Pan-Asian strategies are back in vogue, but this time investors want core exposure. Sharon Hayes reports on an emerging sector

Some of the largest global names in asset management are either busy raising hundreds of millions of dollars to invest in core Asian real estate, or are planning to do so.

Asia, it seems, is the latest focal point for core real estate investors globally. It is almost ironic that at a time when the economic outlook in Asia has become somewhat overcast, global institutions are turning to the region for diversification.

Savvy investors think there is a ‘recovery’ story – that it makes sense to take a position as markets cool down, for gains at a future date.

A survey of more than 130 institutions indicates that they plan to invest up to US$10bn (€9.23bn) in Asian real estate in 2016. The survey, by the Asian Association of Real for Investors in Non-listed Real Estate Vehicles (ANREV), found that investors plan to invest US$58bn in 2016, and 17% of the capital is destined for Asia.

To tap that capital, some of the world’s largest fund managers are either planning new core Asia funds or growing existing funds. Market sources told IPE Real Estate that names such as Morgan Stanley and JP Morgan are jostling with regional Asian managers, including the Singapore-based Alpha Investment Partners, to raise capital.

Morgan Stanley Real Estate Investing secured a $200m Cornerstone investment from Danish institutional investor PFA.

South Korea is among a growing number of Asian countries considered to have core markets

South Korea is among a growing number of Asian countries considered to have core markets

Industry sources believe Morgan Stanley is close to completing an initial capital raising of $450-$500m for a new Asia core fund. A senior industry executive, who declines to be named, says Morgan Stanley “will need to raise that much capital to give them enough equity to acquire assets of sufficient quality for a core type exposure”. 

Paul Keogh, formerly with AustralianSuper, joined Morgan Stanley a year ago. He was taken on specifically to run the new fund, according to sources. But Morgan Stanley has declined to comment on this claim.

The executive names Morgan Stanley, JP Morgan, Invesco , Deutsche Bank, M&G and Pramerica as managers that will dominate the sector in the coming years. Deutsche Bank Asset Management is said to be rebuilding its Asian asset management team.

Last year, Pramerica raised money for its Asia Property Fund III, which pursues wider investment strategies, encompassing core, value-add and opportunistic.

Benett Theseira, Pramerica Real Estate Investor’s head of Asia Pacific, says investing in core assets is ultimately about investing in future growth. “Even though we are experiencing many bumps on the road today, from a long-term perspective, Asia’s growth is forecast to be 1-2% higher than in the US or Europe over the next 10 to 20 years,” he says.

“Because of the size of Asia GDP and its investable-grade real estate, investors can’t ignore Asia. If they are looking for diversification they should participate in the growth of Asia through core strategy. One of the more exciting things about core in Asia is that the markets are becoming more established and more mature.

As well, over the next two decades, Theseira says, Asia  - which already has the world’s biggest stock of institutional-grade commercial real estate - will continue to grow its pool of core assets as urbanisation and economic growth transform more urban areas into major cities.

Having first established its presence in Singapore, in 1994, Pramerica arguably has a longer history than its peers in Asia. It boasts a sizeable pan-Asian real estate platform with a staff of more than 70 people. Today, Pramerica manages assets worth $4.7bn across several Asia Pacific markets, including Australia. The bulk of the assets are located in suburban shopping centres in Singapore and Malaysia.

This portfolio, Theseira says, lends itself to a core strategy because grocery-anchored suburban shopping malls are very resilient in terms of performance. “The average vacancy in Singapore’s suburban malls over the past decade has been 1.5%,” says Theseira.

“The diversity of our business means that we can provide stability for investors and enables us to ride the cycles of buying and selling.”

The executive believes LaSalle Investment Management could also be contemplating a core fund, but the US firm says it sees more value in country-specific core funds than a regional fund.

Justin O’Connor, chief executive of Savills Investment Management, told IPE Real Estate that his firm is planning a billion-dollar pan-Asia core fund, Savills IM Asia Fund 3, in the second half of this year.

Savills last year acquired the Asian fund management platform of the Swedish bank SEB, based in Singapore, and is using that business to launch new funds.

SEB has had two small Asia core close-ended funds since the mid-2000s. Savills IM has taken over SEB Asia Fund 2, now rebranded under the Savills banner. It has around €200m in assets in a closed-ended structure.

Investor appetite returns

In its 2015 capital-raising survey, ANREV found that 56% of the $23.5bn raised for Asia-Pacific in 2014 was dedicated to core funds, compared with 31.1% for opportunity and 12.5% for value-added funds. Some 88.6% of survey participants expected capital raising activities to keep growing over the next two years.

ANREV’s director of research Amelie Delaunay says: “Definitely, core funds are in demand. Asia Pacific investors prefer core when compared with investors from Europe and the United States.”

Core funds are a relatively new breed in Asia. Only a handful exists today. These include funds offered by Australia’s Lend Lease (see Blazing a trail since the 1990s), the UK’s M&G, Invesco Real Estate from the US and the newcomer Savills Investment Management. Regional players such as Singapore’s Alpha Investment Partners are becoming more active in the sector.

The existing Asia funds have been experiencing a strong inflow of capital in recent times. Some say there is more capital available than there are investment opportunities.

“Overall, the market is flushed with liquidity,” says Jyoti Ramchandani, managing director, investment management, Asia at Lendlease. “Many investors have a strong appetite to invest in real estate globally and in Asia.”

Ramchandani, who oversees some A$4.3bn in assets invested in Asia, primarily in Singapore, adds: “Asia forms part of the global exposure of our investors, and they continue to remain interested in Asia. We see a good level of interest as investors constantly approach us. We’ve worked with our investors in Asia since the 1990s, so they have been on the journey with us in this market.

“We have ongoing conversations with them about our pipeline and new investment opportunities. This suggests to us that the appetite for core assets in Asia is strong.” 

Invesco, which set up its pan-Asia core fund, Invesco Real Estate Asia Fund, two years ago, now manages around $1bn in assets in key Asian cities.

Graeme Torre, managing director Asia Pacific, at Invesco Real Estate, says: “We started thinking about this fund several years ago. But it takes time to craft and establish such a product.

“We have been able to attract global investors from the very early stages and, reassuringly, we have been able to continue to raise money as we invest the contributions.”

He notes that investor interest in the fund is growing as each new asset is added to the portfolio. “Quite rightly, our investors are looking to take a position in long-term, high quality, strong-yielding core real estate in Asia. They like low leverage, good tenants and buildings that, in terms of location and design, can stand the test of time.”

For this reason, Torre says, they want to invest in open-ended core funds that give the ability to invest for the long term.

“In our observations,” says Cuong Nguyen, head of research Asia at M&G Real Estate Asia, “European and US investors have been looking – and investing – at the opportunistic end of the market in Asia for the past decade.”

The region’s strong economic fundamentals remain the primary draw for investors, says Nguyen. But “the biggest change is a shift from a value-add, opportunistic mindset to open-end, long-term core exposure,” he says.

“Some close-ended opportunistic funds are gradually switching into open-ended core. We look at this as a validation of our view of the continued structural advancement in both physical real estate and capital markets across Asia.”

Cuong Nguyen

In 2006, M&G launched its M&G Asia Property Fund Core, which now manages $2.9bn in property assets in Australia, Japan, South Korea, Hong Kong and Singapore.

Ramchandani recalls a huge wave of capital-raising in the mid-2000s for Asian real estate. Although there is a high level of activity today, it is still lower than it was before the 2008 financial crisis.

Mark Gabbay, chief executive, Asia, LaSalle Investment Management, says blind pools such as pan-Asian core funds appeal to certain types of investors. “Investors with $50-$100m to spend want access to core assets in Asia, and will participate in these funds,” he says.

He points out that high-quality, core assets in strong locations in gateway cities are scarce commodities, generally unavailable below the $300-500m price range.

“Big sovereign wealth funds have the ability to buy large assets in a single deal, and they don’t necessarily have to participate in core funds,” says Gabbay.

Mark Gabbay

While he understands the rationale behind core Pan-Asia funds – because Asia is a big and diverse region – Gabbay believes that, in the longer term, it is better to have a country-specific strategy.

LaSalle works with institutions with investment budgets upwards of $200-250m. With gearing, that gives them $500m of buying power. 

“We can start to build a core programme over a number of years in Asia for these clients,” Gabbay says.

Economic uncertainty

Australia and Japan dominate in geographic preference because they are deeper, more established and bigger markets. But assets are harder to procure in these two countries, especially in Japan.

Gabbay says: “Japan and Australia are a natural choice because they offer a wider range of potential assets and investors are able to achieve positive spreads in those two countries.”

Today, Seoul, Singapore, Hong Kong and Shanghai are included in the basket of core markets.

Torre says: “Over time, we will add new markets, and others may drop off our list. Markets are included if they meet our global criteria for core – these include, amongst a number of other key considerations we consider, performance outlook and pricing of assets.”

Nguyen says competition has compressed cap rates. “Prices of quality assets are probably getting to a level where people need to be careful to avoid overpaying for access.”

“In a competitive environment, managers who already have established and diversified portfolios at cheaper holding cost will have significant advantage over ones looking to build up their exposure,” he adds.

O’Connor says Australian assets are fully priced as a consequence of  “too much competition” from global investors. But he says that recent economic data is pointing to weaknesses in the Australian economy, and that trend may seep through to the property sector.

Prices are adjusting downwards in Singapore, Hong Kong and China. “When we are ready to start spending money in a year’s time and during our investment period, I think a lot can happen in that time,” O’Connor says.

O’Connor will build his investment strategy on what he calls the recovery story. He cites Singapore as an example. It is on “a rocky road” but remains fundamentally sound. Buying into Singapore in coming months will position Savills IM Asia Fund 3 for recovery in three to four years.

Nguyen says M&G has been delivering returns of 9% – ahead of its target of 8% – to investors in the past three years. “It is a reflection of how this market has performed,” he says 

In contrast to Asia’s strong returns, Nguyen says that after a strong run after the global crisis, the outlook for the US market is not “not so rosy” today.

Gabbay says returns in the US and European markets have been strong over the past five years and some investors feel they are unlikely to continue to generate such high returns.

Therefore, it is hardly surprising that capital will continue to flow into Asia, in particular to core funds. Invesco and Lendlease have delivered returns that exceed the expected 6-8% band for core funds.

Gabbay says: “When investing in Asia, you have to have a different strategy. You have to look at holding assets for a longer term.”

Blazing a trail since the 1990s

The Sydney-based diversified property group, Lendlease is a trailblazer in operating property funds in Asia.

Riding on the back of its global construction business, Lendlease first launched what was known then as the Asia Pacific Investment Company (APIC), investing largely in completed projects in Asia from the mid-1990s.

As this vehicle reached the end of its terms, a new fund was formed, acquiring some of the investments in APIC. 

Today, Lendlease runs five core funds out of its Singapore operations. The biggest of these, as of 30 June 2015, are the Asian Retail Investment Fund (SGD2.51bn) and the Parkway Parade Partnership (SGD1.2bn).

Lendlease, which has operations in the UK, Europe and the US, has an investment in most of its funds.

Of the AUD21.3bn in funds under management at June 30, 2015, AUD5.3bn is in Asia.

Jyoti Ramchandani

But perhaps more significantly, it provides the stepping-stone for global investors to access tightly held markets like Singapore.

Last year, Lendlease formed a partnership with Abu Dhabi Investment Authority (ADIA) to develop Paya Lebar Central, a large mixed used project with commercial, retail and residential components on a prime site, in Singapore. The land itself was acquired for SGD1.67bn.

Global pension funds, sovereign funds, and other international and Asian institutional investors, are among those who have gone into Lendlease funds for exposure to Singapore. 

Jyoti Ramchandani, Lendlease managing director, investment management Asia, told IPE Real Estate: “We were actually amongst the first in the real estate fund management space in Asia. 

“Currently, the majority of our funds have a core strategy, where the assets we manage are stabilised and income-generating.”

However, Ramchandani says Lendlease does not see itself as a passive rent-collector, but rather as an active asset manager. “We continue to refresh assets to keep relevant in the market.” 

The Asian Retail Investment Fund, which was incorporated in 2006, has offered investors the opportunity to participate with Lendlease in the development and long-term ownership of Asian retail assets, primarily in the Singapore retail market. 

Today, it owns three projects: 313@somerset, a shopping mall located in Singapore’s premier tourist and shopping thoroughfare, Orchard Road and stakes in the Jem shopping centre and an adjoining office block and Setia City Mall in Shah Alam in Malaysia. All were greenfield developments.

Asked if these are open-ended funds, Ramchandani says: “Open-ended can be defined in many ways – it can mean they are always open for equity or they have an infinite life. Our funds have seven-year liquidity reviews and investors have options to exit at that point, or they can choose to rollover their investment.

“Our objective is to deliver average annual returns of 8-10% over the long term,” she says.