Asian pension funds may tap property more
Many Asian pension funds have small exposures to real estate assets in their investment portfolios, particularly when compared with global property portfolio allocations, according to the Asia Pacific Real Estate Association (APREA).
But reforms under way in Asia's pension fund industry could see more investment flowing into property, the association's chief executive, Peter Mitchell, says.
'Real estate is an important asset class for pension funds, with attractive investment characteristics that match their long-term liabilities, such as high yield potential, lower volatility than equities, inflation hedging and diversification,' Mitchell said. 'Globally, pension funds have been tapping into this important asset class for years and we hope that this trend will be emulated in Asia.'
APREA membership covers all players in the property market, including estate companies, listed real estate trusts, unlisted property funds, investment managers, and investment banks. It works to encourage greater investment in the real estate sector in the Asia-Pacific through the provision of better information to investors. Mitchell said pension fund assets had increased globally from US$17 trillion in 2001 to over US$30 trillion this year, despite the global financial crisis.
Eight of the world's top 20 pension funds were domiciled in Asia, the top spot in terms of total assets being taken by Japan's Global Pension Investment Fund.
With Asia being home to 60 per cent of the world's population, the growth of pension funds in the region would be dramatic, Mitchell said, with total assets expected to double from 2006-2015 and to exceed US$4.3 trillion by this year.
A key shift over this period will be a decline in the share of total fund assets in the region commanded by mature markets such as Japan (which will see its share of regional fund assets falling from 69 per cent to around 36 per cent), and the rise of pension funds in markets such as China, India, and South Korea.
Over US$750 billion is invested in real estate globally by pension funds, Mitchell said, with funds typically allocating 7-10 per cent of their portfolios to this asset class, and some major funds considerably more.
In Japan, where, according to recent surveys, up to 35 per cent of pension funds do invest in real estate, the average asset allocation level is still only about 1.2 per cent.
In South Korea, however, the allocation of real estate investments in the portfolio of pension funds has recently been on the rise, from about one per cent at the start of the year to as high as 10 per cent now.
An APREA survey found that, overall, pension funds in Asia were more positive about investing in real estate, recognising the benefits of diversification. But there was a strong sense that their teams' knowledge levels were low, stopping them from making substantial investments in the sector.
