Allianz targets Chinese real assets despite Evergrande

Evergrande’s near bankruptcy has done nothing to dent Allianz’ appetite for property and other real assets in China, according to two of its senior executives.

“Evergrande has not changed our long term view. We think this is an organised plan, [Beijing] had the three red lines policy and they are implementing it,” Rushabh Desai, CEO of Allianz Real Estate’s Asia Pacific business told AsianInvestor. The government’s three red lines policy limits the amount of annual new borrowing for property developers by capping their debt ratios.

Allianz Real Estate has €2.2 billion of its €79.2 billion worldwide AUM invested in China. Desai said that in the government-guided deleveraging it had been hard to pinpoint which company would be first in line.

Despite the headlines, there were no surprises in how the process was being handled for the Allianz Real Estate China team, which comprises five staff based in Shanghai. “If you’re on the ground you spend time and resources understanding every situation, and this one seems like a well-controlled restructuring,” he said.

Slowing process

However, he said Allianz was spending a lot of time understanding and communicating the implications of Evergrande and the government’s policy of deleveraging. 

“It is taking slightly longer to make investment decisions. We are spending a lot more time gathering relevant information to make informed decisions,” he said, adding that understanding capital market fundamentals, including how liquid investments were, the process of exit and what data was available was slower in China than in some property markets in the region.

Evergrande, China’s second largest property company is also the world’s most indebted, with $300 billion in liabilities. Despite the risk of its collapse, investor flows into China and Asia Pacific's commercial property sector surged last year. Allocations to China were up 19% to $35 billion in the first three quarters, according to Real Capital Analytics. The Asia Pacific sector as a whole grew 12% to a record $137 billion in the same period.

A key focus of Allianz Real Estate’s China investing is the country’s growing residential sector. Desai said that government policy to promote affordable rental housing – a trend in many countries across the world – was set to boost China’s residential multi-family sector.

“China is looking to ensure that condo prices do not get out of hand,” he said, pointing to the county’s high proportion of younger workers and the growing preference for renting over buying, as rising sale prices in the major cities pushed homes out of reach.

“The Chinese government will ensure that condo prices do not get out of hand,” he said, pointing to the country’s high proportion of younger workers and the growing preference for renting over buying, as rising sale prices in the major cities pushed homes out of reach. “As this develops, the attractiveness of multi-family residential increases.”

REITS

China’s early forays into real estate investment trusts (Reits) is good news for Allianz Real Estate’s investments in the country’s logistics sector, which total €900 million, Desai said. Compression between logistics and office yields in China has so far lagged that of other countries in the region such as Australia and Japan.

In June 2021, China launched a public Reits market in Shanghai and Shenzhen, in part to help ease the burden on local governments by allowing the listing of infrastructure projects. Three Reits have so far been added to the nine listed at launch.

The successful launch of Reits is already accelerating the compression of logistics yields, said Desai.  “Now that the government is allowing industrial Reits immediately we have seen impacts on the yields and [our] portfolio becomes more valuable,” he said.

Desai would not be drawn on the prospect of future sales to lock in profit, however. “We look annually at this and don’t have a particular target. When to sell is related to the investment KPIs, asset location and quality, who the operator is, who the tenant is and what [is good] for our investors,” he said.

Infrastructure

Allianz Capital Partners, which manages infrastructure equity investments for Allianz China, is also targeting China.

“China is a huge and growing market but the opportunity set is more limited than one might think because of the large number of state-owned enterprises operating in infrastructure. But there are still opportunities to invest,” Yves Meyer-Bülow, head of Infrastructure funds and co-investments at Allianz Capital Partners, told AsianInvestor.

He said the business was seeking investment opportunities in sectors including data centres, logistics and commercial solar, which tend to have private sector counterparties (Allianz Real Estate and Allianz Capital Partners pursue data centres and logistic investments depending on the structure of the individual deal).

Meyer-Bülow emphasised that ESG considerations are critical for Allianz Capital Partners in China, as in other locations. “We wouldn’t invest with managers that aren’t aligned with Allianz’s ESG priorities,” he said.

He gave the example of a data centre subsidiary in Greater China, where co-investment ownership meant striking contracts directly with customers, allowing Allianz to influence customers' approach to energy procurement and other emissions-related choices.