6 March, 2013
Real estate investment turnover by institutional investors in Asia Pacific rose 88 per cent from US$4.2 billion in 2010 to US$7.9 billion in 2012. The growth in activity was led by the increase of real estate allocation among Asia-based institutional investors and the re-emergence of their western counterparts. These funds are set to continue their buying spree in Asia Pacific as they seek safe investments alternative to low-yield bonds and volatile equities. Institutional investors include sovereign wealth funds, pension funds and insurance funds. However, the lack of available stocks for core investment and tight yield requirements as well as restrictions on real estate investments have acted to slow their pace of acquisitions in 2012, making the level of investment 9.5 per cent below the amount in 2011.
In Singapore, investor sentiment remained positive throughout 2012 in particular the end of the year was very active. Sales turnover of real estate investment properties was $31.45 billion in 2012 (including residential and government land sales), which was 4.8 per cent higher than the previous year. This was driven mainly by buoyant public sector land sales, several mega commercial deals, a vibrant strata-titled commercial market and several S-REITs’ getting listed. Demand for strata-titled commercial units from private companies, high-net worth individuals and other investors in some cases switching form the residential sector remains firm, particularly for units priced under S$3 million. On contrary, property funds were big sellers as they divested about $3.36 billion worth of properties in 2012 while making acquisitions of around $1.31 billion. Only a few foreign property funds are shopping for new acquisitions but many are either approaching the end of their fund-life or are not the most aggressive group of buyers, and are therefore losing out to the other investors.
In 2012, about 70 per cent of these investments were made by regional institutional funds with Chinese and Taiwanese insurance companies and South Korea pension funds being the most active groups.
Greg Penn, Managing Director, Capital Markets, Asia said “To date, most of the Asia-based institutional monies are still trapped within their domestic market due to regulatory issues and lack of overseas investment experience, but this is set to change.”
In China, following the rule change to allow real estate investment in 2010 by insurance funds, the China Insurance Regulatory Commission (CIRC) further liberalized overseas investment in real estate in October 2012. Chinese insurers are now authorized to invest in stabilized commercial properties in the gateway cities of 45 designated overseas countries.
Another noteworthy regulatory change currently under discussion is a move to permit domestic insurance companies in Taiwan to invest in real estate offshore, the aim being to alleviate some of the pressure on the domestic market. It is believed that leading Taiwanese insurers will move fairly quickly following any rule change, with most having already established overseas business arms.
Across South East Asia, we have seen an increase of interest in the Indonesian real estate market in particular. Many investors as much as developers are looking into opportunities how to enter the Indonesian market given high yields and returns Indonesia offers. The cross border investment has been, however, challenged by Indonesian investment regulations and requirements to enter the market remain difficult. Similarly to Indonesia, the rest of South East Asia region remains dominated by the domestic players while foreign investors are looking to partner with local developers. Looking ahead, the SEA market retains the strong and active development market while many of the property groups and players are also focusing on expanding their landbanks and operations in the provincial cities.
Malaysia’s Employees Provident Fund is set to increase overseas asset holdings from 13.4 per cent in 2011 to 30 per cent by 2017 while South Korea’s National Pension Service plans to increase alternative investment to 10 per cent by 2017.
In Australia, the fast growing pool of superannuation capital suggests that the current trend of deployment of new capital for real estate will continue in 2013. While the superannuation funds continue to expand their portfolio domestically, many are evaluating international investment opportunities as they look for greater diversification. According to a survey conducted Australian Institute of Superannuation Trustees, superannuation funds’ allocation to offshore property will gradually increase from 2.3 per cent in 2011 to 3.2 per cent in 2013.
Globally, more institutional funds are increasing their allocations to real estate for long term stable income and part of these funds are expected to be channelled to Asia Pacific.
Canadian and European pension funds and insurance funds as well as Middle East Sovereign Wealth Funds are looking to increase their allocations in Asia Pacific as the region continues to be the growth engine of the world.
Norwegian Government Pension Fund Global, one of the world’s largest Sovereign Wealth Funds, is planning to increase its allocation in real estate up to 5 per cent and has just made their maiden investment outside Europe in February by acquiring a 49.9 per cent stake in a portfolio of five Grade A offices in New York, Washington and Boston from TIAA-CREF, a New York-based retirement fund with a total consideration of US$600 million, although they haven’t reached Asia Pacific yet.
Institutional investors have favoured well-located properties in major cities that provide highly secured income stream. The increase in investment appetite among the institutions has further intensified the competition for core assets which are largely held by property companies in Asia. Low yields and weakening office occupier demand also add another layer of difficulty for institutional investors making purchases in Asia Pacific.
Australia continues to remain the primary focus for international institutional investors, thanks to the market’s transparency, liquidity and attractive investment yields. Within Asia, Japan is the market that offers the biggest pool of commercial properties for core investment. The country is benefiting from the view that the office rental cycle is bottoming out and the positive yield spread over the low borrowing rate.
Some investors are therefore taking different channels in accessing the core market or move up the risk spectrum to access core products in the future. Besides buying hard assets, some are funding developers or co-investing with investment managers. One example is the direct office investment in the 50 per cent stake of the prime Barangaroo development project in Sydney to be completed in 2015 by CPPIB from Lend Lease, reflecting its long term commitment to investing in Asia Pacific.
The impact of deregulation would not be immediate. These entities need time to build up their real estate investment operating platform and gain knowledge of the overseas markets. For insurance companies, the need to fulfill regulatory requirements for their overseas real estate investments and in some cases approval from the regulator will act to slow their investment decision making process. The uncertainty over approval could be viewed as an additional counterparty risk from vendors’ perspective, especially when the market is filled with willing buyers for core assets.
The process for Asian institutions to pick up their cross border investment activity could take two to three years. By then, Asia is likely to offer a bigger core real estate investment market to absorb capital as the region has a big pipeline supply of office and retail properties. Owner occupiers could take this advantage to free up some capital on their premises through sale and leaseback deals while real estate private equity funds could capture this opportunity to invest in assets which could potentially be turned into stablised core assets in the coming years for institutional investors. However, this is still not enough to absorb the huge pools of institutional capital waiting to be invested in real estate. Strong pipeline of purchases for safe investment is in sight, not only in Asia but elsewhere in the world.
In 2013, Singapore market dynamics are likely to remain unchanged with reasonable amount of transaction activity across the various sectors. Both buyers and sellers are keen to do deals at present across multiple sectors but in some cases there continues to be a price gap, which will hinder the transaction process.
Notable acquisitions by institutional investors in Asia Pacific (2012)
| Quarter | Country | Property Name | Sector | US$ million | Buyer |
|---|---|---|---|---|---|
| 2012.3 | Australia, Sydney | Two office towers at the Barangaroo South Project (50%) | Office | 1040 |
Canadian Pension Plan Investment Board |
| 2012.3 | Singapore | neX shopping mall (50%) | Retail | 672 | NTUC Fairprice, NTUC income, Singapore Labour Foundation |
| 2012.4 | Australia, Brisbane | Myer Centre (50%) | Retail | 379 | Industry Superannuation Property Trust |
| 2012.4 | China, Shanghai | PLaza 353 | Retail | 369 | ADIA |
| 2012.4 | China, Beijing | China Electronics Plaza (Tower B) | Office | 258 | Ping An Insurance |
| 2012.3 | Australia, Various | Portfolio of 13 industrial properties (50%) | Industrial | 187 | National Pension Service of Korea |
| 2012.3 | Australia, NSW | Bay Village Shopping Centre | Retail | 171 | PSP Investments (80%) JV Charter Hall (20%) |
| 2012.3 | China, Shanghai | Oriental Financial Plaza (11,12, 15-17/F) | Office | 108 | Cathay Life Insurance |
| 2012.4 | South Korea, Seoul | National Information Society Agency | Office | 66 | GIC |
Source: CBRE
Attachment: CBRE PR - Institutional investment in APAC doubled in the last two years.pdf
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CBRE Group, Inc. (NYSE:CBG), a Fortune 500 and S&P 500 company headquartered in Los Angeles, is the world's largest commercial real estate services and investment firm (based on 2016 revenue). The company has more than 75,000 employees (excluding affiliates), and serves real estate investors and occupiers through approximately 450 offices (excluding affiliates) worldwide. CBRE offers a broad range of integrated services, including facilities, transaction and project management; property management; investment management; appraisal and valuation; property leasing; strategic consulting; property sales; mortgage services and development services. Please visit our website at www.cbre.com.
