Diversification and opportunity are the two key reasons why the Dutch giant ABP is increasing its exposure in Asia, with the rapidly expanding non-listed markets looking increasingly investable. Richard Lowe reports
ABP has been investing in Asian real estate since 2000 through listed securities, but it was not until 2002 that the €220bn Dutch pension fund extended its activities to the non-listed markets. Today, the amount of capital ABP has committed to non-listed investments in Asia is roughly equal to that committed to listed investments in the region. It is no coincidence that this 50/50 split has developed during a period when opportunities in the non-listed space have grown exponentially.
"The market only opened up about five years ago to get meaningful exposure to non-listed Asian real estate markets," says Patrick Kanters, managing director of global real estate at APG Investments, the wholly owned subsidiary of ABP that manages all services for the pension fund, including the management of all the fund's assets.
"Now there is pretty much an explosion of different opportunities. In the few years since that opportunity arose, we have been able to build up quite a substantial portfolio. We are in the process of further building that exposure across both listed and non-listed investments."
In fact, the growth of non-listed real estate opportunities in Asia has been a vital factor for one of the world's largest pension funds, which is constantly looking for new ‘opportunity sets' in which to invest its considerable capital.
The first and foremost reason for investing in Asia was diversification, Kanters explains, but equally the move has been about expanding the opportunity set, which is very important because "we have a very large amount of money to invest for our clients".
Kanters says: "First of all, real estate in Asia has simply become more investable. The listed market has been there for many more years, but the non-listed markets were hardly developed. That means the opportunity set really is there at the moment and was absent up until recently.
"Also market transparency is increasing, the opportunities are there, macroeconomics seem to be very strong; it is all pointing in the right direction. The different signs are pretty much on green right now."
Today, 17% of ABP's total real estate allocation is invested in the Asia Pacific region. But this rises to over 20% when all the capital that has been committed is included.
The pension fund is invested in the more mature markets of Japan, Singapore, Hong Kong and Australia, but is currently focusing on building its exposure in China, and making its first investments in India.
"APG is still in the process of building more exposure to China and India," Kanters says. "On India, we are about to close our first investments. It is a very different market, of course, compared with China. They are both emerging markets, but with very different characteristics. In China we have a little bit more experience and we have committed more capital to that market."
Kanters admits to having a cautious strategy for India, with the risk-return outlook for China looking "a little more positive", and it also being "easier to find managers with somewhat established track records".
In India "foreign investment is highly regulated right now", Kanters says, and opportunities to place capital are highly constrained to ground-up developments. "If that changes, the whole investment landscape will change, not only for foreign investors. So the regulations are highly influencing the value of the markets and the opportunities that will arise."
Having said this, one of Kanters' chief concerns is China's regulatory regime, with the government often carrying out last-minute changes.
"Many times already in the last couple of years all kinds of measures have been taken by the government to try to cool off the real estate boom over there. Quite recently a measure was taken to further limit the ability to invest money from abroad into China, for example.
"These regulatory changes are very much a challenge and can decide upon real estate valuations, for example, or how the real estate markets will behave. It is something you have to cope with - you cannot control it. It is something we hardly see in the US or Europe, but it is something you have to go with in the Chinese markets."
Kanters explains how he travelled to China at the end of February and met up with colleagues based in Hong Kong "to look at new China-focused investments". The pension fund established its Hong Kong office at the start of 2007, demonstrating how seriously it is seeking Asian real estate investment opportunities.
Kanters explains how having a team "on the ground in Asia" will help APG to build ABP's exposure by being "closer to the market" and showing the market that ABP is "there for the long term". From April, APG Investments' office in Hong Kong will increase from a real estate team of three full-time professionals to five, all working exclusively on non-listed investments. They will be joined in the future by another team focusing on the listed sector.
"We started the Hong Kong office first to focus on non-listed real estate and infrastructure investments, because that is the business where we thought we could create most value given its lack of transparency, the high illiquidity market and the importance of building up relationships with local parties. By now APG has a team of five people on the ground in Asia who are purely dedicated to non-listed real estate.
"APG is also in the process now of setting up a listed real estate securities team in Hong Kong, since we are convinced it makes a lot of sense to have those teams together," Kanters concludes.
"Many Asian (and especially Australian) listed funds launch non-listed investments and vice versa, and so it makes a lot of sense to be able to work on your relationships from one position. There are a lot of synergies and arbitrage opportunities having non-listed and listed teams together in the same office - we get even more information within the APG team."