Asia-Pacific was seen as more volatile than the core markets of US and Europe. But the region looks like a beacon of stability, writes Florence Chong

The post-COVID performance of open-end core real estate funds has highlighted what some fund managers believe are the real differences between Asia-Pacific and other key regions. They say recent performance shows more stability and little or no correlation to either the US or Europe.

In the quarterly returns coming out of the global pandemic, those from funds listed on the ANREV Open End Diversified Core Equity (ODCE) fund index challenge the perception that the performance of pan-Asian core funds is more volatile than their peers in the US or Europe.

There were eight ANREV ODCE funds with a total gross asset value (GAV) of US$22.9bn (€20.7bn) at the end of February. The four largest funds account for 84% of the ANREV index’s GAV. They are, in order of size: the M&G Asia Property Fund, Morgan Stanley’s Prime Property Asia Fund, Invesco Real Estate Asia Fund, and JPMorgan Asset Management’s Strategic Property Fund Asia Fund.

Pan-Asia core fund managers speak of the different positive drivers that support their conviction that their region is no more volatile than its counterparts in Europe or the US. But perception can sometimes be hard to change.

Ian Schilling

Ian Schilling: “returns from Asian core funds in the market over the last few years have in fact been more stable than other regions in the world”

A study recently published in the Journal of Real Estate Portfolio Management reinforces the view of volatility of Asia core funds. It says: “The high volatility experienced with the ANREV returns stands in stark contrast to the relatively stable NCREIF and INREV returns. Asia was the first geographic region to experience the COVID-19 pandemic, which shows in the steep decline in returns during the first quarter of 2020. Europe and North America followed in the second quarter of 2020.”

For their analysis, the study’s authors compared the NCREIF ODCE, the European INREV ODCE and ANREV ODCE indices from the Q2 2016 to the Q4 2020. The US study confirms that ANREV-indexed funds delivered stronger performance. 

“The data shows that, over the five years, ANREV properties appreciated annually at a greater rate on average (3.72%) compared with INREV (2.70%) and NCREIF (1.94%). In addition, ANREV’s average annual income returns (3.76%) also outperformed INREV (2.77%) and NCREIF (3.30%). Overall, ANREV generated an average 12-month total return of 7.59% compared with INREV at 5.52% and NCREIF at 5.28%,” the report stated.

The Global Real Estate Fund Index (GREFI) for Q4 2022 found the downturn was most pronounced for funds investing in Europe, delivering a total return of -6.19%. This compared with a positive 3.3% in Q1 2022. Funds investing in the US posted a total return of -4.83% in Q4 2022 compared with 7.51% in the first quarter. Asia-Pacific funds delivered a positive return of 1.8%, for Q4 2022 compared with 1.95% in Q1 2022.

The GREFI numbers show Asia-Pacific funds have outperformed globally with an increased performance quarter-on-quarter. 

Ian Schilling, co-chief investment officer and head of core funds for Asia at Invesco Real Estate, says: “It is interesting that Asia is often thought of as being a more volatile region by global investors. Returns from Asian core funds in the market over the last few years have in fact been more stable than other regions in the world.”

Schilling says return targets for core funds generally may range from 8% to 11% – typically half of the returns come from income and the other half from capital growth. “Up until June last year, Asia has been producing consistent capital returns of 4% to 6% per annum on top of stable income yields of around 4% per annum over the last few of years,” he says. 

Amelie Delaunay, research director at ANREV, says the total return of the ANREV ODCE for 2021 was 5.39% and for 2022 it was 0.99%. In local currency, however, returns were 10.84% for 2021 and 8.91% for 2022, suggesting that the underlying real estate markets in Asia-Pacific are performing well. 

Schilling says: “Up to June 2022, US ODCE funds provided close to a 30% return for the year – this is in the realm of opportunistic returns and is not sustainable over the long term.”

US ODCE quarterly returns started to turn negative as interest rates rose and the property markets started to correct at the end of 2022. “The bigger the party, the bigger the hangover,” jokes Schilling. “Given the strong capital valuation growth in the US and Europe over the last 12 months, the correction that we are seeing in valuations is far more significant in the US and Europe than is being experienced in the Asia-Pacific.” 

David Chen

David Chen: “it is the dramatic divergence of returns, particularly between 2021 and 2022, that caused people to notice the difference between the regions”

David Chen, head of real estate Asia-Pacific at JP Morgan Asset Management, agrees that a one-year total market return in excess of 20% is less common for core real estate. It could happen when there has been severe dislocation in the market, he says, and real estate is completely repriced, like in the global financial crisis. But there was not the same level of systemic financial shock during the COVID-19 pandemic. 

“It is the dramatic divergence of returns, particularly between 2021 and 2022, that caused people to notice the difference between the regions,” says Chen.

The INREV ODCE return was 8.74 in 2021 and -1.27% in 2022. The NCRIEF ODCE 2021 annualised return was 21.02%. The return in 2022 was 6.55%.

Asia-Pacific fund managers say that, in times of stress, these differences are highlighted, but when everything is going well those variances are missed – and the diversification benefits of investing in Asia-Pacific are not fully appreciated.

Richard van den Berg, fund manager of the US$8bn M&G Asia Property Fund, says: “Many of the fundamentals providing outperformance over the past few years remain in place. However, with some strong downward price corrections in Europe and the US, there is more upside should these markets start to recover. We are not seeing signs of this as yet.”

He says: “Well-structured and diversified core strategies have always been a safe haven during uncertain times. As investors look to increase allocations to lower risk and add more income-oriented strategies to their portfolios, core strategies sit in the sweet spot to capture upside, while minimising risk.

Richard van den Berg

Richard van den Berg: “well-structured and diversified core strategies have always been a safe haven during uncertain times”

“With the exception of China, Asia-Pacific was less impacted by COVID and the current interest-rate environment for a host of reasons. Firstly, as a result of key lessons gleaned from the Asian and global financial crises, debt levels in this region are generally lower. 

“Secondly, governments were quicker to embrace stricter COVID measures, resulting in a shorter period of impact and earlier re-opening of economies.”

Van den Berg adds: “Finally, Asia-Pacific’s economic growth is generally higher vis-à-vis Europe and the US, supported by a growing middle class and lower inflation levels, because increasing fuel and commodities costs were more evenly absorbed by companies and the workforce.”


Asia appears to be less affected by global inflationary pressures and the corollary of rising interest rates. And although the region has its own geopolitical tensions, it is further away from Russia’s war on Ukraine.

“One of the reasons we say it is important to include Asia in a global core portfolio is that it has at certain periods been less correlated to the rest of Europe and the US,” Chen says. Today is a case in point, with Europe and the US facing an uncertain economic outlook and a challenged banking sector.

The head of real estate in Asia for a global firm, speaking under anonymity, says: “Asia is a diverse region, quite different to Europe or the US. We have some markets which are quite uncorrelated to each other. I think that will continue, but as Asia matures and the sectors mature the correlation might narrow. Today, we certainly feel that if you are putting together a global core portfolio, Asia has the best diversification and growth benefit relative to the US and Europe.” 

The dynamics in Asia are quite mixed. Japan has retained its low-interest-rate policy, while China is cutting rates to stimulate post-pandemic recovery. China is the world’s second-largest economy, an important growth engine for the world and, more especially, its neighbours. Japan is the third-largest economy and inflation has been relatively low. Liquidity and Japanese asset pricing have continued to be robust.

The strongest impact of interest-rate increases and inflation has been felt in Australia and Korea. Although they are still important to the region, they do not have the same flow-on economic impact on the region as do China and Japan.

The global real estate executive, speaking anonymously, adds: “Accessibility to the inflation hedge is stronger in Asia. Most countries have leases for two and three years, so you have reversionary benefit, getting access to strong rental growth driven by inflation.”

Chen says: “When you look across the Asia-Pacific landscape, one of the reasons why Asia performed well is because intra-regional trade, which represents more than 50% of the region’s overall trade flows, feeds off structurally higher growth dynamics and demographic tailwinds within the region.”

Double diversification

There are more than 30 countries and territories in Asia-Pacific, but not all of them are deemed core real estate markets. Core real estate in Asia-Pacific tends to be limited to eight countries, which represent close to 90% of the institutional market, says Chen. Even within the core markets, core funds invest mainly in the gateway cities, such as Sydney and Melbourne in Australia, and Tokyo and Osaka in Japan. 

When it comes to sector weightings, however, there are similarities between ANREV funds and those in the NCREIF and INREV indices, although individual strategies can vary dramatically. 

The study, published in the Journal of Real Estate Portfolio Management, finds that office accounts for the largest component for all three indices – 30.80% for NCREIF, 43.3% for INREV and 41.66% for ANREV. 

But there is a greater disparity in the allocation to residential, with NCREIF at 26.1%, INREV at 6.5% and ANREV at 11.7%. For industrial/logistics, the range is 22% both for NCREIF and INREV, and 28.91% for ANREV.

Office performance in Asia is considerably different to that in the US or Europe. The physical occupancy within the office sector in Asia, with the exception of Australia, has returned to pre-pandemic levels in cities in Japan, Korea, China, Singapore and Hong Kong.

Schilling says the office sector in Asia is more resilient than it is in the US or Europe because of the high densities of Asian cities which drive higher occupancy levels and stronger tenant demand.

Chen attributes employees’ return to the office to a combination of physical space limitations at home, less experience with remote working, and cultural and geographic factors.

Australia is the laggard, with working from home having become more entrenched. According to the Property Council of Australia, occupancy in February ranged from 46% in Canberra to 81% in Perth CBD. Sydney and Melbourne are 46% and 61%, respectively.

Shopping centres in Asia are also different to those in suburban US markets or Europe. In large cities such as Singapore and Hong Kong, shopping centres are rich with amenities, particularly food and beverages. They are designed to be community and entertainment hubs.

With their higher allocations to logistics and industrial, ANREV-indexed core funds are riding a wave of digitalisation in this region. The sector is underpinned by low vacancies, with strong growth in demand across all markets. 

Although the region escaped the pain of redemptions, it has been a difficult capital-raising year for funds in Asia. Investors have been concerned about the denominator effect on their allocations to real estate, coupled with concerns of valuation correction. 

Schilling says investors are generally overweight property, given the fall in equity values globally and are waiting for real estate values to correct – so there is less appetite for core at present. But he expects to see investors start to increase their allocations as capital markets stabilise later this year. 

“The fundamentals of APAC for real estate performance remain attractive,” says van den Berg. “I expect a continuation of strong income flows, although cap-rate expansion has clearly reversed in some markets. However, the negative effect of cap-rate expansion appears to be mitigated by strong income growth across the region.”