In November 2011, this column predicted an influx of open-ended core real estate funds in Asia. Thankfully, we didn’t place an ETA on our predication because the market certainly has taken its merry time. Finally, certain news to emerge last month has pushed the story along.
Invesco Real Estate, the real estate subsidiary of global asset management giant Invesco, has come to the market with its first open-ended core fund for Asia. Not only that, the fund has attracted $100 million in equity from the Los Angeles County Employees Retirement Association (LACERA).
The commitment by LACERA to the Invesco Real Estate Asia Fund is significant on multiple levels. For starters, it marks the first time the $39.2 billion pension plan has committed to a core-focused fund outside of the US.
Impressed by Invesco’s handling of a $1.2 billion separate account stateside, for which the firm has generated an 8.4 percent IRR and 1.5x equity multiple net of fees, the pension determined it was ready to take the plunge with a manager it trusts.
Secondly, the commitment shows that one of the more active US pension plans in private real estate investment believes Asia now has an investible universe capable of satisfying a fund that is expected to grow to $1 billion of commitments within five years. Indeed, in LACERA’s public recommendation to commit the capital, it cites research by CBRE Global Investors that maps a global investable universe in which both developed and emerging Asia accounted for about 15 percent in 1985 and will account for more than 30 percent in 2020.
More important than both LACERA’s courage to invest overseas for the first time or the predicted size of Asia’s investible real estate universe, however, is the fact that LACERA believes Asia today is ripe for investing in “existing income-producing properties for long-term holding,” to quote from the recommendation. This is the type of property the pension, and many other institutional investors like it, wants across geographies but, to date, has not sought in Asia.
It is interesting that the launch of the Invesco Real Estate Asia Fund comes in tandem with the launch of a more traditional, closed-ended opportunity fund, which is intended to make investments in the same target markets (albeit via different strategies). At press time, PERE understood that the core offering has attracted noticeably more interest from investors than its opportunistic brother.
LACERA’s previous exposure to Asian real estate had come via similar-structured opportunity funds: the pension is invested with one effort of AIG Real Estate (which was acquired by Invesco in February 2011) and a Japan opportunity fund and value-added fund of CBRE Global Investors. The pension admitted it previously had perceived Asia as higher risk in general and subsequently warranting higher returns than the 8 percent to 10 percent offered by the Invesco Real Estate Asia Fund.
This commitment to Invesco’s core fund evidences a shift in mindset by LACERA, but it is surprising realisations like that already haven’t come elsewhere – and on a larger scale. Today, there is little logic for any institutional investor bent on diversifying its real estate exposure to ignore the most sophisticated markets in the East as they offer many of the same characteristics of their Western counterparts: same occupiers, leasing structures, building specifications, etc.
So, in anticipation of more institutional capital flowing into Asia’s core markets, what is needed next is more fund launches to accommodate investors following in LACERA’s footsteps. Indeed, even with Invesco’s offering, the number of open-ended core real estate funds in Asia can be counted on one hand.
First to offer such a vehicle was PRUPIM, part of the asset management arm of UK insurance giant Prudential, which teamed up with Chicago’s LaSalle Investment Management in July 2007 to raise money against a portfolio of assets previously held on PRUPIM’s balance sheet. Notably, in April last year, LaSalle severed ties after deciding the best approach to core real estate in Asia is on a country-by-country basis and more bespoke to the wants of individual investors. PRUPIM nevertheless is keen to stick to the pan-Asia model, and PERE understands the firm currently is ramping up its management capabilities in the region to that end.
In the last two years, Pramerica Real Estate Investors converted a series of closed-ended development funds holding 11 shopping malls in Singapore and Malaysia into an open-ended core fund – admittedly, partly in response to certain investors seeking quicker liquidity. Meanwhile, MGPA and SEB Asset Management have each brought to market open-ended core funds in an effort to meet the growing ambitions of German investors to diversify their real estate exposure overseas but maintain a core investing profile – much like LACERA.
Invesco’s addition to examples like this gives PERE the confidence to maintain its predication of more open-ended core real estate funds in Asia in the years to come – even if they do take their merry time to emerge.