As of last month, Morgan Stanley Real Estate Investing had raised $650 million in equity commitments for its maiden core property fund in Asia.
Notably, most of the capital for the pan-Asia open-ended vehicle (Prime Property Fund Asia), came from European investors, according to a source familiar with fundraising. Limited partners include the Copenhagen-based PFA Pension, Denmark’s largest pension fund, which is an anchor investor and believed to have committed $150 million-$200 million.
Amid subdued growth, projected inflation and persistently low interest rates in Europe, an increasing number of the region’s investors are flocking to other markets to seek investment returns comparably higher than at home.
As the composition of MSREI’s investor base shows, the lower-risk property funds in Asia have become a viable investment option for European pensions, insurance companies and other institutional investors.
Suchad Chiaranussati, founder and managing director of Singapore-based investment manager SC Capital Partners, said returns from a core or core-plus investment in Europe are now down to single digits of 6-8 percent. By contrast, some of the early investments made via the SC Core Fund, the firm’s debut core-plus fund for Asia, are expected to generate internal rates of return of approximately 10 percent, with a 5 percent distributable yield.
The other driving force behind the European investors’ push into lower-risk investments in Asia is the relatively higher interest rates in the region compared with Europe.
“With the exception of Japan, whether you look at China, Singapore or Australia, the interest rate in absolute terms remains relatively high,” said Chiaranussati. “In order to get financing, the underlying asset needs to satisfy a certain yield. And the [partial] reason why the underlying yield in these markets is better is a function of the debt market.”
The SC Core Fund has so far attracted $280 million and is expected to corral $480 million by the end of March.
SC Capital declined to comment on fundraising, but a source told PERE that European investors would take up a majority by the time the fund is closed. Initially, the firm only marketed to existing investors in its RECAP opportunistic fund series, and had raised equity from US investors. It was not until last June that SC Capital decided to approach European investors. At present, a German insurance group, a Swiss public city pension and a Danish pension fund are believed to have invested.
Several European investors have publicly stated their intent to deploy capital into Asia in the past year. In July, Switzerland’s largest public pension fund, Publica, announced that it will be allocating 4 percent to foreign real estate, marking its first-ever global push into the asset class. As PERE reported, 20 percent of this will be invested in Asia, initially in open-ended funds with broad investor bases. A few months later, Compenswiss, the investment manager of The Swiss Federal Social Security Funds, issued a request for proposals from fund managers for Asian, US and European mandates.
Part of this demand could be attributed to the performance of non-listed Asian funds. According to trade body ANREV’s quarterly index, Asia-Pacific was the only region to see an improvement in funds’ performance in the third quarter of 2016. According to the Global Real Estate Fund Index, which analyzed 489 funds in total, Asia-Pacific funds generated a total return of 2.58 percent, compared with 1.98 percent for US funds and 1.01 percent for European funds. Core funds in the region were the best performers on a relative basis, with a return of 2.98 percent, while value-add and opportunistic funds recorded 2.38 percent and 1.08 percent returns, respectively.