Asian investors tipped to shell out US$150b in global real estate

That's over the next five years.

According to the latest research from CBRE, Asian institutional investors could look to invest in excess of US$150 billion in global real estate over the next five years, but with limited investable stock available in Asia will seek opportunities overseas in London, New York, Sydney and other gateway cities.

Cash-rich Asian institutional investors currently control a fifth of global institutional capital; however, the current low global interest rate environment and weak stock market performance means they face significant challenges in maintaining adequate returns on their investments.

Many of these investors have begun to recognise the benefits of adding real estate assets to their portfolios, but despite a sharp increase in investment activity in recent years, presently allocate just 1.7% of their assets to real estate, compared to 6%-8% among institutional investors in North America and Europe.

The lack of overseas investment experience, regulatory restrictions, limited investable stock and aggressive pricing have posed significant challenges for investors seeking to expand their portfolios within the Asian Pacific region. This has prompted Asian institutional investors to seek opportunities overseas, with core assets in gateway cities the most sought after asset class.

Acquisitions by Asian investors outside the region surged from US$2 billion in 2008 to almost US$9 billion in 2012, with Asian institutions accounting for a large portion of the purchases. Europe is currently the major focus for Asian investors followed by North America and Australia.

As Asian institutional investors diversify into low-risk alternative asset classes, more are expected to increase their allocation to real estate.

A conservative estimate of increasing their allocation to real estate to 2.5-3.5% in the next five years – allowing for a steady increase of asset size at 4-6% per annum - would translate into a potential inflow of in excess of US$150 billion (including direct and indirect real estate investment) into the global real estate investment market.

The large volume of prime commercial property currently in the development pipeline in Asia Pacific will partly alleviate this pressure; however, this new stock will still be insufficient to meet the demand of the large volume of institutional capital earmarked to be invested in real estate.

In addition, other investors such as REITs and end-users will also be competing to acquire new properties, a situation which may result in a prolonged period of structurally low yields for core assets in Asia.