Investment Intentions - Asia-Pacific: Supplying demands

Investors have a preference for core assets, but can Asia supply enough suitable product? Alan Dalgleish looks at the latest ANREV survey results

Publication of the ANREV Investment Intentions Survey 2015 in January meant the association’s office had a busy start to the year. I enjoy seeing the results each year, especially as the survey has become more and more robust. It means that we can look ahead and say with some confidence where Asia-Pacific investors will put their money in 2015, and what their preferred investment products are. We also look at the constraints they face and how fund managers expect to align their products to investors’ needs.

This year’s record sample of 337 respondents – 144 institutional investors, 19 fund-of-funds managers and 174 fund managers – makes this survey more robust than ever. Each year we increase the number of respondents, all of whom are decision-makers and so are at the ‘coal face’ of investment allocation decisions. 

What I particularly liked this year was the work that Real Capital Analytics undertook to back-test the investment intentions – we wanted to know whether or not fund managers are doing what they say they intend to do. Is the survey a good predictor of transaction destinations? The answer is positive – there is indeed a strong relationship between the intentions of managers and actual property market transactions, illustrating how the survey acts as a good predictor of transaction activity in investment markets.

This year’s survey shows Asia-Pacific investors’ allocation to global real estate will continue to grow. In 2015, there will be an estimated influx of capital amounting to $58.5bn (€51.1bn), driven by nearly 60% of Asia-Pacific investors who expect to increase their real estate portfolio allocations versus the global average of 46%. 

It is very clear that cross-border capital flows will continue to increase in 2015 and Asia-Pacific investors will play a leading role in this trend. Their real estate allocation will also increase from the current 9.8% to 11% in 2015. Since 2014, there has been a trend for Asia-Pacific investors to catch up with their counterparts across the rest of the world in terms of real estate allocations. 

Recent regulatory change for domestic insurance companies in China and Taiwan has opened up the route for offshore investments. Some big transactions were reported in 2014 and we think this trend will continue in 2015.

Investors from inside and outside the region could see some good investment opportunities in the Asia-Pacific market. According to the survey, the most popular investment destination in the region is Tokyo, followed by Sydney, and tier-one cities in China (Beijing, Shanghai, Guangzhou and Shenzhen) and Melbourne a joint third. This is not surprising. Tokyo recorded the highest level of transactions in 2014 since 2007; its economic status, the pursuit of Abenomics, and the prospect of the 2020 Olympics are giving the city opportunities to continue to attract investment from domestic and non-domestic investors. As the largest mature market in the region, Tokyo offers international diversification for existing domestic real estate portfolios.

The sheer size of the Tokyo office sector is one reason for its most favoured status; however, grade-A buildings are difficult to obtain for non-domestic investors, who tend to focus more on grade-B buildings in the market. Market participants report competitive market conditions so we can expect this to continue in 2015.

Australia offers the highest yield in the region for investors as well as the type of core products that investors now typically favour. It is the most securitised market and also benefits from the highest transparency in the region. The Sydney and Melbourne office sectors are the second and third most attractive market for investors in Asia-Pacific.

China’s first-tier cities are the investment destination of nearly half the investors in the survey in 2015. The country has ranked amongst the top three destinations since 2008, but with investors’ risk appetite slightly changing, opportunistic investments are less favourable in the region at present. Investors are looking for more income return versus capital appreciation and more core products. The limited supply of core products in the office market, as well as higher yield in other sectors, means this year investors have preferred the industrial and logistics sector over retail (see figure 1).

Investors in the Asia-Pacific region indicate a greater desire than European and North American investors to invest offshore. Some of the biggest Asia-Pacific investors are not allowed to invest in their own domestic market. Insurance companies, usually risk averse, prefer to invest in more mature markets such as the US and Europe. Australian investors are looking outside the traditional investment universe for exposure to other asset classes, such as multifamily in the US or student accommodation in the UK.

This year is the first time that investors have shown equal preference for core and value-added funds, which probably means investors are using a lower-risk investment strategy. Figure 3 shows a historical perspective of investors’ preference of fund style. 

There has been a clear trend since 2013 for investors to increase their preference for core funds and at the same time decrease their preference for opportunity funds. Value-added funds have attracted more interest. The proportions are similar to the European market, showing that investors could start to have similar risk approaches to these two very different markets.

However, investors’ expectations regarding investment style illustrate that the market is currently lacking core products, as 64% of investors expect to invest in value-added funds compared with 43% who expect to invest in core funds. 

Non-listed real estate funds continue to attract investors (figure 2) with about 40% of investors expecting to increase their allocation in this product. However, as observed since 2013, investors expect to increase their allocations to joint ventures and club deals. This trend is in part driven by the desire of investors, especially large ones, to exercise more control over their investments. Whether sufficient joint ventures and club deals can be found remains to be seen.

Investors’ main concern about investing in non-listed real estate funds is the availability of suitable products and they expressed strong concerns about the ability for managers to achieve target returns. This was followed by

lack of transparency and market information and the alignment of interest with fund managers in joint second place. The worry about product availability should sound a warning bell about yield compression in gateway cities, a common theme globally. With a number of managers intending to launch new funds during the year, we hope this will not be a concern for too long. 

Alan Dalgleish is CEO of ANREV