Delegates at PERE’s seventh annual Asia Summit heard from the concluding panel of Day One how the lack of a widely acknowledged benchmark was standing in the way of the region’s core real estate market from becoming recognized globally.
Core strategy funds for private real estate investing in the region currently are in their infancy but are enjoying some early support by international institutions as evidenced by Invesco Real Estate’s $400 million first closing for a core fund, by PERE last week.
However, Graeme Torre, Invesco’s managing director for Asia, pointed out while on the panel how international investors have struggled to position core real estate in their global portfolios in the absence of a widely recognized benchmark.
Torre said: “Many core investors invest off of a benchmark. That’s the one thing Asia doesn’t have. If we’re really going to be considered a major market we need a core benchmark.”
In the absence of a widely acknowledged benchmark, the panel told how investors keen to participate in core real estate investments in Asia were adopting makeshift benchmarks including US benchmarks with an added premium for Asia or various Asian REIT benchmarks.
On the sidelines of the conference, Amelie Delauney, director of research at the Asian Association for Investors in Non-Listed Real Estate Vehicles, said the association was in the throes of constructing a performance index for core real estate funds in Asia. But she appealed to the market for greater input. She told PERE: “The power is in their hands. It is a matter of whether they really want to create a benchmark or not. We’ve had some support but we need more if we want a reliable and active benchmark.”
Delauney said of ANREV’s 150 member funds, 94 contributed performance data when last approached in Q2 last year.
The panel concurred that investors should expect IRRs of between 8 percent and 10 percent from core real estate investments in Asia – chiming with an audience poll where 54 percent of respondents agreed. In that poll, 44 percent said returns should be between 6 percent and 8 percent while 2 percent said they should be more than 10 percent.
Also debated was the definition of what makes a core real estate investment. After some deliberation, panellists, also including M&G Real Estate Asia chief executive officer Scott Girard and Morgan Stanley Real Estate Investing’s China head Calvin Chou, agreed that core real estate effectively was property that could be compared to low-risk equivalent asset classes like bonds. It would be a high specification building in a strong location able to retain tenants over the long term and demonstrate sustainable and long-standing income.
The panel discussed whether property with such characteristics is obtainable in China. Ultimately, it determined that such property was available but in selected markets and in small quantities. Chou said: “These things can be found in China but what is considered core to one person isn’t always considered core to another.”
In a further indication that MSREI is looking at introducing core strategies in the region, Chou outlined how the firm considered Australia, Japan, Hong Kong and Singapore as the region’s main core markets but that China should be included over time.
All panellists however outlined one major obstacle for core investing in China was the exporting of distributions from a fund offshore. Girard said the cost of expatriating capital from China could lead managers to redefine the risk they would be willing to take to get to their target returns: “We don’t dispute that you can find core real estate in China,” he said. “But the key is the capital controls of the country. There is a cash drag which would bring down the distribution yield and that bites into how you define your core fund.”