IN BRIEF

In this PDF we highlight the case for APAC core real estate, which offers scale, stability, liquidity and transparency on par with the core markets of the U.S. and Western Europe, and which we believe is underrepresented in investor portfolios:

  • APAC is the world’s largest real estate region globally, as measured by invested stock. The region presents broad opportunities for core real estate.
     
  • The key 15 core APAC markets by our definition are mature and stable – with strong fundamentals on par with those in the U.S. and Western Europe.
     
  • APAC tenants are large, stable enterprises, with strong credit ratings. In fact, more Fortune Global 500 companies make their headquarters in APAC than in either the U.S. or Europe.
     
  • Economic growth in APAC, albeit slower, is forecasted to be double that of the U.S. and Europe. This attractive fundamental is coupled with the rapid growth of the region’s middle class and the wealth of developed economies.
     
  • APAC core markets are attractively or fairly priced today by historical and global relative value comparisons.

Institutional investors have long realized that a bias in portfolios toward their home markets can be detrimental in times of economic crisis and market stress. In their public equity portfolios, many investors allocate approximately 55% of their assets to international markets to solve for this dilemma1. However, many of these same investors maintain a persistent domestic market bias in real estate portfolios, with approximately 15% of real estate allocations invested internationally2.

A broad geographic exposure in core real estate offers growth similar to equities and yield opportunities like those in fixed income, with the potential for additional diversification as well. This is especially true for core real estate in the Asia Pacific region (APAC), which can diversify an investor’s entire portfolio horizontally across asset classes, and vertically within real estate sectors and geographies. For institutional portfolios with real estate allocations currently dedicated to the U.S. or Europe, the broad opportunity in APAC core real estate not only provides diversification, but can deliver enhanced risk-adjusted results.

Summary: APAC may offer enhanced risk-adjusted returns

In combination, the favorable attributes of APAC core real estate – low correlation with the U.S. and European markets, greater downside resilience and inflation outperformance – may improve the risk-adjusted return of a variety of portfolios. Over the past 15 years, adding APAC core real estate to home market-centric allocations for illustrative U.S. or European investors (allocating 75% to the home market and the balance to either the U.S. or Europe) would have resulted in meaningfully higher returns and lower volatility, and thus higher returns per unit of risk (see Exhibit). Furthermore, the addition of APAC core real estate may mitigate some of the downside risk associated with developed market real estate portfolios, reducing the maximum drawdown in each scenario.

In aggregate, the Asia Pacific region is large and vibrant, with some of the best opportunities for core real estate investment in today’s global economy. But it’s not solely an emerging markets story: many parts of APAC’s property sector have already reached core quality on par with the West. Whether due to distance, or unfamiliarity, U.S. and European institutions have largely overlooked the opportunities, but we believe that investors who include APAC core real estate in their strategic real estate allocations are likely to see better investment outcomes.

EXHIBIT. THE CASE FOR ADDING APAC CORE REAL ESTATE IN THE PORTFOLIO

Illustrative 15-year historical analysis: diversified core portfolios of direct private unleveraged property performance.

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Notes: The exhibit represents returns of diversified portfolios of direct real estate properties. The analysis shows returns on an unleveraged and gross returns basis for comparison purposes.

Sources: NCREIF (U.S. Real Estate), IPD/CBRE/JPMAM – Global Real Assets Research (European Real Estate), JLL/JPMAM – Global Real Assets Research (APAC Real Estate). Data time horizon = 2000 to 2014.

 

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1, 2 Source: "The erosion of the real estate home bias", IPD, November 2014. MSCI Asset Owner Survey, Towers Watson survey. These surveys cover the developed markets of U.S., Japan, UK, Australia, Canada and Switzerland. The percent allocation represents average allocation across these regions and the allocation percentage has been rounded to the nearest multiple of five for simplicity purposes.