The center of gravity has shifted in real estate capital raising

Michael Kovacs, founding partner of Castleforge, a London-based manager focused on investing in the UK and Europe, spent a few weeks in February and March meeting with investors in Asia-Pacific. Last month, South Carolina’s Greystar hired its first managing director of investor relations for Asia-Pacific, Bianca Solomons, on the back of the firm’s growth in the region.

There is a good reason for managers to focus more attention on Asia-Pacific capital. The region’s investors are now the primary source of capital for private real estate globally, contributing 35 percent of total money raised in 2022, up from 26 percent in 2021, according to The Capital Raising Survey 2023, published this week by the industry associations ANREV, INREV and NCREIF. This year marks the first time in the survey’s nine-year history that the region is the most significant investor domicile for global real estate capital.

In contrast, European investors saw their share of capital raised drop to 30 percent in 2022. Last year, the region was the largest source of real estate capital, representing 41 percent of aggregate money raised. North American investors accounted for approximately a third of capital both years.

The dominance of APAC investors in capital deployment can also be seen elsewhere. During Q1 2023, Asian capital represented 74 percent of all purchasing activity and 100 percent of transactions over £85 million in the central London office market, according to CBRE data. One such deal was Castleforge’s joint venture acquisition of Winchester House, Deutsche Bank’s UK headquarters building, with Malaysian property developer Gamuda Group.  

Multiple factors are driving this shift, according to the capital raising survey. One is that APAC investors are more underallocated to real estate than their US and European counterparts. Investors from the region had an actual allocation of 6.3 percent against a target allocation of 8.3 percent, according to the ANREV/INREV/PREA Investment Intentions Survey 2023, published in January. In contrast, European investors were slightly overweighted to the asset class, with a 10.8 percent allocation against a 10.5 percent target, the survey showed. North Americans, meanwhile, were slightly underweight, with a 12 percent allocation against a 12.7 percent target.

Although monetary policies will impact investors’ weightings to real estate in the short term, the regional differences in allocation can also be attributed to longer-term factors, such as Asian investors generally being newer to investing in real estate than their US and European peers and real estate allocations being built out later in investment portfolios than other asset types like equities.

The rise of APAC investors in capital deployment has been years in the making. Back in November 2020, Kovacs and fellow Castleforge executives Brandon Hollihan and Adam MacLeod noted in a research letter that Asian capital represented on average 3 percent of total investment into the London market from 2000 to 2010, but that number grew to 24 percent over the next decade.

The firm pointed to long-term structural and policy changes that have occurred recently in China, Korea and Japan and are expected to drive continued investment in real estate. These include increased allocations to real estate, alternatives and overseas investments for South Korea’s National Pension Service and intentions to deploy more capital to alternatives among Japanese corporate pensions.

“The scale of these changes suggests that the influx of capital from Asia may very well continue, in particular into alternatives – and will likely increase over the coming decade,” the executives wrote.

Although APAC capital is on track to remain active for the long term, courting the region’s investors is more a case of addition rather than subtraction for managers like Castleforge. As Kovacs told PERE this week, with the geopolitical and macroeconomic environment shifting every year, to depend on one region because investors there are more actively deploying capital than their peers elsewhere “just seems short-sighted.”

During unpredictable times like these, diversifying one’s investor base – and consequently mitigating concentration risk – is all the more important.