Asia-Pacific investors allocate more to Europe: INREV

Investors from Asia-Pacific expect to increase their allocations to real estate in Europe in 2015, according to the latest global Investment Intentions Survey from property fund industry associations INREV, ANREV and PREA.

Allocations from Asia-Pacific investors are set to rise from 9.8% to 11% this year, while their counterparts in North America will increase allocations from 8.6% to 9.1%, the survey found. European investors retain their lead with allocations from this part of the world expected to increase from 12.3% to 12.6%, boosting total allocations to 11.3% from 10.8% currently.

As a result, total allocations to global real estate are set to rise by over 20% to €42.5 bn this year. Last year, market participants planned to allocate just under €35 bn.

While investors from all major regions across the globe aim to increase their allocations to real estate this year, Asia-Pacific investors are the most ambitious, noted Henri Vuong, INREV’s director of research and market information. ‘The amount Asia-Pacific investors plan to allocate to real estate in 2015 is triple the amount they indicated last year,’ she said during a seminar in Amsterdam this week.

Targeted allocations for European investors are also slightly higher, she added. Diversification is the key reason cited for most respondents, especially for those with a multi-asset portfolio.

The strong growth in allocations from Asian investors is related to the immaturity of the real estate asset class in this region, Vuong said. In recent years, a growing number of Asian countries have eased regulations to enable insurance companies to invest in real estate. China is one of the latest countries to ride that wave and still has a very small allocation to real estate, she added. ´The small share of real estate investment in Asian countries in general is reflective of where their insurance companies are in terms of developing their exposure.' Vuong also singled out Korea as a country which will show more activity in the next couple of years.

Offices and retail have changed places this year in terms of preferred sector, followed by industrial with residential moving down to 4th position from 3rd last year. In terms of potential obstacles, fund managers again cited the ability to achieve targeted returns as the main challenge facing the sector.
Interestingly, investor interest in core and value add strategies is on par this year, Vuong said. ‘That is a clear indication that investors are moving up the risk profile. Indeed, the picture looks alarmingly like 2007 and history has a way of repeating itself,’ she added. ‘Let’s hope the industry won’t make the same mistakes.’

EUROPEAN FAVOURITES
A considerable volume of capital (45.1% or €19.2 bn of the anticipated total allocation) is pointed toward Europe, with Germany, UK and France still ranked as the top three investment destinations for all investors. Italy is also a hot favourite, jumping three places from last year to become the eighth preferred target destination. Meanwhile, Turkey has dropped off the list of top-15 target destinations.

As in previous years, investors display a preference for investing in domestic markets. Currently 67.7% of investors in Asia-Pacific say they invest in their own region. A similar approach is adopted by 77.5% of investors in Europe and 68.5% of investors in North America.

However, almost half of the investors polled indicated they plan to move further afield. Investors from Asia-Pacific, for example, are demonstrating a desire for geographic diversification with an increase of around 20% planning to invest outside their region and more than half of them targeting Europe and North America. The survey indicates that the single most important reason for investors to invest in real estate remains diversification, rated 4.2 on a scale of 1-5*, followed by income return (3.7) and risk-adjusted performance and enhancing returns (3.6 respectively).

In terms of sectors, investors have identified offices – and German offices in particular – as a key target, displacing German residential, which occupied one of the top-10 country/sector slots in 2014. Alternative sectors are gaining in popularity. Just over 20% of respondents highlight examples such as hospitality, student housing, healthcare, real estate debt and parking as desirable investment targets.

'This year’s survey is broadly consistent with the predicted and actual investment trends we’ve seen over the past couple of years: it’s a case of investors chasing dependable returns through real estate in an otherwise unexciting investment landscape,' Vuong said. 'But we can’t ignore the cyclical nature of real estate and what the survey shows us could also be reflective of a market enjoying a period of calm before the storm.'

FLIGHT TO NON-LISTED
For a significant proportion of investors (44.2%), non-listed real estate funds are seen as the preferred route for investing in Europe. Together, joint ventures and clubs are seen as the next most favoured investment vehicles for investors at 41.4%. And while larger investors continue to favour direct investment, this option appears to be losing its appeal.

Investors ranked access to expert management as the most important reason for investing in non-listed real estate funds (at 51.5%), followed by international diversification (at 37.5%). In terms of risk-reward strategy, a growing number - or 41.4% - of investors is selecting value added as their preferred investment strategy. This puts value added on a par with core, for which a further 41.4% of investors express a preference.

While opportunity funds remain lower down most investors’ lists of preferred investment strategies they have nonetheless seen a significant gain in popularity, rising from 7.1% in 2014 to 17.8%.

The balance in favour of value added and opportunity funds versus core funds is greater among investors in Europe and North America than among those in Asia-Pacific.

Almost 74% of investors express a preference for closed end over open end fund structures. They also prefer seeded pooled investments to blind pools, as well as funds with a GAV of up to €500 mln rather than those above €500 mln.

'The insights from this year’s Global Investment Intentions Survey could be pointing toward potential structural shifts in the real estate industry. In addition to the growing tilt towards risk and an apparent blurring of the lines between the investment strategies adopted by investors, fund of fund mangers and fund managers; there’s a subtle hint that the conditions may exist for the creation of a secondary market for trades. As in previous years, the survey offers plenty of food for thought,' concluded Matthias Thomas, CEO of INREV.