Investors pivot from Asia to the West for higher returns

Investors are prioritizing real estate investments in the West in the near term as the US and Europe offer more attractive returns than Asia because of more significant pricing correction in those two regions, members heard at the PERE Network Asia Summit at the Shangri-La Singapore last week.

Kian Sin Toh, head of real estate at Asia insurer AIA Group, said on a panel that the investor will focus on finding opportunities in the US first where the repricing is the most significant. AIA has $7.73 billion of real estate assets under management, of which 40 percent is allocated to the US and 30 percent each to Asia and Europe.

“If you ask me to prioritize, it’s probably in the order where I saw the biggest correction, and in terms of recovery which market is going to come back first. So, it’s probably the US, Europe, Asia,” he said.

Apart from the more appealing returns and pricing emerging from the dislocation in the US and Europe, Toh noted that there are more concerns for investors looking into emerging markets in Asia. These include the complexity of execution and the exit options.

“I think the other considerations that we must think about are also how best to invest in the market and the size of the investable market,” he explained. “That would probably determine when you want to exit. Will you be exiting to institutions, or will you be exiting to high-net-worth individuals or just local bodies?”

Shakir Asri, director of property investment at Malaysian retirement fund Kumpulan Wang Persaraan, also thought the risk and return opportunities are more attractive in the West now. The investor has traditionally invested only in the UK and Australia for cross-border investments, but it is planning to expand into the US and other parts of Asia this year.

“Perhaps that balance between a developed market like the UK and a developing market like Vietnam is no longer that obvious. There are now opportunities for much higher returns than the last five years in developed markets. You don’t necessarily have to go into emerging markets to get it,” he explained.

Indeed, market dislocation in the US and Europe is going to present significant opportunities for investors now, according to the opening presentation at PERE Asia by PIMCO Prime Real Estate chief executive officer and chief investment officer Francois Trausch. At least $1.5 trillion and $670 billion of commercial real estate loans are reaching maturity through 2026 in the US and Europe, respectively.

Trausch expected opportunities will emerge for investors to provide rescue capital to fill the funding gap in the US and Europe from 2024 onwards, whether through preferred equity, buying loans at a discount or buying equity at a deep discount.

Lower returns in Asia

George Agethen, executive vice president and co-head of Asia-Pacific at Ivanhoé Cambridge, also predicted that the returns in Asia would be lower in the next 12 months compared to the US and parts of Europe on the back of such dislocation.

“Yes, we want to increase our exposure to Asia. But if we look globally, after a year or maybe more of not great returns, do we take a more opportunistic stance and deploy on more special situations that will arise elsewhere?” he questioned in his panel.

Having said that, Agethen pointed out that diversification into Asia is key to building a resilient real estate portfolio, and that concept was not proven until last year. He said the region performed “reasonably well” relative to the rest of the world last year and this strong relative performance justified diversifying into the region. Previously, the US would outperform Asia even when Asia was delivering decent returns, he noted.

Simon Mok, head of portfolio manager of international private real estate at Employees Retirement System of Texas, said in a different panel that although he is prioritizing the US for distressed opportunities right now, he would look at growth opportunities in Asia in the long term. Potential opportunities could include buying oversupply stock, such as logistics assets in Incheon, South Korea, he said.

Trausch also was betting on Asia’s long-term growth opportunities. “I think the demographics and digitalization, in particular, are very strong in Asia,” he said.