Some Asian institutional investors are growing into cash-rich entities with billions under management and are looking for ways to transport that capital abroad. So far, however, Asia’s new wealth engine has yet to translate into velocity into private real estate.
According to PERE’s Research & Analytics division, assets under management by Asia-based sovereign wealth funds and pension plans has ballooned to $4.5 trillion, but their disclosed allocation to real estate remains a measly $94 billion, or just 2 percent. The proportion drops even further – to just 0.4 percent – when Australian institutions are excluded.
Still, such statistics can be deceiving, warns Nick Crockett, executive director for Asia-Pacific at global real estate advisory firm CBRE Capital Advisors. He says local sovereign wealth funds and pension plans do tend to be underweight in real estate investment, but that is not due to a lack of interest. Indeed, in just this past year, Crockett has been impressed by how inquisitive institutions in Asia are becoming, adding that the level of detail in their questions shows real intent.
Investors from Korea in particular have caught the eye. A survey by the Asian association for investors in Non-listed Real Estate Vehicles (ANREV) found that 50 percent of Korean investors hope to increase their allocation to real estate by between 2 percent and 5 percent over the next two years. That could translate to as much as $25 billion of new capital for the asset class.
One of the best-known Korean investors is the National Pension Service of Korea (NPS). “Given our goal of a globally-balanced portfolio across all asset classes, we are working to reduce the fixed-income portion while at the same time increasing the proportions of equity and alternative investments,” a spokesman tells PERE. Overseas real estate especially “contributes to the profitability and to the lower volatility of the NPS investment portfolio.”
Beginner’s caution
As frustrating as it may be for fund managers, Asian institutions are being patient and smart about their real estate allocations. Even the possibility of investing in real estate – to say nothing of international real estate – is a brand new concept for them, which keeps them painfully aware that their capacity remains immature, Crockett explains.
“These institutions are only just getting used to investing in assets that are not government bonds,” says Jeremy Stewardson, chief executive of ANREV. As such, their desire for reliable information has grown exponentially, only to make them realize how much more they have to learn about structures and markets, adds his colleague Alan Dalgleish, director of research.
International markets actually are harder for Asian institutions to understand than one might think. Indeed, language and cultural misunderstandings make even the simplest deal far from straightforward for Asian institutions that function adroitly in their own countries.
“Even though we think of a place like London as the epitome of transparency, to Koreans it actually isn’t transparent and thus they remain wary,” points out Dalgleish.
“Asian [investors] still need education in real estate investment, so for now they are just dipping their toes in the water,” Crockett adds. “The capital will come, but I think it will take longer than people predict.”
In fact, several Asian institutions say they are perfectly willing to take their time to find the assets they want at the right price. In addition, they are willing to work together to find the right way.
A targeted approach
A desire for caution and patience has led to a focus on targeted strategies. Indeed, everyone agrees that Asian investors have a hunger for control and want to know exactly what they’re getting into.
For example, a recent Jones Lang LaSalle study predicts that the Australian superannuation funds industry will commit $7.5 billion to overseas real estate by 2020. However, the firm’s Asia-Pacific head of international capital Alistair Meadows expects that such investors will commit capital “in the form of joint ventures and dedicated investment mandates with specialist local managers.” APN Property Group even pulled out of the blind-pool funds business recently because Australian investors no longer wanted such vehicles.
To follow their set strategies, Asian investors have been surprisingly willing to go into niche markets, even if it means taking on more risk. Orion Partners’ ¥25 billion (€189 million; $250 million) senior housing fund serves as one concrete example, while ANREV points out that Koreans have ventured into second-tier cities and Malaysian investors have backed development projects.
Japanese corporates, especially the domestic pensions served by Japanese fund of funds Nomura Real Estate Asset Management, have come to prefer the stability and liquidity that open-ended core funds offer. However, a surface evaluation of a fund’s strategy is nowhere near enough to quiet the fears of Nomura’s clients.
After the onset of the global financial crisis, many Japanese pensions found themselves stuck with unprofitable closed-ended funds they couldn’t exit, according to vice president of investment management Yuki Sugawara. To prevent that from happening again, those investors that stayed in real
estate chose to play it safe. And for them, ‘safe’ means staying informed.
“They became more cautious [after the global financial crisis] and now are constantly looking over their shoulder at what other institutional investors are going to do,” says the firm’s other vice president of investment management, Masato Nagano. He explains that this herd mentality fundamentally is a safety measure for these pensions, which draw on each other’s experience and due diligence. Since Japanese pensions in particular are struggling to meet their liabilities, they need to be sure certain real estate markets will perform.
Once again, however, general market knowledge isn’t enough for Japanese investors. They also have developed a need to know exactly what their investments are doing and how their money is being used. “Our investors like more control and governance rights,” Nagano adds. “They want to know more about how the investments are progressing and have the chance to reflect their opinions rather than giving all the authority to a fund manager.”
For Nomura, this translates to extensive requirements for funds. Sugawara and Nagano explain that a fund needs to show both downside protection and growth potential, as well as an ability to source deals differently from the market. Nomura generally prefers to see a fund’s pipeline before it invests and likes to see how the managers get ‘hands-on’ with their investments. Those are the details that will usher Japanese investors into overseas real estate, they believe.
One Chinese insurance company also tells PERE that it will stay away from global and regional funds and instead select country-specific funds with a good sector focus according to which markets look set to pick up. “Being general is what you do in public markets,” says the firm’s head of real estate. “If you want alpha, you need to have your own strategy to outperform the market.”
It will take a fair amount of time, however, to convince Chinese insurers and investors that particular strategies work, the real estate head at the Chinese insurer confesses. Most Chinese investors have little knowledge of overseas risk, so wealthy individuals and even institutions will need to build up the capacity before they can even ask the right questions. Strategies that worked in China may not work abroad, and even this insurer admits it needs to get the right experience in direct investing and funds before it can help other Chinese investors follow in its footsteps.
Inch by inch
The ponderous steady pace of Asian investors may seem agonizing to Western investors. However, patience actually plays a role in itself as the Asians are weeding out partners they cannot trust. Funds and developers that only look at an investor’s capital under management are partnerships the Asians want to avoid.
“I don’t just want to have formal meetings, I also want to talk to the key and mid-level people who are executing the deals,” the Chinese insurer explains. “I must get a feel for whether they are like-minded – understand their thinking and personality – as well as the progress of investments.”
Nomura also adds that keeping communication steady is vital for both its investments and its investors. Only by constantly showing them the details and returns from overseas real estate will Japanese investors become comfortable with the idea. Although earning the trust of investors and finding trustworthy funds “takes some convincing,” Sugawara says the firm is far from being discouraged – it is willing to take the time needed to earn trust.
Crockett goes on to say that the culture of trust in Asia is hard to explain to Westerners. Indeed, the investors he has spoken with actually are quite skeptical of the traditional methods of introduction, like brokers. They prefer to call in their own connections to start the conversation.
Asian investors are willing to put huge amounts of money behind groups they trust, Crockett explains, because over time they become sure this partner doesn’t just have “alignment of interest,” it has the investor’s interests at heart. Of course, breaching that trust also is treated far more severely.
“The ones who have been successful at getting Asian capital are the guys who have been coming out here for many years, not just every six months,” Crockett says. “It doesn’t matter how good of returns you’re getting, if you haven’t put the energy and time into building that relationship, you’ll never be able to get capital.”
After being in Asia for seven years, Crockett says he is only just starting to see investors come to him. “For those who have the patience, there will be a big reward,” he predicts.
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