High net-worth investors buck institutional trend on property

High net worth individuals (HNWIs) are predicted to significantly increase allocations to property, industry experts across Asia said, continuing to buck the growing institutional trend of avoiding the sector.

Results from Knight Frank’s HNW Pulse Survey, published as part of the real estate advisor’s Wealth Report in early March, found that 32% of Asian HNWIs planned to expand their commercial property portfolios in 2023, ahead of the global average of 28%.

The most common reasons given were inflation hedging and diversification benefits.

Stéphane Monier, CIO at Swiss private bank Lombard Odier, explained the growing Asian HNWI demand for the sector as a result of growth expectations this year, supported by the reopening of China and the emergence of Asian economies from the challenges posed by the Covid era.

“Real estate is a growth-oriented investment, [so] it benefits when gross domestic product rises,” Monier said. “As growth is expected to be higher in Asia than in the other regions in 2023, this should help [with] leasing activity.”

Evelyn Yeo, head of investments and deputy CEO at Pictet Wealth Management Asia, pointed to the appeal of the sector as a form of protection against current inflation in Europe and the US.

“Inflation is expected to outstrip interest rate rises, particularly in Europe,” she said. “This is helpful for real estate, as inflation helps push up rents, while the cost of financing increases at a more modest pace. This dynamic should help keep a lid on capitalisation rates and support real estate prices.”

This sentiment is in contrast to what some large institutional investors have told AsianInvestor in the past few months.

Netherlands-based pension fund PGGM, for instance, is slowing the pace of its Asian property allocations as part of a worldwide brake on new investments in its €18 billion ($19.07 billion) global property portfolio.

AustralianSuper, one of the country’s largest superannuation funds, has also expressed a downbeat outlook on global property markets, while singling out Australia’s economy as relatively resilient when compared to other developed markets.

“In general, we are cautious about the outlook for valuations across most sectors of property,” Bevan Towning, head of property at AustralianSuper in Melbourne, told AsianInvestor previously.

CASH IS KING

Allocations to property by HNWIs in APAC increased 30% in 2022 compared to 2021, accounting for more than $1.53 billion, even as total investment volumes into the sector fell 21% across APAC, according to figures published in Knight Frank’s annual Wealth Report.

Several commentators explained Asian investors’ current appetite for the sector in terms of their ability to secure good prices, given the speed with which they could deploy capital as well as their lower dependence on borrowing.

“HNWIs care less about yield movement and tend to be more sensitive to changes in capital values than institutional investors. As the cost of finance increases and capital values soften, they can make investment decisions quickly,” said Henry Chin, global head of investor thought leadership in Asia Pacific for CBRE.

Neil Brookes, global head of capital markets at Knight Frank, said that HNWIs’ lower reliance on debt, combined with their ample cash reserves, made them able to secure prime assets quickly at competitive prices.

As interest rates rise, spreads form a smaller portion of total yields from property investments, reducing the appeal of borrowing. Because HNWIs tend to borrow less than institutional investors, the sector is seen as more resilient for them.  

Cash-rich HNWIs face less time pressure to produce returns, meaning less pressure to time the bottom of the market, said Jyrki Rauhio, regional head of credit advisory in Asia Pacific at HSBC Global Private Banking.

“HNWIs usually do not have a definite time span for real estate investments, while institutional investors may need to achieve certain internal rates of return or to redeem the capital via disposal of real estate projects within a specific timeframe,” he said. “This puts HNWIs in a more favourable or flexible position in the current rising interest rate environment.”

CATCHING UP

Brookes said that growing allocations would be led by Singapore, where the number of super-rich family offices has nearly doubled in the past two years, according to government estimates.

“Investment activity is expected to increase in the second half of 2023 in tandem with improvements in general economic sentiment, once there is clear evidence that interest rates have reached their peak,” he said.

Increasing allocations to the sector will bring Asian investors closer to their global peers. In 11 of the 13 property sectors surveyed by Knight Frank, Asian HNWI allocations formed a lower proportion compared to the global average. The two exceptions were data centres and life science.

The biggest under-allocations in 2022 relative to the global average were in the hotel and leisure sector, where 19% of Asian HNWIs allocated to the sector compared with a global average of 36%.

The Knight Frank report also revealed the contrasting motivations for property investment by Asian investors versus their peers. Forty-three percent of APAC HNWIs indicated that capital appreciation is their biggest goal for wealth in 2023, compared with a global average of 31%.