Although real estate investment volumes in Asia-Pacific dropped 32 percent in the first half of 2020, the region is expected to be the first to recover, with a gradual loosening of lockdown measures and restrictions, according to JLL. Meanwhile, the number of covid-19 cases continues to spike elsewhere, led by the US with close to 7 million of confirmed cases. This week, over 300 delegates around the world gathered online at PERE’s first virtual conference, PERE Japan Korea Week, to discuss how they have been coping with the impact of the pandemic. Here are the event’s four key takeaways.
The inability to conduct physical due diligence due to travel restriction remains the top concern for both South Korean and Japanese investors. Janghwan Lee, executive director, head of the alternative investment division at South Korea’s Lotte Insurance, said the proposal of “untact due diligence” was disapproved by the local financial authority. “We saw this as a window to buy quality assets at discount prices…” he said. “But we received negative feedback from the authority.” The issue is even more severe for Japanese investors, which have traditionally been very “process-oriented,” according to Masaki Arimura, executive director at PGIM Real Estate. He believes time allowance is critical for Japanese investors to feel comfortable in making investments during such an unprecedented time.
Importance of managers
Given their inability to conduct on-site due diligence, investors have become more reliant on managers for overseas investments to address the uncertainties of doing business in foreign markets. “We believe the pandemic will bring new revenue and new risk to the market. But we don’t have enough resources to figure out everything. It’s more practical to have your fund managers handling it,” said Takeshi Ito at Japan’s AISIN Employees’ Pension Fund. Harry Song, head of overseas real estate at South Korea’s Public Officials Benefit Association, also planned to work more closely with managers for overseas investments going forward. The investor is currently in talks to set up separately managed accounts and Song expects this to be the main channel for the firm’s overseas investment next year.
Investors have further polarized their preference for sectors and strategies since the outbreak of covid-19. The pandemic has accelerated investors’ interest in logistics and datacenters, for instance. Meanwhile, investors are further shying away from retail and hospitality as these two sectors are directly impacted by lockdown restrictions. In terms of strategy, investors are either embracing the “strategy with highest stability” or “highly leveraged and speculative strategy,” according to Lee. This also corresponds to POBA’s approach of constructing its portfolio with core and opportunistic investments. POBA is looking at the residential sectors in the US and Japan for safer returns, and has also recently invested in distressed property loans.
Switching from equity to debt
With today’s macroeconomic uncertainties and due diligence challenges, some investors with lower risk appetite are switching from real estate equity investments to debt issuance or infrastructure projects. For example, Japan’s Orix Life Insurance paused its first real estate equity fund commitment earlier this year due to the pandemic and invested the capital into debt/infrastructure products instead, according to Kiyosei Sugioka, head of alternative investment at Orix. But he noted the insurer will continue to monitor the situation and resume real estate equity investments once the pandemic stabilizes. “They don’t need to do site visits and they can communicate with managers online for debt investments,” said Doyle Kim, managing director and head of real asset investment finance department at Hana Financial Investments. He also agreed investors can return to equity investments with managers once the pandemic subsides.