Institutional investors turn to renewables as real estate falters
Institutional investors in Asia are increasingly seeking out renewable real estate and infrastructure investments to maintain exposure to real assets while addressing growing pressure to incorporate sustainability in their portfolios.
The shift comes as traditional real estate investments have been struggling recently.
“There has been a pivot from office or residential real estate investments to these sectors,” said Spencer Park, special counsel in the Seoul office of Milbank LLP.
Milbank LLP
Park said his company was helping Korean investors with several cross-border wind farm and solar project deals.
“Investment routes include project finance funding for energy projects in the US and Australia. There are limited opportunities in Korea, in part due to the regulatory restrictions,” Park said.
There was a strong demand for ESG initiatives among Korean corporations.
They saw synergy from partnering with leading Korean companies that are seeking a competitive advantage against foreign rivals in sectors such as alternative energy, artificial intelligence, and battery storage, he added.
“Korea has this expertise and a strong history of investing in energy-related projects. Increasingly, quasi-government Korean institutions providing financing for offshore projects to help Korean companies win business,” he said.
In 2023, allocations to Asia-Pacific commercial property fell to their lowest level since 2012, down 28% from 2022 to $139.7 billion, according to MSCI data.
As investors seek alternatives to poor-performing real estate investments, renewables investments provide the promise of strong returns while satisfying the need for more sustainable portfolios.
The investments also allow investors to capitalise on the trend of decarbonisation.
Asian investors generally favour sustainable investments in sectors geared to decarbonisation for the potential of demonstrable return, rather than the wider application of ESG screening or rating, according to Andrew Thompson, head of private equity and sovereign wealth, Asia Pacific at KPMG in Singapore.
“A lot of investors in Asia are concerned by ESG when making investment decisions, but they tend [to favour] sectors that have a clear and direct benefit from trends like decarbonisation or the shift to electric vehicles, and show clear evidence of consumer or industrial demand,” Thompson said.
MAKE AN IMPACT
For NZ Super Fund, it distinguishes between specific impact investments and the fund’s growing integration of ESG measures more generally into the portfolio.
In 2022, NZ Super shifted 40% of its investment portfolio to market indices aligned with the Paris Agreement, the international climate change treaty.
“Typically, with impact investment, the focus is on the main business: i.e. products or services that are a material part of the companies or the assets (such as bonds, infrastructure, forests) in the portfolio,” said Anne-Maree O'Connor, head of sustainable investment at NZ Super.
O’Connor pointed to international standards to help investors measure the social and environmental outcome of their allocation.
This includes those produced by the Global Impact Investing Network GIIN and the Sustainable Development Investments Asset Owner Platform (SDI AOP), an initiative co-founded by Australian Super.
SDI AOP uses revenues to evaluate how far a company’s products or services advance the United Nations’ sustainable development goals. “Revenues can be a good measure,” O’Connor said.
DEMOGRAPHIC DRIVERS
Demographic development is also driving investors’ interest in certain real estate sectors.
Mary Power, principal consultant and head of property research at JANA Investment Advisers, noted the resilience of other sectors in Australia, including residential and healthcare real estate, despite the waning appeal of commercial real estate such as offices.
“Healthcare is an opportunity that is strongly supported by the aging population thematic and overall government expenditure in this area,” Power said.
“The housing shortage in Australia means that the residential sector has the potential to emerge as an alternative sector, offering investment opportunities in addition to office, retail and industrial,” she added.
Power pointed to the sector’s diversification benefits and potential growth.
“The demographic drivers underpinning the residential sector are different to the traditional sectors driven by GDP growth and consumer spending. Australia is well behind the well-established multifamily sector in the US and the more recent emerging UK market,” she said.