Despite sharp recent falls in allocations to Asian property markets, leading APAC sovereign investor the New Zealand Superannuation Fund (NZ Super) has indicated it is ready to increase allocations to the sector.
“We have recently added internal resourcing by hiring real asset specialists and, as pricing becomes more attractive, we will look to actively build our exposures in these sectors,” read an excerpt from its annual report, published on 31 October.
A spokesperson for NZ Super declined to give further details.
In September, Toby Selman of NZ Super told AsianInvestor that it was in the process of finalising a sizeable commitment into an APAC-focused data centre fund alongside other large institutional investors.
According to its annual report, the fund’s real asset investment theme – which includes property and infrastructure – was the strongest performing of its four strategies in the year to end of June 2022, returning 3.28%.
At the same point, property made up 3% of the fund’s total AUM, with infrastructure at 4%.
A combination of falls in equity markets, concerns about global growth, and fears over high interest rates and high inflation have seen demand for Asian property fall sharply in recent months.
According to the latest global capital trends report published by MSCI Real Assets on November 3, global investors allocated $33bn to APAC property in Q3, down 38% on a year earlier. CBRE’s Asia Pacific Q3 data, published on November 13 , recorded a 20% fall in commercial real estate allocations to APAC over the period compared with a year earlier, to $27.3bn.
“A correction appears to be underway across the whole of the region and higher borrowing costs mean it will likely be difficult to finance new acquisitions at current prices,” said the MSCI Real Assets report.
The cooling of Q3 has accelerated in recent weeks, according to Jeffrey Hobbs, head of private markets at bfinance in London, whose clients include a number of Asian sovereign, pension and insurance funds, as well as wealth managers, endowments and charities.
“The turnaround in the market in the last six weeks has been huge, heralding a new era for investing in real estate, with the change in direction of rates and the spike in bond yields,” he said.
“Our investors in APAC have tended to pause their property investments over the last six weeks while they take stock,” he said, although he noted that a small number were now moving to take advantage of the correction in pricing, particularly in listed real assets and real estate debt.
“The REIT market, which is showing a big discount to asset values, is generally a forward-looking indicator,” said Hobbs, adding that this indicated widespread future falls in non-listed assets, whose prices were slower to respond because of the illiquid nature of property assets, were likely.
MSCI’s Asia Pacific REITs Index fell 27.5% in the year to the end of October; the MSCI World REITs index dropped 29.3%.
Mary Power, principal consultant for property at JANA Investment Advisors in Melbourne, Australia, said falls in equity markets over the year created strong pressure to reduce exposure and rebalance portfolios among superannuation funds and other Australian institutional investors with large allocations to real assets such as property.
“Investors globally are overweight in real assets, so deployment is very thin and there will be pressure to redeem, even from managers or sectors that are the best of the best,” said Power, pointing to large sell offs of REITs.
“Some investors may be stuck trying to make redemptions since it is not easy to sell,” she said, adding that future allocations would depend heavily on the ability of global equity markets to right themselves. One reason for the selloff in REITs is the lack of liquidity among directly invested property assets, which have left many investors struggling to make sales.
Power said that the cost of currency hedges for Australian investors had increased this year with increased volatility in currency markets. Historically, currency hedges and the tax disadvantages associated with investing offshore had discouraged Australian investors from making property allocations offshore, she noted.
“These are two immediate costs that you don’t have when you invest locally,” she said. “The cost of hedging currencies needs to be considered very carefully when you’re looking abroad.”
Power also noted that rising interest rates provide an additional hazard for Australian investor allocations to the US, where borrowing comprises a higher share of total investment – typically between 40% and 60% - than in Australia, where it is typically 15% to 25%.