ASIA NEWS: Long-term play

It has long been mooted, but Allianz Real Estate, the real estate investment management arm of German insurance giant Allianz, has finally set its first Asian strategy. 

The Munich-headquartered firm, which currently has €21.5 billion – or 3.25 percent of its total assets – committed to real estate globally, announced last month that it intends to commit an additional €2 billion to real estate in the US and China. According to Vincent Chew, group head for Allianz Real Estate in the Asia-Pacific region, the China part of the strategy involves investing up to €300 million in the country during the next 12 to 18 months.

Investments would need to be ratified at Allianz’s Munich headquarters. However, as the most senior decision-maker for real estate in the region, Chew told PERE that he already has a “green light” to pursue investments in certain sub-sectors of China’s real estate market. In addition, because Allianz currently is relatively ‘resource light’ in Asia, the insurer primarily will focus on investing indirectly through third-party investment managers, particularly via club deals, rather than making direct property investments. 

An additional €300 million looking for third-party stewardship might sound like a dream for an industry that has struggled to raise capital of late. According to PERE Research & Analytics, real estate fundraising for value-added and opportunistic funds in China dropped from $4.4 billion in 2011 to $3 billion in 2012. 

Still, Allianz’s commitment to Chinese real estate is not to be considered a free-for-all. The firm is interested primarily in retail and logistics real estate strategies as it is keen to benefit from the country’s consumer growth story.

“As an insurance company, a lot of what we do is about matching assets and liabilities, and we generally look towards real estate as a yield play,” Chew said. The ‘yield’ Allianz wants, however, is over time, which not many aspects of China’s real estate investment market currently support, he noted.

For example, although Chew sees potential in China’s growing residential real estate, he noted that most funds enter that space with a quick in-and-out strategy in mind, selling investments as soon as they can. Quick exits may bring a high IRR but not the consistent yield that Allianz is looking for in the region, he explained.

Office properties present a similar predicament, even though they are Allianz’s “bread and butter” in developed markets like Europe. That is because Chinese investors have long invested in the asset class on a strata basis, which is less conducive to institutional investors who want their managers to have more control over a property. 

For Chew, retail and logistics real estate offer an attractive combination of long-term yield and exposure to China’s urbanization and middle class growth stories. Shopping centers within burgeoning residential surroundings, for example, can generate consistent returns if the shops correctly harness the traffic afforded by the surrounding demographic.

As far as geography is concerned, competition in Tier I cities like Beijing and Shanghai has prompted Allianz to look at Tier II cities, or what Chew dubs ‘Tier 1.5’ cities. Tier 1.5 cities are those that have the hallmarks of one day becoming Tier I cities. 

In logistics real estate especially, Allianz is interested in development on the fringes of Tier I cities, but which serve those cities directly. “Some of these locations might not technically be Shanghai – they may be another city that you may not have heard of before – but, effectively, it’s serving as a distribution centre for Shanghai,” Chew said.

Underlining a current trend among institutional investors of backing operators over capital allocators, Chew said: “For China, we’re typically looking for managers who also have strong operating capabilities.” 

Following another trend among investors – and speaking to its longer-term investing thesis – Allianz also is looking for meaningful co-investment prospects alongside the funds it backs. This would allow the firm to have the option to remain invested in a real estate asset even after the GP has exited, Chew explained. 

Furthermore, Allianz will not invest on behalf of its China subsidiary and will be looking primarily at outlays to offshore funds. Chew admitted that this presents certain repatriation issues as the communist nation has a good number of ‘cash traps’, as he called them, for foreign investors. In no sector is that more prevalent than in real estate, he said.

For instance, although returns can be collected upon exiting an asset, the investor needs to keep a significant amount of its investment onshore while still invested in the asset. Naturally, that has an impact on distributions. 

“There is a big spread between our returns and what we can get offshore,” Chew said, adding that maximizing Allianz’s potential for steady distributions within China’s onerous tax regime would be a long-term focus. Given the firm has a long-term strategy for real estate in the country, Chew has time to do his homework.