More than half of investors to increase allocations to APAC real estate
A majority of institutional investors globally, 56.7 percent, have said they will increase their allocations to Asia Pacific real estate over the next two years, according to the latest Investment Intentions Survey of institutional investors and funds of funds managers published by ANREV, INREV and PREA.
European investors are leading the charge into Asia Pacific, with 69 percent responding that they will increase allocations to real estate in the region over the next two years, followed by 50 percent of U.S. investors. Meanwhile, most Asia Pacific investors, 48.1 percent, intend to make no changes to their Asia Pacific allocations, with most instead preferring to increase allocations to the United States and Europe, 58.3 percent and 54.2 percent, respectively.
This bullish stance on real estate comes as global investors indicated their intention to place a minimum of $72.7 billion of new capital into the asset class in 2019, more than the $53.8 billion designated in 2018, showing a continuation of recent positive sentiment. Around $45.1 billion of this total is earmarked for non-listed vehicles. Asia Pacific investors are also confident about real estate, with a sizeable 40.7 percent of investors from the region telling the survey they will increase their allocations to the sector over the next two years.
Current average allocations to real estate increased to 10.0 percent from 8.9 percent in 2017, against an increase in target allocations from 10.2 percent to 10.4 percent, significantly narrowing the gap between the two for the first time.
Looking at the AUM-weighted results, 80.4 percent of investors intend to increase allocations, indicating that larger investors will likely commit more than their smaller counterparts.
On a regional basis, while most Asia Pacific and North America investors expect no change in their allocations, the majority of Europeans expect to increase theirs. More North American investors will decrease their commitments, than their counterparts in other regions.
Diversification and enhanced returns remain the two main benefits attracting all investors to the asset class.
Asia stands firm on core investments as preference for value added shifts globally
While pricing of core assets remains high in Asia Pacific, 44.3 percent of investors globally have once again indicated that value added is the style with the best risk-adjusted performance prospects in the region. However, core has regained attractiveness, with 37.7 percent of global investors seeing it as having the best performance prospects in the region in 2019, compared with 25.9 percent in 2018. The bounce back for core suggest that while investors are still taking risk, appetite has lessened since last year’s survey.
Despite this, the vast majority of Asia Pacific investors, 81.3 percent, still say they will invest in core strategies as opposed to the 18.8 percent who say they will invest in value added investments and 12.5 percent who plan to invest in opportunistic assets. Among global investors, these numbers are 54.1 percent, 44.3 percent and 27.9 percent, respectively.
More investors pour into top Asia Pacific investment destinations
As in previous surveys, Sydney, Melbourne and Tokyo are still the dominant investment destinations for global investors, with 75 percent, 72.2 percent and 66.7 percent of respondents indicating they will invest in the three cities, respectively, compared with 76.3 percent, 65.8 percent and 55.3 percent in 2018 — marking significant increases for Melbourne and Tokyo. Among the top-ranking investment destinations, there was an impressive increase in the number of investors stating that they will invest in Seoul, rising from 31.6 percent in 2018 to 38.9 percent this year. The South Korean capital moved from sixth position last year to fifth in this year’s ranking.
However, despite strong interest among European and U.S. investors in Australia’s top two cities, Asia Pacific investors appear less bullish on Sydney and Melbourne. Compared with 87.5 percent of U.S. and 83.3 percent of European investors, only 62.5 percent of Asian investors favour Sydney, while 62.5 percent like Melbourne compared with 87.5 percent and 75.0 percent of U.S. and European investors, respectively.
Instead, Asia Pacific investors appear to prefer other Australian cities, with 43.8 percent favoring them over 33.3 percent of European investors. No U.S. investors expressed an interest in these cities. The same trend can be seen in Tokyo, where only 50.0 percent of Asian investors are expecting to invest as opposed to 83.3 percent and 75.0 percent of European and U.S. investors, respectively.
Overwhelming preference for Asia’s office sector but other sectors attracting more interest
For the first time, 100 percent of investors surveyed stated they would invest in Asia Pacific’s office sector, followed by 80.6 percent who said they would invest in industrial and logistics — a higher proportion than last year. Meanwhile, 63.9 percent of investors said they would invest in retail.
Healthcare has also seen a notable uptick in interest, with 16.7 percent of investors saying they will invest in the sector — up from 10.5 percent in the last survey. While this sector was only a target in Australia last year, participants this year have indicated they will also target the sector in Japan.
Also for the first time, Melbourne’s office sector ranked first in the city-sector combination ranking, selected by 67 percent of investors and replacing Sydney offices at the top spot. Sydney industrial and logistics ranks third.
Japan also made a comeback in the ranking, with Tokyo offices moving back up to fourth place in the rankings after falling to seventh in 2018 — with half of respondents saying they will invest in this market. Tokyo industrial and logistics also made a huge leap up from 10th place last year to fifth this year, tied with Melbourne’s industrial and logistics sector.
Non-listed real estate funds remain the most popular investment route
Globally, investors have indicated they plan to invest $28.0 billion in non-listed real estate funds. In Asia Pacific, 50 percent of investors have indicated their expectation to increase their real estate allocation in Asia Pacific through that route.
With 89.5 percent of investors investing into funds, non-listed real estate funds are definitely the most popular route to market in Asia Pacific. However, the survey also indicates a rising interest in Asia Pacific non-listed real estate debt, with 18.8 percent of investors looking to increase their allocations to these products this year as opposed to 13.3 percent in 2018.
Cautionary note
While interest in real estate is booming, institutional investors and funds of funds managers remain concerned about the availability of suitable products, transparency and market information and currency risk exposure when investing in non-listed real estate funds.
“This year’s survey highlights some interesting themes, with a clear trend of investors diversifying globally and building up their portfolio in Asia Pacific. The appeal of the core market remains undiminished, particularly among Asia Pacific investors. Despite pricing issues, investors clearly feel the benefit of these mature and liquid markets, where it is easier to invest. On the other hand, we can see them moving up the risk curve, and looking for more riskier types of investments such as value added and opportunistic strategies,” commented Amélie Delaunay, ANREV’s director of research and professional standards.
