High risk, high volatility and a track record of lower returns than the more developed US and European real estate markets. Those are the most common reasons cited nowadays by a large contingent of global institutional investors and fund managers when excusing themselves from engaging with Asian property markets. Compounding this caution further at the moment are persistent negative headlines coming out of markets such as China.
But now just might be the right time to reassess the region. No longer is the risk and return gap between Asia and the western markets as wide as before, with recoveries well underway in the US and Europe and with positive results from a raft of policy measures being implemented in many Asian markets.
According to estimates, real estate funds raised in the region recorded an improved performance last year, in some instances even outperforming their overseas counterparts. And as research reports suggest, even the flight of institutional capital from Asia to other gateway cities is expected to moderate this year.
If the statistics are any indication – and they ought to be – then “the overlooked and underrated” region, as Simon Treacy, global chief investment officer at BlackRock Real Estate put it at a media briefing in March, should now be back on the radar.
For starters, cooling measures in markets such as China, Hong Kong and Malaysia have led to a correction in property prices and better yields, while yields in the US and UK markets have further compressed. For example, prime office yields in London declined from 6 percent in 2008 to 3.5 percent in 2014 while markets like Shanghai can currently offer a net yield of 4.5 percent, according to the latest numbers from professional services firm PWC.
Lately, there has been much emphasis on outbound real estate investments from Asia, especially in light of some landmark property acquisitions by Chinese insurers in London. However, Asian institutional investors which are looking to invest overseas in the next one or two years will find it increasingly hard to replicate the success of Anbang or Ping An’s maiden forays as yields continue to reduce.
While they may still get a 6 percent yield on investing in second-tier markets in Europe and the US, many would be more willing to invest in the known gateway cities within Asia, according to brokerage Colliers, which estimated in a report published last month that intra-Asia capital flows in real estate will reach $62 billion this year, a massive 52 percent jump from the $39 billion invested in 2014.
In fact, the report has predicted that a “quantum leap” is on the cards for Asian real estate, with inbound investment set to outpace outbound investment volumes. Some global investors have already taken their cue. For example, PERE has already written about how Norway’s $870 billion wealth fund is preparing to purchase properties in Tokyo, its first investments in Asia. Perhaps more interesting then is that the New Jersey Division of Investment reportedly recently pulled capital out of two core US real estate funds and redeployed it into an Asia-Pacific property fund late last year.
US institutions typically choose Europe as their first stop when they begin to branch into overseas markets. A comparative analysis between the current state of the European and Asian property markets suggests that practice may soon change.
Non-listed real estate funds in the Asia Pacific region performed better than equivalent funds in Europe for the whole of last year, according to findings from the Global Real Estate Fund Index released by the Association for investors in Non-listed Real Estate Vehicles (ANREV), last month. The 79 APAC funds, whose data was used to compile the index, clocked 9.44 percent annualized returns as compared to 8.9 percent returns generated by the European funds. This at least partially responds to the notion that there is not enough liquidity available in the region to lap up the assets up for sale via funds that are nearing their exit.
Treacy said in the media briefing that that for value-add investments, Asia could offer returns in the 15 percent to 18 percent range compared with 13 percent to 16 percent in Europe, he said.
Speaking at the PERE Asia summit in March, Benett Theseira, head of Southeast Asia for Pramerica Investment Management said that even for core funds, Asia is now able to provide around 7 percent to 10 percent returns, the same level of returns that one can find elsewhere.
The statistics and forecasts make for more alluring reading nowadays, be it the data on APAC fundraising, fund performance and exits, or the overall investment returns. These are all telling signs pointing towards a resurgence of investment interest in Asia.
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