In recent years, global institutional investors have become increasingly interested in Asia’s core markets as the region’s weighting in the global investable real estate universe continues to increase. In fact, Asia is expected to represent approximately 40 percent of the global investable real estate market by 2020.
Investors, therefore, are looking to diversify their overall property portfolios by seeking opportunities in Asia. They have typically been under-allocated to the region as the focus had been on the recovery play in Europe and the US after the global financial crisis. But now with the Brexit vote, upcoming elections in Europe and uncertainty in the US, these investors are back looking at Asia.
At the same time, Asian property markets have matured and there are now enough cities with core stock, quality assets and blue-chip tenants. This means investors in the region can now expect a consistent income stream from Asian core properties, alongside greater transparency and liquidity in the markets.
Now, the need for a reliable income stream as interest rates start to creep up will mean that real estate becomes a good fixed-income substitute in lieu of bonds.
As such, we have seen a lot of investment managers launch products to cater to this longer-term strategic allocation to Asian real estate in the last year or two. But, in reality, they are in aggregate targeting just $4 billion-$5 billion of capital. That is a drop in the ocean, given the investable real estate available in Asia.
But, Asia is still not an easy marketplace. It is a region of many countries, languages, tax structures, legal systems, and to be well-versed in each of these you need to be in those countries. A fly-in-and-out approach increases the risk of mistakes, as we have witnessed from international investors over the years.
This is why the open-ended fund structure in Asia appeals to international investors, as it provides the ability to hold assets long term and through cycles. Investment managers are not under pressure to invest within a constrained investment period, nor sell assets at the wrong time because a fund’s life is coming to an end. That flexibility allows a manager to shift in strategy and allocation to different markets and sectors as cycles change.
International investors that are not adequately staffed to have an extensive direct program in Asia are as such more likely to invest via the fund route. However, there is also a boon to be felt for the entire real estate industry in Asia as these open-ended core funds continue to grow.
Importantly, the number of open-ended core funds in the market could prompt the creation of an index in Asia similar to the NFI-ODCE index in the US or, more recently, the MSCI PEPFI (Pan-European Property Fund) Index in Europe.
Inclusion on an index could bring major benefits for investment managers and investors in Asian core real estate funds. Indices are crucial for comparing performance against a peer group and support liquidity and capital-raising.
An index would also provide an easy way to track the overall health of the Asian core real estate space. Additionally, as the index matures, the historical data would be able to provide some guidance to investors as to how the markets have reacted to certain situations in the past.
Trade body ANREV (Asian Association for Investors in Non-listed Real Estate Vehicles) is currently pushing for the development of such an index, but there are major issues with currency and definition of fund styles. Continued expansion of the core fund universe in Asia, however, will support better development of a suitable index.
A true benchmark would be a great benefit to the overall real estate industry in Asia and would provide much more transparency, which in turn could lead to more institutional capital flow.