Diversification equals deals

August 31, 2011 / By  

Diversification away from volatile markets is leading to real estate deals particularly in Asia Pacific, backed by continuing tenant demand and rising currencies. During the recent bout of volatility in the markets we closed a number of real estate deals including an office development in Shanghai, a data centre sale and lease back in Japan and an industrial site in Suzhou.

Clients are ready to buy real estate and pension funds are reported to be increasing allocations to real estate. With Asia Pacific the key engine of global growth, it is likely much of that cash will come to this area. In quarter that closed in June, Australia attracted USD 1.2 billion of inter regional money from outside Asia Pacific as well as cash from within the region. Have a look at our August 2011 Capital Markets Bulletin for full details.

Investors buy real estate for many reasons, including portfolio diversification and as a hedge against inflation. Academic studies have found little correlation between real estate and equities or bonds over long run periods, although the correlations shift and are closer for shorter time periods dependent on the country under analysis. This lack of correlation makes real estate a good alternative asset class in a balanced portfolio. At present Asian pension funds have little allocation to real estate. Each fund is different, but the average is well under the 10% average allocation to real estate found in UK and European pension funds. If Asian funds were to allocate to real estate in the same percentage as European funds by say 2015, it would mean an extra USD 60 billion a year into real estate, in a market which in Asia Pacific totaled last year USD 85 billion.

In Asia Pacific rents for office, industrial and retail space rise because there is a shortage of space for the current levels of tenant demand and inflation is rising across Asia Pacific. The latest figures from Consensus economics show rising inflationary expectations in China, India, South Korea, Singapore and Hong Kong. With the US Fed signaling low interest rates for the next 12 to 24 months, we will continue to see negative real interest rates in many Asia Pacific countries.

So with portfolio diversification away from volatile markets, and rising inflationary expectations, investors are buying real estate. Its key characteristic is that it is heterogeneous. If you own gold and it goes down- it goes down regardless of where you live.

If you own real estate and you have bought well, in other words, you have bought what tenants want to rent, there is the opportunity that your piece of real estate will fare better than the average. In the final analysis, tenants pay rent before they pay their shareholder dividend.

The views expressed here are those of the writer.

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