Institutional capital remains committed

Just as investors are moving on from the disruption of the global covid-19 pandemic, real estate markets around the world are entering a new phase of uncertainty. Investment decision making by global investors – including those in Asia-Pacific – is being influenced by myriad emergent macroeconomic headwinds, including but not limited to rising inflation, increasing interest rates and contractionary monetary policy, currency fluctuations, and systemic changes to office work culture in many markets.

“Australia now dominates the top city and sector combinations as target destinations for  institutional capital. Sydney residential has overtaken Tokyo residential for the top position, with 62 percent of investors indicating this preference”

Charles Haase
ANREV

Nevertheless, we expect overall real estate allocations to remain relatively stable amid these market pressures, since the results of the ANREV/INREV/PREA Investment Intentions Survey 2023, published in January, reveal that institutional investors intend to maintain their allocations to real estate globally. As investors are largely putting the covid-19 pandemic in their rearview mirrors, institutional capital remains committed to global real estate.

The truly interesting question for 2023, however, is the way preferences across locations and sectors will readjust within those overall allocations, as investors navigate increasingly volatile markets and seek to balance their risks and opportunities in the near term.

Shifting undercurrents

While the institutional real estate markets in Australia and Japan – the most established in the Asia-Pacific region – are expected to continue attracting capital from investors, the Investment Intentions Survey presents the interesting result that Sydney and Melbourne have edged out Tokyo to become the top two investment destinations in the region for real estate investors in 2023. Sydney now holds the number-one spot, with 86 percent of investors saying they plan to invest there.

Sydney is followed by Melbourne, in second place with 83 percent. Tokyo now moves down to third place, with just 66 percent of investors saying they plan to be active in the world’s most populous metropolitan area.

Moreover, the residential asset class has now become the most preferred sector for institutional investors, with 83 percent of respondents indicating they will invest in residential properties in 2023. This puts the residential sector ahead of the perennial favorite in recent years, moving the industrial/logistics sector down into second place with 76 percent of respondents favoring it. The office sector now comes in third, with 72 percent – still strong despite the lingering effects of work-from-home trends during the pandemic.

As a consequence of these developments within investors’ real estate allocations, Australia now dominates the top city and sector combinations as target destinations for institutional capital. Sydney residential has overtaken Tokyo residential for the top position, with 62 percent of investors indicating this preference.

Melbourne residential (at 59 percent) and Sydney office (at 55 percent) follow in second and third place, respectively, as more than half of respondents indicated that they intend to invest in those cities and sectors. The Australian residential market has now clearly become the one to watch this year.

ESG in the forefront for the next generation

It should be no surprise to anyone to read that in recent years, environmental, social and governance matters have become firmly established within the decision-making processes of most institutional real estate investors. As of 2023, 71 percent of investors consider a net-zero carbon commitment to be an important feature when investing in non-listed real estate funds, and 81 percent of investors surveyed pay close attention to a fund’s environmentally and/or socially responsible investments.

These results reflect the fact that ESG has become firmly embedded in the valuation and underwriting methods of real estate investors, including many of those in Asia-Pacific.

Addressing this key industry focus, we recently held our inaugural ESG conference. This event, held in July, brought together industry stakeholders to discuss the latest trends and best practices in the field of ESG across Asia-Pacific’s real estate industry. A wide range of topics, from climate risk, green building and technology solutions to best reporting practices for non-listed real estate funds were covered by a broad array of speakers, exploring the implications for how private real estate funds in the region can build sustainable and resilient portfolios while positively impacting society and our environment.

83%

Residential is the most preferred asset class, favored by more than four out of five investors

71%

Net-zero carbon commitments are important to seven in 10 investors

As ESG factors become ever more priced into investors’ decisions, such conferences will be a crucial forum for increasing market participants’ understanding of the field.

Capital raising activity remains strong amid consolidation

The ANREV/INREV/NCREIF Fund Manager Survey, released this past May, revealed that the average AUM of respondents increased by 12 percent in 2022 over the 2021 figure. Moreover, the top quartile of survey respondents now accounts for fully 80 percent of real estate funds’ AUM globally. These results highlight the continuing concentration of AUM in the industry’s largest fund managers, and the ongoing trend of non-listed fund manager consolidation.

$264bn

Significant new capital was raised in 2022 for non-listed real estate

86%

Most investors indicate Sydney as
their most preferred investment destination

These phenomena are present throughout the global investable universe, including in Asia-Pacific, which is now dominated by single-sector industrial and logistics investment managers. APAC has also experienced the emergence of an Asia-based manager on the list of the top 10 largest global fund managers by AUM.

Last year saw strong capital raising activity, despite the growing economic and geopolitical uncertainty we witnessed from last year through to the present day. Capital raising last year hit its second-highest level on record since 2015, according to the ANREV/INREV/NCREIF Capital Raising Survey.

In 2022, investment managers surveyed raised at least $264 billion of new capital for investment into the non-listed real estate market. The vast majority – 83 percent of investment managers surveyed – indicated that they successfully raised capital in 2022, reaffirming real estate as an indispensable institutional asset class.