ASIA - Liquid Chinese institutions could replace western investors in the region's mature property markets, including Japan, according to Standard Life Investments.

Asian Pension funds and sovereign wealth funds based in Asia will invest more aggressively in the region's property markets as liquidity dries up among western investors.

The US economic downturn could be positive for the region's commercial property market as Asian central banks build up their foreign exchange reserves, according to Standard Life Investments,

The result will be to ensure continued liquidity - in addition to the willingness of some markets, notably Hong Kong, to cut interest rates in order to secure macro growth.

Liquid local pension funds and sovereign wealth funds are also likely to pursue diversification strategies more aggressively. "Property could be a natural home for such traditionally long investment horizon funds," said SLI's global investment strategist Richard Batty.

"SWFs want to invest outside their domestic markets. There's clearly huge scope for Chinese investors to participate. At the same time, there has been an expansion of money flows into Asia. That trend will continue," he said.

Singapore sovereign wealth fund GIC has already taken strong property positions in Japan, for instance with its acquisition of Westin Tokyo Hotel and its shareholding in Realty Investment Corporation.

"GIC is one of the more sophisticated sovereign wealth funds, with a long-term perspective. It [SWF investment] is a trend I envisage continuing," said Batty. "There will be a lot of value revealed, both in JREITs and physical property."

Although the report focuses on the appetite for physical property, he said the indirect property strategies were  "useful for specific markets - for Hong Kong, Australia and Hong Kong-listed China property equities. Japan is seeing slower growth but you're seeing value revealed in JREITs, with 4.7% yields. They're attractive."  The firm is "cautious" on Singapore because of the danger of oversupply.

"We take a pragmatic view," said Batty. "Physical property has a low correlation with global equities, and the correlation is low between property equities and general equities in the medium and long term. We're not against indirect investment - absolutely not."