Why investors are underallocated to APAC real estate

Although capital flows are tightening across most of the globe, ESR’s Jeffrey Perlman explains this will be less the case in Asia-Pacific.

Jeffrey Perlman, ESR

Hong Kong-based private real estate manager ESR may have one of the largest real estate platforms in Asia-Pacific – and the largest focused on new economy real estate – but Jeffrey Perlman, the firm’s chairman and head of Southeast Asia and Asia-Pacific real estate at Warburg Pincus, still expects significant growth ahead.

One reason is the lack of institutional exposure to the region relative to the rest of the world. “If you look at the largest global investors, most are pretty meaningfully underallocated to Asia-Pacific, especially in terms of real assets,” he tells PERE.

He points to multiple reasons for this underallocation. One is home bias, with investors naturally more comfortable with deploying capital in their home markets. Another is that APAC historically had a dearth of operators and managers with scale and long-term track records. However, “I think that’s really started to change over the last five to 10 years in Asia, which certainly opens up greater potential conduits to invest that capital,” he says.

Click here to read our in-depth interview with Jeffrey Perlman

A third reason is Asia tends to lag the US and Europe in the development and evolution of its institutional real estate market. “Especially as we think about new economy real estate, it’s still very early innings in Asia,” Perlman explains. “So where a lot of them were deploying a lot of capital into the US and in Europe over the previous decade, that’s really only started to ramp up in the last handful of years in Asia. And we expect that to continue to increase in a bigger way.”

Singaporean sovereign wealth fund GIC, for example, first partnered with ESR in 2018, acquiring six completed logistics assets in Greater Tokyo and Osaka from the firm. Since then, the two parties have formed multiple joint ventures focusing on the logistics sector across APAC, including in Australia, China, India and Japan.

“In many APAC markets, GIC continues to see logistics as an attractive sector that is supported by macro tailwinds such as structural shifts towards e-commerce and a favorable occupier outlook,” says Richard Massey, deputy head for Australia and New Zealand real estate at GIC. “ESR has been a strong player in this space. They have a good track record in deal sourcing, identifying attractive scalable opportunities, development and asset management, which makes them a preferred regional partner to work with. ESR’s local on-the-ground expertise across jurisdictions and tailor-made investment solutions have also helped us in our deployment strategy.”

Doors are opening

Perlman also expects the REIT market in Asia-Pacific – with China expected to be a major driver of its growth – to have a “transformational” impact in a region traditionally lacking in exit options. “That’ll give a lot of confidence to LPs in terms of what’s one of your key exits,” he believes.

“In the US, the REITs have been big buyers of assets, from development funds and core funds and other funds. And so we would expect that [to] start to pick up substantially in an Asia context as well.” The total REIT market capitalization in the US was about $1.7 trillion, or 7-8 percent of the country’s gross domestic product, in 2011, while REITs represent just 1 percent of GDP in APAC, according to data from NAREIT and JLL, respectively.

Another growth driver is the expectation that more corporate real estate owners in Asia-Pacific are expected to sell off assets in a bid to become more asset light. “That trend has happened to a large degree in the US, it’s happened in Europe, and we expect it to happen, certainly, over the next decade, in Asia as well,” Perlman says.

“So I think if you add those factors together, we think that’s a very, very positive backdrop for our business going forward, which is why we think we can continue to grow our funds management business at a healthy and sustainable pace.”