazine, out one week Monday, you’ll read about global property services firm DTZ’s new First Steps research initiative. It is aimed at modelling private real estate portfolios for Asian investors yet to invest beyond their own borders. It is innovative stuff.
First Steps’ central finding is that Asian investors should not follow a herd mentality, supplementing their domestic property portfolios with overpriced and under-yielding assets in cities like London, New York or Chicago. To make its point, DTZ has constructed hypothetical portfolios from the world’s 21 most liquid property markets by adopting a modelling approach that looks for low correlations between cities. Discovering those, according to the methodology, pays dividends.
In the case of Chinese investors, seemingly the biggest source of cross-border capital in the world's private real estate markets today, DTZ has found that they should really be supplementing their domestic portfolios with properties in Milan and Seoul. After reviewing historical returns of these markets and comparing them to returns from Beijing, the firm has found mismatched correlations with both places and argues that it makes them ideal portfolio bedfellows.
DTZ has yet to market its new initiative far and wide. Its global research head, Hans Vrensen, quite rightly expects media like PERE to show and report an interest and that hopefully will court attention. When it is widely peddled, he expects investors in Asia’s mature markets like Japan and Australia, as well as the initiative’s prototype, Korea, to sit up and take note. He is less optimistic that Chinese investors will pay it as much heed.
Judging by comments made at the Urban Land Institutes Asia Pacific Summit in Hong Kong this week, it would seem his forecast will prove accurate. On stage, Andrew Zhou, chairman and chief executive officer of Ping An Real Estate, the real estate arm of giant Chinese insurer Ping An, spelled out plainly domestic investors’ current attitude to their outbound capital. He told how while Chinese investors were “eager” to be acquainted with international bricks and mortar, they were particularly interested in investing where Chinese businesses and Chinese students have a larger presence. “Having a Chinese investor handle the real estate – for offices or for places students can live – makes it more convenient and comfortable, so we want to be close to such opportunities,” he said.
The insurer’s purchase of the Lloyds of London building in the City of London last year, in handhold with private equity real estate firm Gaw Capital Partners, was a case in point. Gaw Capital is not active in Milan yet so, by Zhou’s logic, don’t expect Ping An to show up there anytime soon either.
If Ping An’s words are how Chinese institutions are thinking, you can bet your bottom dollar that China’s high net worth capital, also a sizeable pool with designs on spreading its wings further overseas, is in greater ‘birds of a feather’ mode. Indeed, you’ll also find in the June issue of PERE a focus on Asian high net worth capital, which according to DTZ’s rival Jones Lang LaSalle accounts for a cool $6.6 trillion.
Our interviews for that article also suggest that Chinese family offices are bent on investing in clusters. These investors have in common with their institutional counterparts a desire for sustainable income-producing assets that can be held for lengthy periods. However, they are more likely motivated by buying close to where their children are attending university than by the market’s correlation with Beijing.
A decent case study will be the Beijing-based boutique investment firm Grand China Fund. As PERE revealed last week, it has started fundraising from Chinese high net worth investors with a view towards collecting $100 million for investments in the US. In a sign of things to come, it is opening a rep office in New York to help get the ball moving.
Interestingly, DTZ’s First Steps modelling actually found that Chinese investors were best off supplementing their domestic portfolios with investments in Tokyo. However, the firm discounted its own findings on the premise that geopolitical relations between the two countries were too strained for that to be considered practical – further indication that, for some investors, it really isn’t all about the numbers.
P.S. Chinese investors and Chinese real estate are the focus of next month’s PERE Forum: China 2014. For information on the event, click here.