By Asia-Pacific is home to more than half of the world’s population and encompasses a wide collection of economies and geographies, including two of the world’s biggest – and very different – growth markets: China and India.
For European and North American institutional investors with ambitions of achieving true diversification within their real estate portfolios, the question of how and where to increase exposure to Asia-Pacific markets has been an ever-present agenda item over the past decade. This is no mean feat for investors based so far away, when it is now well understood that investing successfully in real estate requires understanding – and having conviction in – local markets with their distinct dynamics and idiosyncrasies.
The COVID-19 pandemic and restrictions on travel threw up a new obstacle in 2020. Since then, concerns about China – relating to both global geopolitical tensions and, until not too long ago, a closing down of its cities in response to a resurgence in COVID-19 – have not helped engender greater capital flows into Asia-Pacific real estate.
This year’s annual Investment Intentions Survey published by regional real estate associations ANREV, INREV and PREA found that 53% of institutional investors globally expected to increase their allocations to Asia-Pacific over the next two years (see figure on page 6). This was higher than to Europe (39%), the US (51%) and Americas ex-US (23%). This trend was particularly marked among European investors, 61% of whom expected to increase their allocations to Asia-Pacific, but the shift was less strong among North American investors (42%).
Following a briefing on the results in Shanghai, real estate consultancy Cushman & Wakefield said: “While 2022 was a challenging year for commercial real estate investment in Asia-Pacific, there have been a number of encouraging signs since the beginning of 2023, including a more rapid reopening of China, slowing inflation rates in some countries, and recovering stock market performances. Findings from the 2023 survey reflect this returning confidence, with over half of the survey respondents indicating an expectation to increase their allocations to Asia Pacific real estate over the next two years.”
Catherine Chen, head of capital markets research at Asia-Pacific at Cushman & Wakefield, added: “Capital markets did slow in the second half of 2022, but we expect investment activity to pick up this year, given record levels of ‘dry powder’ currently in the market and strong investor interest in increasing their Asia-Pacific allocations. In addition, China’s faster pace of reopening and more supportive financial policies for developers will benefit the China property market as well as the wider Asia-Pacific region.”
So will 2023 see the start of a resurgence in western institutional capital targeting Asia-Pacific real estate markets – including China’s?
“I do think that this will be a pivotal year where flows will come back into Asia after being quite dormant for the last three years, because of COVID and the inability of people to travel,” says Simon Treacy, CEO of private equity real estate at Singapore-headquartered CapitaLand Investment, which manages some S$130bn, the majority of which is in Asia-Pacific.
A former global real estate CIO at BlackRock, Treacy joined in 2021 when those restrictions were still being felt and just after CapitaLand had been delisted from the Singapore stock exchange as part of plans to create the largest fund management group in Asia.
More recently, Treacy has been on the road, travelling three weeks each month. He has found investors “taking a pause” to digest the events of the past year and what they mean for real estate markets. They will continue to invest, he says, but also “diversify, particularly from a European perspective, into the Asia-Pacific region”. He says: “Investors are saying they want to finally return to Asia-Pacific, physically meet with their managers and continue to diversify their portfolios.”
At a time when Europe is facing low growth and inflation, Asia-Pacific is looking particularly interesting. “The same writing has been on the wall for 20 years,” says Treacy. “Asia is the growth engine, globally, from a GDP, population, trade perspective. The markets are maturing, the financial systems are quite robust and healthy. Interest rates have been lower, inflation has been lower.”
A good example of major European real estate investor with big ambitions to diversify globally is Bayerische Versorgungskammer (BVK), Germany’s largest pension fund. Last year, Rainer Komenda, head of real estate investment management, told IPE Real Assets that BVK would be turning its attention to the Asia and Americas as it sought to capture growth in these regions.
“I can imagine that the investments in Europe will become more difficult in the future and for tactical reasons we will bring the planned threshold for allocations in APAC up,” he said. At the time, Asia-Pacific investments made up 11% of BVK’s real estate portfolio.
“Investors’ real estate portfolios in Asia-Pacific are probably 8-15%,” says Treacy. “But that should really go up to 25-30% over the next 10 years.”
Treacy, who has been active in real estate and infrastructure since the 1990s, has lived and worked in Australia, Singapore, Hong Kong, Japan, China and New York, giving him a global perspective and decades of experience. He knows that such a shift in allocations cannot take place in a vacuum.
He says: “Now the wild card in all of this is, is the world really reverting away from globalisation?” The rise in political risk – most obviously in relation to China – clearly has implications for how investors’ Asia-Pacific allocations develop in the coming decade.
But Treacy also knows China well and feels that investors’ perceptions of the risks surrounding its real estate market – of transparency, for instance – could be misplaced. MGPA, the firm he co-founded in 2004 before it was sold to BlackRock, carried out the first “true arms-length institutional transaction” in China. Since 2013, the transparency of China’s real estate market and its openness to foreign investment has increased, despite widespread perceptions to the contrary.
Rather than being opaque, the Chinese real estate market is under-reported, Treacy suggests. “In terms of transparency and lease laws, it is no different from the US, Japan, Australia, UK. People think is not as transparent. It is. You can get all the information,” he says.
At a time when other countries have put up barriers to foreign investment, such as through taxes, “China has not restricted any foreigners buying any real estate in the country”, Treacy says. “It’s the same process that’s been in place since 2013, when the markets started to open up – very transparent, very predictable conversion of currency, setting up of companies, the collapsing of capital structures. All a well-trodden, proven path. The issue has always been it’s been massively under-reported.”
Meanwhile, the local Chinese capital markets have developed significantly over the past decade, with “a whole array of RMB [denominated], domestic real estate and infrastructure funds”, the creation of real estate investment trusts (REITs), and the participation of Chinese insurance companies with “huge portfolios with western asset management disciplines”.
When western institutional real estate investors look to Asia-Pacific, they should acknowledge how much some of the underlying markets have developed in recent years. “My view is that there is no Asia-Pacific. There’s China, there’s Australia and there’s about 12 other countries, and they’re all very different, working on different speeds,” Treacy says.
“All these markets have different characteristics, but they’re all maturing. They’re all on this kind of level now where there’s more transparency and there’s more acceptance in terms of investments. So I think Asia-Pacific offers a whole basket of opportunities for foreign investors to lever into the market where they’re comfortable, up and down the risk-return spectrum, in either debt or equity, or alternatives.”
CapitaLand has been active in China for more than 25 years and manages assets in 40 cities, across several sectors, including data centres, mixed-used logistics and retail. Today, it has also established a special-situations strategy for the country.
“We have a select number of investors who have positioned themselves early to see outsized risk-adjusted opportunities,” Treacy says. “That window will open and close, in the same way that I’m sure there are people positioning their capital right now in the UK – and they are going to be reaping the benefits of that 12 months out, looking back.”
But CapitaLand is active across Asia-Pacific. India is another potentially huge market that could appeal to investors that have reservations about investing in China. India has reduced the level of government bureaucracy, simplified regulations and introduced more attractive foreign-direct-investment rules. The growth of its technology sector, in particular, has created significant occupier demand for offices and business parks – an area of the market CapitaLand is looking to take advantage of.
Treacy spent some time in India in the mid-2000s. “Back then, strategically, we had a decision of: do we go into China or India or both? We chose China because it has one system, one language, one infrastructure,” he says.
This turned out to be the right decision, given the market distress that transpired during the global financial crisis. But since then, “the whole ecosystem ecosystem has changed tremendously in India”, says Treacy. “People would think [that] to get a building approval, particularly for something complex like a data centre, would take years and it would be tricky. We got approval in 14 days for a data centre in Hyderabad, probably one of the most innovative states in the world. It is the Silicon Valley of India.”
Another major – but very different – economy that could give reason to consider looking to Asia-Pacific this year is Japan. Kazuo Ueda has been nominated as the next governor of the Bank of Japan, signifying a potential break with tradition and the current imcumbent Kuroda Haruhiko. Japan, for so long dogged by low growth, has recently recorded 41-year high inflation at more than 4%.
It might just be possible that Japan is “about to break out of a 30-year process, where the government is positively supporting wage inflation strategies”, Treacy says. “We could be on the cusp of something looking really different in Japan through wage growth and inflation, which will go to property values, which the government will get back in terms of property tax… That is a big story.”
He adds: “What does Japan need? Now? It needs infrastructure. It needs social infrastructure. So I think inflation is going to be great for Japan. Wage growth is going to be incredible. I think that’s the biggest news.”
