German insurer Allianz’s realty investment arm Allianz Real Estate is actively scouting for logistics deals in the booming consumer economies of China, India and Southeast Asia as it seeks to build a pan-Asia logistics portfolio.
The investor already has exposure to the logistics sector in Australia, China, Japan and Korea. In fact, it has doubled its exposure to the e-Shang Redwood (ESR) backed logistics fund in Japan this year, a top executive has revealed. Allianz Real Estate had invested $100 million in Redwood Japan Logistics Fund II, a JPY-denominated logistics fund, in September last year.
“The Asia Pacific logistics market is large but still under-penetrated while e-commerce and the growth in consumption is exponential. We feel there is a secular growth trend we should take advantage of. Of course, the yields have compressed in most of the markets but there seems to be value. So logistics is something we would like to focus on this year,” Allianz Real Estate’s Asia Pacific CEO Rushabh Desai told DEALSTREETASIA in an interaction recently.
Alllianz Real Estate, which dips into its parent insurance firm’s capital pool for making investments, co-investing with partners or pooling with other funds, is looking to increase its total exposure to the Asia-Pacific to up to 10 per cent of its global portfolio.
The investor ended the year 2017 with a total exposure of EUR 56 billion globally, with the Asia Pacific accounting for EUR 1.6 billion of its EUR 40 billion global equity investments.
Meanwhile, other than logistics, Allianz Real Estate will also focus on the office space in cities like Beijing, Shanghai, Tokyo, Hong Kong, Singapore and Sydney, while it looks at starting the lending business in Australia and exploring alternative sectors like student accommodation, data centres, senior living and residential for rent in China.
In a detailed conversation, Desai discussed the valuations in the region, patience as an insurance investor to hold long term and how it has been witnessing a higher interest from Asian institutional investors for investments in Europe and US.
At the start of this year, Allianz Real Estate had said it was looking to double investments in Asia over three years. You have made quite a few announcements ever since. Would you say the Asia real estate story has started well this year for you?
Globally we ended the year 2017 with a total exposure of EUR 56 billion. Roughly EUR 40 billion of that was equity investments and EUR 15-16 billion was the lending book we have in Europe and US. Asia Pacific accounted for EUR 1.6 billion out of that EUR 40 billion. In Asia, we do not have a lending business yet, so that roughly accounts for 4-5 per cent of the global equity exposure. That was our first target, to be at around 4 to 5 per cent of the global equity book. I think we went from EUR 500 million to EUR 1.6 billion in a very short period of time which was fantastic. We are very happy with the outcome and the growth needs to continue.
We are looking to increase that allocation from 5 per cent to anywhere between 5 to 10 per cent. We are moving directionally to a 10 per cent allocation. However, we have to keep in mind that the 10 per cent is of a bigger number. We have different numbers than what we are estimating at this point in time but it would translate to EUR 4.5-6.5 billion of equity exposure in Asia Pacific in three-and-a-half years. Obviously, numbers change every year and it will depend on the global portfolio at that point of time.
We have closed 6-7 transactions and some of it is deployment of previous year’s deals. We have done one student accommodation deal, an office asset in Shanghai with Gaw Capital. And then we did a deal in Hong Kong. We have exposure to Japan logistics through ESR. Last year we invested in it and this year we doubled the exposure to it since the progress has been great. It was not worth announcing. We are at around EUR 400 to 500 million equity exposure and we are only in April.
Is there a plan to start the lending business here? If that comes in, the book might go up?
For lending, we like certain markets in the region, mainly Australia. But we have to make sure that when we enter, we do all the checks and balances and enter in a disciplined way with the right resources. We are planning for it and having discussions with Allianz on potentially lending in Australia. Hopefully, it will happen in some time but we have to make sure the time is right in terms of the cycle.
It feels attractive but we have to keep in mind the residential prices that have gone up in Australia and the office pricing that is at the top of the cycle, so it is not very obvious in that sense. But it is an attractive market as there is a structural shortfall in terms of alternative lenders and it could work well if we could get the right product and right resources for it.
One of your partners, TH Real Estate, is also interested in this lending segment. Would you do a partnership with them or any other player?
It not necessarily may be a partnering with another player since lending is something we have an expertise in (in Europe and US). Loan servicing is not as heavy so what we may need is more of an originating partner. We may not sit and originate in Australia, we may still do it from here so we potentially could have partners who could originate for us. In Australia there are brokers and debt-focused managers. TH could be one of them but we may not necessarily do a joint venture with them. We would explore a wider market.
What would you say about Southeast Asia in terms of lending business? Is that not attractive at all?
It is very light and dominated by the banks. Second, the risk you have to take in Southeast Asia is a development risk which the banks don’t want to have overexposure to. A lot of senior lenders like Allianz do not necessarily want to go into that space. We are a core lender by nature, so the opportunities don’t really match. If someone wants to do mezzanine, SEA and India present good opportunities. The market is not very deep, one could come in early and make a difference. There are some funds like Phoenix and one or two other funds which are exploring that space. We may at some point look at it but at this point, we are growing the equity book and exploring lending in Australia first.
Are there any particular markets in Asia that you are bullish on right now or there is a wish to explore a market that you would like to do more of?
The basic objective is: One, we would like to build a pan-Asian logistic portfolio and we have progressed well but we need to do more. The Asia Pacific logistics market is large but still under-penetrated and the e-commerce and the growth in consumption is exponential. We feel there is a secular growth trend we should take advantage of. Of course, the yields have compressed in most of the markets but there seems to be value. So logistics is something we would like to focus on this year.
Secondly, we do invest in quality offices with quality partners in cities in the region — be it Beijing, Shanghai, Tokyo, Hong Kong, Singapore or Sydney. So, we are looking for opportunities. It is tough in this cycle. We are seeing a few things in China but in some of the other markets, it is a little bit tougher. Retail, we are very selective so we are not actively seeking that kind of exposure in the region at this point in the cycle.
We extended our student accommodation footprint and that is one of the sectors we like globally. We are exploring other alternative sectors like data centres, senior living, residential for rent in China and some other new sectors. Last but not the least, we are also focused on platforms we created in India and other parts of the region. We work actively with Shapoorji, with Scape and with TH Real Estate so that the deployment is in a disciplined manner.
When you talk about the focus this year on creating a logistics portfolio, what is the size of that portfolio right now in the region?
We have exposure with Charter Hall in Australia. We are a part of their open-ended industrial fund and one of the larger investors in that fund. We have a venture in China with a Carlyle-managed fund, a company called Brilliant which is a developer and operator. We are one of the larger investors developing logistics units in tier-one locations in China. There are 14-15 projects they have identified and it is working well in China. Outside, we have exposure in Japan — we re-upped in ESR. So, these are three places where we do have an exposure and we are exploring more in China as it is such a large market that you cannot stop at one deal. We are also exploring India, it is extremely active from a logistics perspective and also exploring Southeast Asia.
Southeast Asia, we have a very fast growing insurance business and sometimes we can utilize some local capital. We are exploring the region in terms of opportunities in real estate. It is challenging because the markets are not deep and there is a lot of construction and development risk. We are exploring in Indonesia right now and if we can find the right operator, we can bring something there.
Is there a reason you have left out Korea?
We do have (a presence in) Korea through some funds. We have looked at a few opportunities and we will continue to look at it. There is a lot more office than logistics and there continues to be enough capital that has taken up that space. Maybe logistics is more challenging and Korea is expecting a lot of foreign investors and there is a lot of competition for every asset.
For each of these investments that you are looking at, is there a preferred size?
The sweet spot would be EUR 150 million to EUR 200 million but the re-up we did in ESR was much less than EUR 100 million. Also, there are smaller deals like we are looking at one in China currently and if we win it, would be less than EUR 50 million. So, the deals are bigger but in Asia, one has to remember that if there is $100, there is $50 of leverage and we are always a partner, so $25 each. Technically, it is one-fourth of the asset value so even if it is a $200 million deal, one ends up investing $50 million of equity. Logistics would be smaller cheques, around EUR 50 to EUR 100 million, but we work with partners and do larger projects.
For certain funds in the sectors we want to scale up in, we try to be a cornerstone investor and partner with the GP and do much more.
What is your take on valuations in the region?
Globally, they are very high. What we look at is micro-location, fundamentals, specific assets and who the operator of an asset is. Within even a high valuation market, you need to look at opportunities and that is what we try to do so that the opportunities outperform the cycle. You cannot avoid the cycle. There will be a dip that can come with quality assets and good partners. Or as I would say, instead of buying value, we would create value.
Australia is a concern, given how fast the valuation has moved and the rental growth it has seen recently. And there is an infrastructure behind it but when things move too fast, one has to be cautious. In China also, the yields have compressed, and in India as well. That is why if you go back to the themes, it is logistics, alternatives and office selectively. We are going after certain trends and not countries and sectors. Demographic trends also have so much diversity in the region.
One of the things we are doing is we are also factoring in cap rate expansion.That is already part of our underwriting approach. Obviously, in markets like India, you can hope for cap rate contraction but in China, we do not expect it.
We also like residential for rent, not residential for sale. The most attractive market there is Japan, China increasingly and Australia. India does not have a rental market.
Have exits been a pain for you in this region?
When one looks at an investment, one also has to look at exit pricing other than the entry pricing. How would you exit and who would be the next buyer, who would it be and what would he think? Public markets are important, that gives a little more confidence. Hong Kong and Japan have public markets. India, hopefully, will soon have one.
Another thing is are local pension funds, sovereign funds or insurance firms interested in real estate or not? Do they have an allocation to real estate because then they would be the future buyers? Like in China there are insurance firms and others who are allocating money for real estate but in India, it is not there. That private space is purely dependent on foreign investors. To have a local domestic pool of investors and a public market is important.
In terms of investment philosophy, how is an insurance firm-backed investor different from a regular private equity investor in terms of real estate?
It is the tenure. When we invest, we look at assets we can hold for the long term and that ability to hold and not having the pressure to sell positions us differently. We can be patient to create value. Even the student accommodation we did in Australia, a typical intention would be to develop and sell but our intention is not to do that but to develop and hold. So, the IRRs might be lower. The idea is to create a development yield of 7 to 7.5 per cent and hold that. As an insurance company, we like stabilized income.
However, at some point in a fund, you have to figure out how to sell it but in most of the cases, it allows us the flexibility to hold the asset. That is the biggest difference and insurance companies focus a lot more on income versus capital growth. So, there are slight nuances. Of course, we do opportunistic investments. I used to describe it as “annuity for perpetuity”.
What do you think of the dry powder available in the market and many more Asia-realty focus funds either being raised or announced?
There is a lot of liquidity in the market and not enough products. It means that people are holding up assets because they think there is an upside. There seems to be that dichotomy in the market. Everybody I speak to is looking for deals and one deal is being chased by 10 people. Having said that, there are also situations now that some of the funds are expiring and the new pocket of money especially core is not there and value-add opportunistic is not there. There seems to be a wind of opportunity where a lot of funds want to hold up, but the fund is expiring and there is not enough core capital chasing that asset.