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Private real estate’s home region bias should be short term

With vaccine success expected and a US government keen to rebuild international bridges, the sector has every chance of reversing this current trend.

Anyone combing the details of KKR’s first Asia real estate fund would have noticed an uptick in Asian investors backing the vehicle, which closed last week.

The New York-headquartered private equity giant closed on $1.7 billion for KKR Asia Real Estate Partners. PERE discovered approximately 30 percent of that was raised from investors in the region, an unusually high figure, according to two capital advisory sources we spoke with.

Notably, KKR collected around $400 million from Korean investors, a group long associated with backing US and European strategies over Asian to supplement their domestic holdings. In 2019, nearly 70 percent of total Korean capital went into European markets, according to a CBRE report in early 2020.

In Asia, KKR is not alone in that regard. Hong Kong-headquartered Phoenix Property Investors is understood to have grown the Asian investor base from 20 percent in its 2013 Phoenix Asia Real Estate Investments V fund to about 50 percent in Fund VI, which closed on $1.15 billion in 2019.

A home region bias is not limited to Asia of course.

Last week’s survey from the associations ANREV, INREV and PREA found that investors from Europe, North America and Asia expect the majority of their 2021 investments to be in local regions. The trend is strongest in North America, where 73 percent of investors plan to invest domestically, followed by Asia at 69 percent and Europe at 62 percent.

A bigger question remains as to whether this bias will stay a prevalent theme throughout the year.

The evidence to suggest it will is ostensibly strong in Asia currently. The region is proving to be the first to reach a recovery stage amid the covid pandemic.

But with Europe and the US still grappling with the crisis, it is important to remember Asian capital has been limited in what investments it can make in the West given travel restrictions. Similar logic applies to other regional investors that have had to narrow down their activities to where they can invest as well. There is a global optimism surrounding an effective vaccine. Successful mass immunization would surely encourage a reversion to a more balanced, multi-region allocation strategy.

Also, with this week’s inauguration of US President Joe Biden, one political headwind thwarting globalization, especially cross-border trade between the world’s two biggest economies, has gone. During Donald Trump’s presidency international groups became net sellers in 2019, according to Real Capital Analytics. It is too early to indicate how the Biden presidency will alter real estate cross-border activity. But investors can at least have more confidence in making investment decisions in the country under a more predictable government and one keen to rebuild international ties.

Private real estate has started 2021 with a home-region bias. Whether it finishes the year with the same bias depends largely on factors not directly influenced by the asset class.