ASIAVIEW: Give and take

That enough institutional-quality real estate can be found in Asia’s markets to warrant pan-regional funds dedicated to core assets is now of little doubt.At PERE’s annual Asia Summit in Hong Kong at the end of February, that fact was made abundantly clear. 

That we still are in the early throes of this market maturation, however, was made just as obvious and was underlined by perspectives, both on and off the stage, regarding a viable performance benchmark for the region. 

During a panel session focused on core real estate in Asia, one investment manager bemoaned the fact that most of his North American investors required a widely-respected benchmark in order to demonstrate to their associates and stakeholders that they could track the performance of their investments. He noted that the lack of such an index was unduly restraining capital that wants to be invested in Asian real estate.

In the absence of a true index, it was surprising to hear how some investors are using makeshift benchmarks, including US indices with an added premium for Asia or various Asian REIT benchmarks, as workaround solutions. Such solutions, while somewhat heartening, should be seen as inadequate.

After all, how can anyone track performance in one region by adapting the performance of real estate thousands of miles away in another and stapling some arbitrary premium expectation to it? For one, anyone comparing prime yields in Shanghai with a market like Paris knows that such a premium does not even exist.

Equally inappropriate is matching private real estate investments with listed real estate shares – at least in terms of assessing whether to back a particular manager with an equity commitment or not. Listed shares can be traded daily and are done so nearly always at either a premium or discount to net asset value, depending on sentiment in both the property market and the wider listed universe. That offers a pretty skewed comparison therefore to private real estate units, which are subject a little more faithfully to real estate fundamentals despite being appraised quarterly, biannually or even annually. 

Nonetheless, as stated before, it was heartening to hear how some investors are resorting to such measures because it underscores the importance being placed today on addressing severe under- allocations in a region that supposedly holds one-third of the world’s investable real estate universe. In other words, they are going for it even though they do not see optimal apples-for-apples comparisons.

The contradiction here is that such a metric for comparison does exist and is only getting stronger. Indeed, it was disappointing that there was little mention at the conference of the good work being done by the Asian Association for Investments in Non-Listed Real Estate Vehicles (ANREV). In fact, one research director from ANREV was so incensed by the lack of mention of its now three-year-old private real estate performance index that she approached me to say so. It was hard not to be sympathetic.

Rightly, the ANREV researcher said the means of establishing a widely-recognized benchmark for Asia’s core real estate market was in the hands of its participants, a meaningful number of whom have yet to be forthcoming with their numbers. That is a shame as the association has made great strides with its index since PERE first wrote about its plans for one back in December 2010, when the association had just 92 members. 

ANREV had 94 members contributing to its last index data collection – and it has gone from producing results annually to biannually. Still, that number is little more than 60 percent of the 150 funds in its database. When you consider that ANREV cannot claim to have signed up anywhere near the total number of private real estate investment fund managers currently active in the region, you get an idea of how much better supported its index could potentially become – and with that how comprehensive a measuring tool for institutional investors it could be.

ANREV, for its part, is going to continue improving its index and, as part of that effort, plans to switch to quarterly reporting soon. However, as the research director said, it needs more contributions to be considered a reliable barometer for folk such as the US investors mentioned on stage. A bit of a promotion on conference stages would not go amiss either.

Still, I also felt a sense of reticence from certain folk at the conference as if, actually, they would prefer to operate in opacity a little longer. Attitudes like that might yield a little advantage when it comes to managing return expectations, but they do no favors to those keen to bring Asia benchmarking in line with Western markets. If investment managers offering core real estate strategies in the region want greater support from institutional investors around the world, they must recognize that a viable performance index against which to benchmark their performance is a pre-requisite part of that and that greater support from them will go a long way.