As western pension funds move into the Asia Pacific markets, there are significant challenges to be met in choosing the right region, the right sector and the right manager with the right track record. Richard Lowe reports
The Danish occupational pension fund AP Pension gained its first access to Asian real estate over 18 months ago by committing to the Sparinvest Property Fund. This global fund of funds vehicle invests mainly in Europe and the US, but has been developing a significant exposure to the Asia Pacific region.
Since then AP Pension has committed capital to the ING Real Estate fund focusing on the retail sector across a number of Asian regions. The pension fund took advantage of Sparinvest's negotiating clout, via a co-investment model, to channel DKK130m (€17.4m) into the fund at the end of 2007.
Peter Olsson, head of real estate investment at AP Pension, explains how this latest investment opportunity - a portfolio of shopping centres in various countries, including a six-storey scheme in Kuala Lumpur with more than 300 shops - was very appealing.
"It was a very convincing portfolio," he says. "We wouldn't have to speculate if the manager was able to source any deals and how long it would take for a committed capital to be called upon. We could see the deals and found them very interesting and convincing."
But AP Pension's activity in Asia does not stop there. "Now we are looking at further opportunities out there," Olsson continues. "But it is a long process and takes time. We are evaluating all the possible funds still open and already out there, and are trying to see what options might be available."
The ideal scenario is for AP Pension to hold a diversified portfolio of country and sector-specific funds. "It depends on the manager profile, but if you have a very strong manager in certain geographical regions or certain sectors of the market, it might be easier for us to be persuaded that it was the right manager instead of a very broad Asian manager.
"We have already joined very specialised managers - for example, only focusing on one particular region. Other managers we have joined through the fund of funds vehicle are only concerned with specific geographical regions."
However, there are a number of challenges in finding appropriate fund opportunities and assessing which managers are best placed to deliver returns with the right level of risk. The most difficult part of the job is screening managers and assessing their appropriateness, Olsson says. One problem for AP Pension in particular is the scarcity of track records compared with European or US markets.
"It is very important that the fund managers we commit to have very good track records or they have portfolios that are convincing, so you can see they are actually able to make deals and get their hands on very good assets. To join in with a manager with no track record and a completely un-seeded portfolio would not be very attractive to us."
Olsson suggests one scenario where AP Pension might invest with less familiar managers is if advisers they consult with in Europe have experience of working with them. "We are talking to different advisers in Europe and if some of the advisers have experience with managers out there it could be more convincing for us to jump in with more unknown managers."
It is paramount that AP Pension invests only in what is deemed to be the right real estate investments in Asia. As Olsson states, "we won't invest in Asia, just ‘to invest in Asia'. It depends on what particular fund opportunities there might be."
This stance makes sense when you consider that AP Pension's motivation for extending its real estate investments to the Asia Pacific region was the identification of "interesting return possibilities". Indeed, Olsson welcomes the diversification benefits that come with the Asian exposure, but he stresses that the incentive to enter into the region was predominately "because we find Asia interesting".
And this is despite an increasingly pessimistic global economic outlook and the potential for a US recession. "We haven't seen anything in the macro-economic or worldwide outline to suggest that we should focus elsewhere," Olsson says. "In the present global economy we find Asia very interesting and we see some very strong economies out there."
In fact, Asia's growing independence from the US and inter-regional trading actually bolsters its investment case in the emerging environment, Olsson feels.
"Asia is dealing more internally and with other parts of the world as well as the US. Of course, that is the strength of the region. That also makes it a more interesting case for us from an investment point of view."
AP Pension is for the most part targeting core and core-plus opportunities, as well as possibly value-add, rather than outright opportunistic investments. "You might say that just going to Asia is a bit opportunistic in the first place," Olsson says. "So, if it was a very opportunistic fund as well it would be a high risk investment. As a pension fund that would not be our profile."
However, this approach does not necessarily rule out China and India, despite these countries often lacking core or investment grade property and that investment in India is almost exclusively developmental in nature.
"It depends, because you could still have funds that are interesting in these countries, but it would entail certain requirements. It should be a relatively core fund and the seeded assets in the fund should be convincing to us."
AP Pension's Asian investments should provide "modest returns" with a "secure investment profile" he adds. The pension fund is "not just aiming at very high returns".
Olsson is keen to disassociate AP Pension's Asian investments from any sense of ‘gold digging'. However, he admits: "If there are some low-hanging fruits we like to pick them up. There are a lot of investors focusing on Asia, so I think it would be difficult to find relatively safe investment that could also give very high returns."
