It was only matter of time before Europe’s insurers hunt for yield and diversification in property investments landed in Asia.
The real assets affiliates of Allianz and Axa were, predictably, the forerunners, and most recently bought up an office/retail complex and a residential tower, respectively.
For the German, its lion’s share stake (60%) purchase of the DUO mixed-use development in Singapore in mid-2019, alongside a sovereign fund mandate, added another asset to Allianz Real Estate’s (ARE) ‘global 24/7 cities office portfolio’. ARE had made at least two earlier acquisitions in Singapore, a country its Asia-Pacific CEO described, glowingly, as a “key headquarter location for corporations in Asia [with] one of the most institutionalized commercial real estate markets in the world”.
For Axa IMRA, the Nagoya acquisition just last month was its eleventh in Japan, where it has ¥10bn ($92m) at stake in residential assets for clients. It also boasts Japanese hotels and offices, and nearly 10 years’ experience in Asia. Its offices include Australia where it purchased Eureka Funds Management in 2016, whence it raises Asian capital for local markets, and sources assets for clients back home.
Laurent Jacquemin, its head of Asia Pacific real assets, calls the region “a key market for geographical growth for our firm…sourcing attractive investment opportunities in Australia and Japan for domestic and international clients”.
Other insurers that follow Europe’s two largest will still be among the vanguard in Asia.
According to June 2019 statistics from the European Insurance and Occupational Pensions Authority (Eiopa), only one Asian/Australasian country – Japan – warranted being singled out by name as having European insurers investing directly in its property. They had put €938m ($1bn) directly into mainly commercial real estate. UK underwriters were responsible for almost all of that (€722m). Only Danes (€86.2m) and the Irish (€69m) also had significant sums, among 11 other EEA countries with some direct property in Asia’s second largest economy.
There may well be much more Asian real estate within the €50bn categorised as ‘rest of world’ by Eiopa.
Only three nations’ insurers – namely Spain’s, Germany’s and Luxembourg’s – have property for their own use in a named Asian country (again, Japan), in Eiopa’s figures.
Even though analysts describe prices in some regions as toppy, insurers will likely find yields comfortably above their homeland ‘risk-free’ rates, experts say. but the appetite to buy from locals is decidedly mixed.
In South Korea, the level of capital charges in local investment rules for holding property dissuade many insurers from significant allocations. Europeans may find a landscape comparatively uncluttered by local rivals for deals. Seoul is no Zurich, where domestic insurers sometimes elbow one another to win prime deals.
Claire Lee, co-author of a recent outlook report on South Korea’s insurers from Fitch, says “not having that high a proportion” of total investments in direct local property investment is largely due to optimization of their asset mix by considering the risk charges.
She puts the allocation at just 2-3% based on the industry statistics.
Venture across the sea to Japan and insurers’ latest financial reports, commonly half-years to September, show largely tepid increases in property allocations, but often stasis. There are some signs of the Japanese diversifying by property type, though. Orix Corporation, parent of Japan’s Orix Life Insurance, for instance announced recently it was opening a shared-work space in Tokyo for tenants.
Look to China, by contrast, and business consultants PwC describe Shanghai underwriters as “flush with cash [and] continuing to plough capital into the top end of the market”.
Close by in Taiwan, overseas property investing has decelerated “dramatically”, PwC’s Emerging Trends in Asia Pacific Real Estate report for 2019 says, blaming a protracted approvals process making it “almost impossible for them to compete with more nimble buyers”.
In short, Asia is every bit as much a patchwork as Europe is, when it comes to diverse property investment opportunity, and diverging appetite among insurers.
Two things seem fairly uniform, though.
One is that property and in particular offices, are expected to offer significant pick-up in total returns, versus local 10-year debt, between 2018 and 2022.
Forecasts that PwC uses from DWS show that expected returns from office property in 10 out of 22 major cities in Asia / Australasia are at least double that from the local 10-year debt yield.
The expected outperformance is greatest from property in Yokohama, Osaka, Tokyo and Nagoya, thanks to abysmal sovereign yields and healthy forecast property returns. In only one place – Hong Kong – is the ‘excess return’ over risk-free expected to be negative.
The second commonality investors in Asia will find, is the need for insurers to bring expertise in reading the political landscape, and understanding how that risk can affect asset prices.
One local advisor to institutions buying real estate in the mature Hong Kong property market quips that political risk was once a phenomenon confined to Asia’s ‘developing’ markets, “whereas now it is just around the corner – literally”.
One pan-regional asset manager helping insurers source property in Asia says the political environments are not necessarily risky for Western insurers, just different to what allocators might have known.
For Ranjit Thambyrajah, founder and managing director of Accuity Funding, understanding the risks of things going wrong is a matter of close experience in the region. Accuity helps institutional and other investors source investment properties in Asia, from government projects to power plants, high-rise towers to hotels.
“There is great risk [investing in Asia] and you cannot really do it at arm’s length,” he says. “The biggest negative aspect is still the political environment, but in terms of growth, many countries here are growing much faster than the Western world. Investing [in Asian property] is about partnering with people with local knowledge who know the risks and can vet the projects.”
He adds many governments are supportive and accommodative of growth, but some come from a background “that is not necessarily business-minded”.
Thambyrajah acknowledges that political and security-risk “scares some people away” from investing in Asian property, though he adds that “even in the UK you can see risk, it is all about how you manage that”.
“It’s about knowing how the people think, what their fears and political persuasions are, and putting together a package they’re comfortable with,” Thambyrajah explains.
When the eurozone’s heavily indebted countries hit the skids in 2012, many property and infrastructure investors looked for projects with explicit or implicit government guarantees.
If insurers believe that similar government guarantees are the antidote to property investment risk in Asia, they are in Thambyrajah’s opinion mistaken.
“That is the last form of security one should look for,” he says. “You need to be derisking without government guarantees. Getting a government guarantee is only a bonus.”
Rather, he adds, insurers and others seeking out reliable business / development partners should work with individuals who are well connected to important local authorities, those with their own capital at risk in the same project. State- and reserve banks may prove wiser to pick as partners than other banks, he adds. And having access to various levels of government is also important.
The rewards for taking such risks, can be far better yields from property than what is on offer in prime Europe, for example.
Equity-based property investors can enjoy returns “in the teens”, Thambyrajah says, while debt-based investors can still receive in the order of 3% to 7%, “and budget for 3% with the management fees built in. Getting 3% to 4% is very comfortable”.
And insurers that do not want to get in at the project-development stage will still find attractive properties for later-stage investing, Thambyrajah says, though the returns will be commensurately lower.
However, they may find duration in investments – a $3.5bn power plant that Accuity is currently involved with in Vietnam has a 35-year contract with the government, and a power purchase agreement.
At the more conservative end of the risk-spectrum, Thambyrajah says it makes sense to construct portfolios of property types more reliant on consumption, including residential and/or government infrastructure such as power, rail and dams.
Mines, he says, are “probably the highest risk” – which European insurers may well agree with, given the reputational danger involved these days in financing fossil fuel extraction these.
Thambyrajah added that auditing both sponsors, and property management teams, is key.