Global institutional investors find it harder to demand a risk premium when they invest in core real estate in Asia now, as the gap between the returns generated in the region, and those in the US and European markets, narrows, heard delegates at the PERE Asia Summit held in Hong Kong.
“From an asset level risk point of view, investors should not expect a risk premium. Firstly, you wouldn’t get it and in most cases, assuming the right asset selection, it doesn’t justify,” explained Benett Theseira, head of Southeast Asia for Pramerica Investment Management.
His view is apparently echoed by others as well. Theseira said that in his conversations with investors who had traditionally been investing in opportunistic strategies in Asia, but had now moved to core, it was made clear that those who expect a risk premium to invest in core in Asia now are “just not in the game.”
A poll conducted during the session, asking the audience to list the perceived risks for core real estate in the region, elicited a similar response. Currency risks, which have been traditionally considered as a huge downside to investing in the region, did not figure in the top two risks. Neither did geopolitical risks. Risks around interest rates came first, followed by concerns about the global economic performance.
According to Suchad Chiaranussati, managing director of SC Capital Partners, interest rate risks are easier to manage – one could do an interest rate swap. On the currency risks, Louise Kavanagh, director and fund manager, Invesco Real Estate Investment Asia Pacific said that in the case of a longer-term holding of a core asset, the currencies would neutralize over time.
Taylor Wilson, Partner and Chief of Investment Funds Practice Group, Haynes and Boone added: “Historically, there has been a mindset that overseas investors are looking for a return premium here in Asia markets to overcome perceived the forex risk, and as a result favor value add and opportunistic categories. That mindset is shifting.”
Singapore-based Theseira, who will assume his new role as the head of the Asia business for PREI, replacing Morgan Laughlin, further said that Asia is now able to provide around 7 percent to 10 percent returns from core real estate funds – the same level of returns that one can find elsewhere.
And this parity is drawing more investors to the region. Theseira cited statistics from a recently-conducted CBRE intentions survey, which estimated that around 43 percent of investors have expressed an interest in core real estate in Asia.
“Fundamentally if you look at the long term economic growth in Asia and the potential of the growth of cities and growth of businesses, that gives more opportunities to get such levels from core assets,” he said.