<article>Global real estate investor TH Real Estate, which is expected to launch its Asia Pacific cities fund this year, believes the region is set to attract more capital as many funds still remain under-allocated.</article>

Global real estate investor TH Real Estate, which is expected to launch its Asia Pacific cities fund this year, believes the region is set to attract more capital as many funds still remain under-allocated.
&#8220;There is a lot of untapped equity for investment in real estate, about $30 billion globally, of which quite a fair bit would be allocated to Asia Pacific for diversification purposes. A lot of funds are still under-allocated to Asia Pacific and it is a growing part of the world economy, so we expect more capital to come to this part of the world,&#8221; Harry Tan, the Singapore-based Head of Research for Asia-Pacific at TH Real Estate told DEALSTREETASIA in an interaction last week.
The realty investor is an arm of asset manager Nuveen, itself a part of US pension giant TIAA, and manages assets worth over $114 billion, about $2.5 billion of them in Asia Pacific — 13 assets spread across the five markets of China, Hong Kong, Singapore, Japan and Australia. In the past, senior executives have said that the realty investor aims to increase its exposure to the region to 10 per cent of its global portfolio in the medium term from just over 2 per cent currently.
The firm, which has a preference for markets such as Singapore, Seoul, and Sydney and Melbourne in Australia, along with malls in China, noted that in many of the Asia Pacific markets, one may be at the late stage of real estate cycle.
&#8220;Although we are globally at the point in that cycle of late stage, there are still fundamental favourable conditions to try and make investments in the Asia Pacific markets,&#8221; said Louise Kavanagh, the Hong Kong-based Head of Real Estate at Nuveen, who joined TH Real Estate last year from Invesco. Apart from looking at the platform in Asia Pacific, her role includes setting the up Asia Pacific cities product to be launched soon.
According to industry insiders, the firm is soon going to register the product and it may hit the market by next quarter. The fund will invest in high-quality, income-oriented institutional grade real estate assets and will be modelled on the open-ended European cities fund that TH Real Estate launched earlier.
Edited Excerpts:
In the Asia Pacific, what have been your focus areas in terms of cities, sectors and segments?
Kavanagh: We are probably at the late stage of real estate cycle in many of the Asia Pacific markets. Cap rates are at a low level. There are still fundamental favourable conditions to try and make investments in the Asia Pacific markets. The way that we look at the cities selection and the specific dynamics when we select our investment market is we use the cities filtering process.
In terms of markets, we like Singapore, Seoul and the Australian markets. Seoul, we still think, has a solid economic outlook for strengthening of the consumer and business sentiment that has accelerated since the government took over last year. There seems to be a heavy investment interest in the city&#8217;s real estate domestically and from international capital sources. The core assets have still continued to trade at a spread that is probably above some of the other markets. The case of these markets is to look at granular assets and sub-markets. There are certain markets that have historically higher levels of vacancy.
Singapore is a diverse economy and it will benefit from the long-term structural demands of the business that makes policies in that market. We have seen Singapore turn a corner in that now pre-commitments in some of the investments are coming. We will see a gradual pickup in rental growth in the market.
The third market that I mentioned was the east coast Australian market. We have seen very strong rental growth in Sydney and Melbourne and the growth will continue in those markets as the economic fundamentals favour them.
Tan: A lot of the work that we do globally relates to mega-trends and that allows us to look into cities or sectors that are secularly resilient and strong. We look at past cycles.
Back to the point regarding the cities or markets that we are interested in, one thing I would say is that even though prices are elevated and cap rates are compressed based on historical norms in many markets, we still find pockets of opportunities in some markets. Over the medium to longer term, we believe there is a strong support to real estate particularly in the core space.
One, Asia Pacific is the epicentre of mega-trends that we are seeing whether it is consumption, the rise of the middle-class or the adoption of technology, particularly in China. So, we are going to see a lot of investor interest in a lot of Asia Pacific as it continues to be mature and develop and becomes more transparent and institutional.
The other point is there is a lot of untapped equity still for investment in real estate, about $30 billion globally of which quite a fair bit would be allocated to the Asia Pacific for diversification purposes. A lot of funds are still under-allocated to the Asia Pacific and it is a growing part of the world economy so we expect more capital to come to this part of the world. Another point worth mentioning is although the cap rates are compressed based on historical norms, there are some markets where the yield spread is very wide. For instance, in a market like Tokyo, as a result of negative interest rates even though the yield has compressed to a historical low, the yield spread is actually wider as compared to three years ago.
There are also opportunities in the alternative sectors like senior housing in Japan and student housing in Australia. These are sectors that are not very volatile and the income is durable.
Is logistics among the sectors that you are bullish on? What is your take on the sector?
Kavanagh: Logistics have been a favoured investment class in recent period mainly because of online retail. Historically, many markets in the Asia Pacific have been under-supplied. There has been opportunistic capital in this sector. From a trend perspective, it makes sense from the lack of supply. In some markets, it makes sense to invest where the government is making it lucrative to invest in logistics. One market I can think of is China where there are tax breaks for it as part of the One Belt One Road initiative.
What is the mix like in your portfolio? Are there particular segments that you are skewed towards?
Tan: We do not have a percentage but a large part of our portfolio is the China Outlet Mall business. And then we have a big allocation towards the office sector in Australia and Japan retail and office.
What is your take on valuations? As a large part of the unused capital for real estate is finds its way to the Asia Pacific, is that further going to drive up prices?
Tan: The prices are elevated. Going forward, the financial conditions are going to be tighter and the interest rates are likely to be higher. But the capital in untapped equity is still going to stay relatively strong in the real asset alternative space because that is still under-allocated and a lower percentage of the global portfolio compared to public equities. But at a late stage of the cycle, we need to be meaningfully cautious for the investments that we make. At the same time, we need to look at past cycles and invest into resilient markets and robust economies that are going to benefit from these mega trends.
With a whole lot of Asian realty-focused funds coming in, do you think there are enough worthwhile avenues for deploying this capital? Also, other than the cities fund in Asia, are you looking at any other vehicle in the region?
Kavanagh: By 2025, the investible universe in Asia Pacific in terms of core investments is going to grow by about 30 per cent to overtake Europe and US.
What is your take on exits in Asia Pacific real estate?
Tan: The key point is that when we make an investment, it is really important to be investing into the right product and demand. Because if one does that, the exit should not be a problem. For example, a sizable product in Tokyo may be more challenging due to a pool of investors that may not be able to fit in a slot of that scale. It also depends on the market and the perception of real estate in those markets.

TH Real Estate, which is expected to launch its Asia Pacific cities fund this year, says many funds still remain under-allocated to the region.

Asia Pacific to get fair share of $30b untapped global equity for realty: TH Real Estate

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