Veteran Investors Move Up Risk Curve While New Entrants Target Prudent Deals
Taipei – According to the latest special report from CBRE, Asia Pacific institutional investors are expected to pump an additional US$240 billion into the world property markets by 2020, which will bring their total allocation into global real estate to US$500 billion—nearly double the US$260 billion invested as of end-2014.
CBRE recorded US$20 billion in total direct commercial property investments by Asia Pacific institutional investors in 2014. The proportion of total investments made overseas by APAC institutions has likewise significantly risen, from just 37% in 2011 to over 80% of total purchases in 2014. In addition, Asia Pacific institutions—which include sovereign wealth funds (SWFs), pension funds and insurance companies—are cash-rich, currently sitting on a combined war chest of nearly US$15 trillion as of end-2014[1], representing around 25% of total global AUM.
We estimate Asian institutional investors today have real estate allocations of around 2%—which is more than it was three years ago—but still considerably below their own internal targets and much less than their OECD peers which sit at 5-7%. This allocation gap, combined with real estate’s attractive risk-adjusted returns, is why we are seeing an acceleration of investment plans by institutional investors not just globally but regionally as well.
In addition to the need to increase their current low allocations to real estate, a number of other key factors will compel Asia Pacific institutional investors to increase their investment in real estate in the medium to long term. These are: (1) Ageing populations and long term liability matching, (2) falling returns offered by traditional investment channels (3) the stronger desire for long-term stable returns and (4) supportive policies and new initiatives.
Based on their different investment strategies and market entry timelines, institutional investors can either be categorized as experienced ‘early adopters’, or as new entrants. Early adopters include major SWFs and public pension funds which began investing in global real estate prior to the GFC. They have already assembled sizable global real estate portfolios and possess a wealth of experience in the market. New entrants are mostly the Chinese and Taiwanese insurance companies who made their maiden overseas property acquisitions in the recent years.
These two groups and their respective market preferences are changing the shape of the global real estate market. Newer sources of capital in particular—mainly comprised of Chinese, Taiwanese and South Korean insurance firms—have made waves worldwide due to their appetite for prominent assets in major gateway cities. In 2014, over 90% of new purchases by the new entrants were in the office sector, with 80% in major global cities. In contrast, only half of acquisitions by early adopters were in the office sector with 54% in global gateway cities. With traditional assets such as office and hotels mainly dominated by new entrants, ‘old capital’ has steadily expanded into niche or opportunistic sectors, with a focus on higher returns over a longer-term horizon.
Ada Choi, Senior Director, CBRE Research Asia Pacific comments, “A number of Asia Pacific institutions have also announced plans to further increase their allocations to property investments, which we expect is going to set the example for other institutions and attract them to similarly invest in real estate.”
Figure 1: Sources of Capital of Projected US$240 billion Increase in Real Estate Investment
Figure 2: Preferred Asset Classes of Early Adopters and New Entrants
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About CBRE Group, Inc.
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.
