A new survey shows that commitment to Asia is set to increase, particularly in China, and that a local manager is critical. Dasha Kruchkoff reports
For many investors the market downturn has prompted a focus on property markets closer to home rather than on any global ambitions. However, the results of the Investment Intentions Asia Survey 2009 show that Asia non-listed property funds will not fall off the agenda for investors.
The annual report captures the trends and preference of participants in the Asian non-listed real estate funds market for the coming 12 months. The results show that in the short term investors are putting allocations to Asian non listed real estate funds on hold but anticipate that they will increase their commitments in the long term. Most concerns in the short term are linked to market conditions, reflecting familiar trends being experienced in Europe. Looking forward, the fact that respondents also highlight the structural benefits of investing in Asian non-listed property funds support their long-term sustainability.
The survey attracted 73 responses from companies who were members of INREV, AREA (Asian Real Estate Association) or PREA (the US-based Pension Real Estate Association). The survey includes responses from investors, fund of funds managers and fund managers. Broken down by region, 44% of respondents were based in Europe, 26% based in US and 30% based in Asia.
Market conditions have clearly hit the short-term intentions to invest in Asian non-listed real estate funds. Investment into Asian non-listed real estate funds is expected to slow in the short term (one to two years) with only 24% of investors intending to increase their allocations to the sector (figure 1). However, this is in the context of investors expecting to reduce allocations across all real estate investment methods except joint ventures.
When considering expectations to invest on the longer term, the picture is very different. Half of investors anticipate an increase in allocations in the medium term (three to five years). Once again, other real estate investment methods mirror this change indicating that short-term concerns are linked to the market conditions.
Concerns over market conditions include worsening economic conditions and the possibility that macro-economic factors will have a major influence on the property sector. High on the list is also the lack of available debt for existing and new funds as well as refinancing concerns. Respondents also note property level issues such as falling demand from occupiers and rising vacancy rates, which could lead to falling rents and oversupply.
By country most respondents felt that Japan was the market most affected by the downturn, closely followed by Singapore. China is overwhelmingly seen as the least affected country, followed by India, Korea and Australia.
There may be turbulence in the short term for the Asian non-listed real estate market but the medium-term interest in the market is supported by the fact that respondents are looking to the sector for its structural benefits. About 79% of investors see expert management as the most important reason to invest in the sector and the other two groups of respondents agree (figure 2). For investors, access to specific sectors and new markets was also of high importance, particularly those based in Europe and the US.
There are also obstacles for those looking to enter the market. It is no surprise that this year market conditions were seen by respondents as the main barrier: investors sighted market conditions (47%) and transparency (42%) as the main reasons. Transparency has been a barrier to the growth of the sector in Europe but the work of INREV has helped improve this. The work of AREA, the Asian Real Estate Association, will also bring similar improvements to the region.
The survey also shows what investors will be looking for in the funds they invest in. A manager's local presence is the main criteria for 74% of investors and 65% of fund of funds manager (figure 3), while target location and style were also highly rated. When the results are broken down by region of origin, target location is more important among European and US participants then Asian investors.
For the developed Asian markets, risk appetite among investors is more conservative, showing an equal preference for core and value added funds. In the emerging Asian markets the results show that investors prefer opportunity funds as they look to gain higher returns in riskier conditions. Fund of funds managers prefer opportunity funds in both types of market. This is in line with INREV's fund of funds database, which shows that most fund of funds managers with global and/or Asian Investments have higher-risk strategies.
For preferred location, China, Australia and Japan featured in eight of the top 10 location and sector pairing preferences of respondents.
China offers the most appealing location according to 90% of investors, 88% of fund of funds managers and 81% of fund managers, as can be seen in figure 4. China residential and retail investments led the way for investors, while China retail, Australian offices and Japan offices were the focus of fund of funds managers.
The results of the survey show the participants in the non-listed real estate market in Asia have been affected by the market conditions and debt problems, and will continue to be affected in the short term. Nevertheless, the benefits of investing in non-listed real estate funds are recognised by those surveyed, and that will encourage investment in Asian non-listed real estate funds in the medium to long term.
Dasha Kruchkoff is research manager at INREV