Building blocks of diversification

16 December 2013   Category: News, Asia, China, Hong Kong, Japan, Korea, Singapore   By David Macfarlane

Institutional investors look to Asia as a source of growth. Today there are few other real estate markets in the world that offer sustainable underlying rental growth to support low cap rates which themselves are partly a function of suppressed bond yields, partly an excess of demand over supply. Economic growth and the completion of supply cycles in most markets are underpinning positive market fundamentals across most sectors in Asia, which is providing greater certainty of medium-term rental growth.

“As the Asian economies mature, so too do their real estate markets, enabling institutional investors to allocate capital to a growing opportunity set within the Asian region,” says Scott Girard, CEO and CIO, Asia real estate, M&G Real Estate. According to him, this has led to strong levels of demand from European and Canadian institutional investors in particular, predominantly for assets within the core Asian markets – Japan, Korea, Hong Kong, Singapore and Australia. China is also of great interest to many investors, but due to regulatory constraints, cannot yet be considered a core market in the region.

Looking back at investing trends 18 years ago, diversification usually meant a balanced allocation to stocks and bonds. “Over the past decade, we’ve started to see investors gravitate toward real assets for additional diversification,” notes Vince Childers, senior vice president and portfolio manager of Cohen & Steers’ real assets strategy.

More recently, the legacy of the financial crisis has left a greater appreciation for the importance of maintaining a liquid, core exposure to these categories, and attention has shifted more toward publicly traded – or “listed” – real assets.

“This is a sensible shift,” says Mr. Childers, “as protecting the long-term purchasing power of a portfolio’s assets has become a top priority. If history is a guide, real assets such as real estate, infrastructure, commodities and natural resource equities have the potential to deliver a risk-adjusted return similar to stocks, but with a low correlation to other types of assets. Real assets may also be among those that perform particularly well if we eventually head into another inflationary cycle.”

Tim Nation, head of real estate capital at AMP Capital, adds: “Real assets are ‘tangible’ and I think this is appreciated more than ever since the global financial crisis where investors saw various forms of synthetic investments evaporate.

“Real assets, held either directly or in unlisted vehicles, also provide a degree of stability to a balanced portfolio as they do not tend to be subject to the day-to-day volatility of financial markets. This is also now better understood and a key reason why pension funds globally have been raising their tactical allocations to real assets.”

In regard to income, Mr. Nation points out that “In a global environment where bond yields are at all-time lows, investors have been looking for alternatives to achieve long term, relatively stable income returns. Asset classes such as real estate and infrastructure can provide this, and in a market such as Australia, where low risk/core property yields are still in excess of 6%, this provides a compelling alternative.”