Real estate debt has attracted substantial investments over the past few years; Preqin’s online platform recorded $32bn raised by private real estate debt funds in 2017 globally, an increase of almost 40% from the previous year. With historically low interest rates and quantitative easing having depressed fixed income yields, investors turned to private real estate debt funds for higher returns while minimizing risks usually associated with alternative assets. Additionally, investors were attracted to the fixed income nature of the asset class.
Some of the factors that fuelled the rise of real estate debt funds – namely low interest rates and asset purchase programs by central banks – are now being wound down. This blog will explore the ramifications of this for Asia-Pacific-based investors in real estate debt funds and compare the current investor landscape with that of one year ago.
Preqin’s online platform currently tracks 184 Asia-Pacific-based investors with a preference for private real estate debt funds, which represent approximately 17% of investors globally that actively target the strategy, an increase of 1% from a year ago. By contrast, this figure had increased by 11% from 2016 to 2017. In terms of investor type, asset managers (16%) closely followed by insurance companies (15%) and superannuation schemes (15%).
Investors active in private real estate debt are primarily based in South Korea (34%), Australia (20%), China (15%) and Japan (14%). The proportions located in South Korea and Japan are each up 3% from one year ago, while Australia and China both now represent a lower share. These trends could be reflective of the general investment and regulatory climate in these countries, whereby Japan- and Korea-based investors are increasingly looking to allocate capital to alternative assets, an example being Government Pension Investment Fund, Japan, the world’s largest pension fund, which has begun investing in private market assets. Meanwhile, in China, notably fewer China-based investors are investing in riskier assets such as real estate investments, and the decreasing proportion of investors from China investing in private real estate debt funds is a likely reflection of this.
Most Asia-Pacific-based investors active in real estate debt favour their domestic region (91%) for investment, followed by North America (69%) and Europe (64%). Interestingly, for their future investments, North America (68%) and Europe (63%) are the top two investment destinations for investors planning to allocate to private real estate debt funds; only 59% intend to target Asia-Pacific.
While the fundamental advantages offered by the real estate asset class are still relevant to Asia-Pacific-based investors, private real estate debt fund investments face major headwinds. Monetary policy tightening makes it less attractive than before, while increased trade tensions and investment scrutiny may make it harder to invest in North American and European markets. Only time will tell if the observed decrease in the growth of the real estate debt investor pool in Asia-Pacific is temporary or the harbinger of a more pronounced downturn in the asset class.