Increased regulatory burden and scrutiny on banks has provided alternative lenders, such as private real estate debt funds, with the opportunity to finance properties that may be outside the criteria of traditional lenders. There has been growing investor appetite for such vehicles in recent years, as outlined in Preqin Investor Outlook: Alternative Assets, H1 2017. From 2014 to 2016, there has been a six-percentage-point increase (from 15% to 21%) in the proportion of investors stating a preference for real estate debt fund commitments.
This trend extends to Asia-Pacific-based investors, with the proportion of investors in private real estate debt funds also increasing over the past two years. Preqin’s Real Estate Online tracks 406 private real estate fund investors based in Asia and Australasia, 45% of which maintain a preference for vehicles employing debt strategies. This is a significant increase from 34% in 2014. Additionally, the proportion of Asia-Pacific-based investors targeting debt strategies is greater than the corresponding proportions in North America (37%) and Europe (13%).
As shown in the chart above, South Korea-based investors make up the largest proportion (30%) of real estate debt investors in Asia-Pacific, followed by Australia (23%) and China (16%). Some of these investors have focused on debt strategies in their recent search for private real estate fund investments. For example, one of the larger institutional investors in South Korea, Korea Post - EverRich Postal Savings, released an RFP in Q3 2016 for a $450mn mandate to co-invest in real estate debt alongside three fund managers.
With the International Accounting Standards Board looking to implement the new International Financial Reporting Standards 17 in 2021, insurance companies, such as those based in South Korea, are pressed to increase their reserves while maintaining the risk-based capital requirement. Real estate debt investments offer institutional investors further diversification, stable income and potentially higher returns as interest rates remain generally low in the region.
Unsurprisingly, insurance companies are ranked among the top three firm types of Asia-Pacific-based investors in private real estate debt funds, alongside superannuation schemes and asset managers. The upcoming accounting regulatory changes may spur investors based in the region to continue favouring real estate debt when investing in alternative assets.
Investors located in Asia-Pacific are projected to continue favouring real estate debt when increasing their exposure to the asset class. Preqin’s Real Estate Online reveals that nearly half (46%) of Asia-Pacific-based institutions that are actively looking to invest in the asset class will be targeting debt strategies, compared to 22% in North America and 24% in Europe. With data pointing to growing investor demand for real estate debt, the strategy may start to play a significant part in Asia-Pacific-based investors’ portfolios.