Asia-Pacific core real estate funds: reopening the taps | Magazine
The eight pan-Asia-Pacific open core real estate funds that make up the ANREV ODCE index posted average returns (in US dollars) of 6.21% in 2021. Calculated in local currencies, such as the Australian dollar or the Japanese yen , those 2021 returns topped 9%, according to several fund managers.
Now the question is, will there be a rush into Asia-Pacific core funds, or will continued global economic uncertainties dampen sentiment in the months ahead?
As interest rates rise in South Korea and Japan – and Australia is expected to follow – minds are on inflation and rising energy and construction costs. “Investors are watching the impact of rising interest rates and inflation, so we have to be cautious,” says a fund manager.
“A key question is what impact higher interest rates could have on cap rates. Will they stop the cap rate compression? Or will the compression continue? We don’t have The impact has yet to be seen. It will take a few months to filter through to the markets.
David Chen, head of Asia-Pacific real estate at JP Morgan Asset Management, says inflation in Asia-Pacific has been relatively subdued – so far. But the company is closely monitoring the impact on real estate in the area.
Asia did not experience the type of inflation that hit the United States (7.9% in February); most markets in the region are at 4% or less, with the exception of New Zealand at 6%.
“In APAC countries, central banks set inflation targets. So far, the near-term inflation outlook remains on target or below,” Chen said.
He thinks Asia is in relatively better shape because it hasn’t felt the scale of the supply chain disruption that has hit the United States and Europe, which are net importers. Asia-Pacific’s net exporter status tends to reduce the amount of inflation imported from abroad.
Global energy prices, which have been rising, are also generally a smaller component of the Asia-Pacific inflation basket. Australia is a net exporter of energy resources and could in fact benefit economically from rising energy prices.
Chen says the length of leases in Asia also makes it easier to adjust to inflation and mitigate its effects on APAC real estate. Most Asian countries have shorter leases, giving landlords the flexibility to adjust rents for inflation and economic conditions, he says.
Richard van den Berg, portfolio manager of the M&G Asia Property fund, says that in times of geopolitical or economic uncertainty, investors turn to safe and income-generating strategies. “Basic funds meet these criteria,” he says.
As for the war in Ukraine, van den Berg says it is difficult to assess the impact on the market. He remains confident that global pension funds and insurance companies will continue to pursue their diversification strategies.
Europeans are leaders in global investing, says van den Berg. “Americans are focusing on the higher returns of value-added and opportunistic strategies, but that’s starting to change for two reasons,” he says. “One is the need for diversification and the other is the underlying economic strength of Asia-Pacific.”
Ian Schilling, co-CIO and head of core funds for Asia-Pacific at Invesco Real Estate, agrees that Asia-Pacific’s GDP growth prospects remain a key draw. “Over the past two years, this region has fared better than the United States or Europe during the pandemic, both economically and in terms of real estate,” Schilling says.
“As the region emerges from the impacts of COVID, APAC is in a relatively strong position, with the prospect of sustained economic growth. The key word here is “supported”.
Schilling says there was a very modest asset depreciation at the start of COVID in mid-2020 compared to the US or Europe and since then asset prices have held up well and have in fact continued to rise. increase over the past 18 years. month. “Capital inflows have been steady over the past two years, showing that investors continue to support the APAC region,” he said.
Over the past five years, the gross asset value (GAV) of the ANREV ODCE index has grown steadily at a compound rate of around 30% per year, reaching $20 billion at the end of 2021. index are heavily weighted to Australia (30.6%) and Japan (29.6%), with less exposure to South Korea (16.9%), Singapore (11.3%) and to China (7.6%). The other markets represent 4%.
Fund managers say raising capital has been difficult over the past two years, in part because investors from Europe and North America have been unable to travel. “In general, COVID has dampened all fundraising across all regions, including Asia-Pacific,” says Chen.
But Amélie Delaunay, research director at ANREV, says capital raising in Asia-Pacific picked up in 2021 after a weak 2020. “The pandemic is not over, but the numbers for 2021 are impressive globally and in Asia-Pacific,” says Delaunay. “Pan-Asian open-end diversified core funds are gaining popularity.”
Van den Berg says M&G’s main fund has grown from $3 billion in four years to $7.1 billion, with $1 billion in investor inflows since 2020. Van den Berg says the fund has attracted investors because of its ability to generate strong dividends. “Our dividend yields have averaged 4.3% per year over the past decade,” he says. “Even during the COVID period, with all the confinements, we were able to distribute 3.7%.”
COVID-19 initially prompted investors to focus on existing portfolios and make new investments closer to home. But, after two years, there is new momentum to resume global diversification. “We’ve seen investors who have been thinking about APAC for a while, start to move, now that COVID is starting to fade into the background,” Chen said. “We expect to see more [this year].”
A shift towards alternatives
“In order to achieve target returns, funds will evaluate build-to-core and certain alternative sectors, but that’s easier said than done,” says a senior fund manager. “A fund has to be a certain size to be able to build-to-core, because you have to be able to tolerate different risk profiles.” This size constraint means that most core funds are likely to shift to alternative assets, such as data centers, student housing and healthcare.
Office is the backbone of core Asian fund portfolios (nearly 45%), followed by industry and logistics (33.4%), residential (12.2%) and retail ( 9.1%). Despite accounting for 40% of global investable real estate, core assets are increasingly hard to come by in Asia-Pacific. This has led to a hunt for core assets in alternative sectors, such as healthcare and self-storage.
Benett Theseira, Head of Asia Pacific at PGIM Real Estate, said: “We were cautious with our core strategy before COVID, as asset values were high and we feared a possible market correction. When the pandemic hit, we saw a recalibration of the market and paused trying to read the direction of the market. »
The PGIM Real Estate Asia Core fund, a late entrant to the ANREV ODCE index, raised $447 million in equity in 2019. To date, $309 million has been deployed. Theseira says two-thirds of that went to residential and logistics, with multi-family accounting for about a quarter.
“The logistics sector has benefited from the pandemic as the growth of e-commerce has accelerated,” says Theseira. “We have invested well in logistics assets in Singapore, Korea and Australia. We have also invested in Chinese logistics for our core-plus and value-add strategies.
PGIM RE has also invested selectively in the office sector. “We still believe in the office, even though there are many concerns about the impact of working from home and the pandemic,” says Theseira. “But Asia is slightly different from other parts of the world; here, the combination of work culture and the size of family homes makes office work more conducive.
“Second, we believe that certain central business districts and key decentralized districts will remain competitive and attractive because offices are part of the ecosystem – good transport infrastructure combined with leisure facilities and networking opportunities – that they offer.”
Core assets have performed well over the past two years. Theseira says, “There has been a flight to quality and safety and, of course, a search for yield. We are seeing positive trends in terms of demand, rental volumes and rental rates. They all point to stronger performance with reopening and economic recovery. »
At the height of the pandemic, M&G Real Estate acquired a half stake in 200 George Street, a high-end office building in Sydney, for 577 million Australian dollars (326 million euros). It also acquired an additional 25% stake in 400 George Street, another prime office building, for A$290 million.
JP Morgan AM was also active. “We’ve made 88 deals with another 40 under contract over the past year,” Chen says. The transactions total a value of more than $2.7 billion and include a joint venture with Nuveen to acquire One George Street, an office tower in Singapore, for $1.28 billion (860 million euros).
Invesco is attracted to the residential sector, which has proven itself during the pandemic. Schilling said: “In addition to increasing our residential exposure to Japan, we are probably the first of our peers to invest in residential construction in Australia. We executed our first build-to-rent transaction in March in Australia and are actively looking to expand our exposure to this sector. »
Invesco has invested in cold storage facilities in South Korea and is considering investments in medical offices. These assets, adds Schilling, essentially become essential.
“Quality assets in alternatives can be considered core investments if they offer a reliable income profile backed by strong corporate commitments and are in deeply liquid markets,” Schilling said.