The Singaporeans have an expressive idiom, kiasu, which, translated directly, means “afraid to lose,” but, in Singaporean culture, is used to describe an anxiety that grips people when they feel the opportunity to get ahead is passing them by.
As property prices around the world have surged, US institutional investors who may not otherwise have given much thought to, for example, Estonia, are suddenly being stricken by a case of kiasu that they are missing out on an historic opportunity to profit in the developing world.
The kiasu is made all the more acute by the fact that the outlook for returns in the US is modest to scary, depending on who you talk to.
New research is adding to a growing sense among many US property investors who have kept capital at home that they have lost out. According to a new study by two researchers from Boston-based Property & Portfolio Research, Susan Hudson-Wilson and Haibo Huang, an investor whose real estate portfolio included properties in Europe and Asia as well as the US would have outperformed a US-only investor by a whopping 171 percent.
Risk, or rather an aversion to it, is why many US institutions have avoided overseas markets. But it is precisely risk and volatility that can enhance returns, and enhanced returns is exactly what primarily pension plans need as the Baby Boomers begin to retire.
The study, called “Benefits of Global Diversification on a Real Estate Portfolio” and appearing in the Journal of Portfolio Management, examined returns data from the first quarter of 1991 through the fourth quarter of 2005 and focused on the office market. Hudson-Wilson and Huang found that “[when] only US office investments are considered, an investor has limited performance options. As we add markets from Europe and Asia, the range of return and risk options becomes greater…” After factoring in currency and other risks, the study's “optimal global portfolio” still outperformed a US-only portfolio by 92 percent.
Risk, or rather an aversion to it, is why many US institutions have avoided overseas markets. But it is precisely risk and volatility that can enhance returns, and enhanced returns is exactly what primarily pension plans need as the Baby Boomers begin to retire. Take, for example, the Hong Kong office market. Over the time period studied, its standard deviation was 27.46 percent, greater than that of any other city (remember SARS?). But its average return was also the highest, at 14.04 percent. Sweet home Chicago, by contrast, had a less frightening 8.86 percent standard deviation but a 5.61 average return.
But institutional investors often create real estate allocations to pursue not simply returns, but risk-adjusted returns. Real estate is seen as a hedge against inflation, a source of current income, a non-correlated asset class, a smoothing asset class. In the same issue of JPM, a trio of researchers and authors of “Global Commercial Real Estate” find that the addition of North American commercial real estate to an overall portfolio greatly improves its risk/return characteristics, while the addition of European and Asian commercial real estate assets doesn't make much of an impact in this regard.
Regardless of the thinking behind an international allocation, it is clear that for the majority of US institutional investors, there won't be much risk or return from abroad. By one estimate, US tax exempt investors have only 3.3 percent of their real estate allocation earmarked for non-US assets.
No wonder private equity real estate firms with a global footprint have been raising so much capital – they provide a compelling way for institutions to indirectly own properties overseas. The largest private equity real estate funds in the market today have global diversified strategies. A recent survey of plan sponsor chief investment officers from Citi found that these investors plan to double or triple alternative investment allocations outside of the US. Considering the size of the globe and the expected demand from limited partners to shift money out of the US, you can expect to see the likes of Beacon Capital, Blackstone, Morgan Stanley and Colony grow dramatically in the coming years.
As reported in our fund of funds story in this issue, you can also expect to see a dramatic growth in funds of funds that put investors in emerging markets.
Past performance does not guarantee future returns, but current kiasu does have the tendency to make investors hope otherwise.