Despite the competition, regulatory hurdles and the lack of internal capability and expertise, institutional investors from Asia Pacific are keen on going into the global real estate business.
In a report, global real estate advisor CBRE noted that sovereign wealth funds, pension funds, and insurance companies have growing interest in the real estate market to boost the long-term prospect of return on investments.
“This trend is being supported by the relaxation of outbound investment regulations in markets including China, Taiwan and South Korea, along with initiatives to increase real estate investment by Japanese and Hong Kong institutional investors,” CBRE said.
In the first half of 2015, CBRE recorded $9.6 billion worth of direct acquisitions in commercial real estate by institutional investors in the region. The amount was $20 billion for the whole of 2014.
“The increase in global real estate investment is being driven by the expansion of experienced investors and the emergence of new investors,” CBRE said.
However, a strong appetite to invest outside the region does not make institutional investors indifference to the obstacles to investing outside Asia Pacific.
A key challenge is competition, as the global real estate market has become “very crowded” due to the number of new investors that entered the game in the last few years.
This situation is a huge factor in keeping prices under pressure.
“Strong purchasing activity in 2013 and 2014 has pushed down yields to historical lows and reduced the volume of investable stock for sale, particularly in core asset classes,” CBRE noted.
Institutional investors from Asia Pacific were place in a situation where they must compete with local and other global players for similar prime assets.
“The ability to source and close deals largely depends on investors’ familiarity and experience with the local market, meaning that many Asia Pacific institutional investors, which have a relatively short history of investing overseas, have a limited ability to acquire overseas property,” CBRE said.
Regulatory hurdles are also a big challenge, as insurance firms and private pension funds are subjected to a number of restrictions.
CBRE cited the case of Taiwanese insurers that cannot use external financing and are not allowed to make co-investment deals and stake acquisitions when purchasing real estate abroad.
“The insurance arms of some financial groups are bounded by regulations prohibiting investment in real estate if they also operate as a bank in the United States,” CBRE said.
Another challenge these investors face is the lack of internal capability and expertise in making deals happen in a foreign market.
“Many Asia Pacific institutional investors still lack specialist internal teams to manage their real estate investments, especially those overseas, a fact that has hindered their expansion abroad,” CBRE said.
A solution is to use an external manager or adopt a co-investment of partnership deals to be able to use the knowledge of local partners, according to CBRE.
Another solution is to invest in less saturated markets as a way of securing higher returns, and extend exposure to logistics and other niche real estate sectors. This would let the institution investor capitalize on ongoing structural changes in the global economy.
Moving forward, CBRE expects real estate investment by institutional investors from Asia Pacific to increase by $240 billion between 2015 and 2020, led by Chinese groups.