Asian pension funds are being urged by a new report to follow the lead of their US and European counterparts by allocating more to real estate.The study, by Professor Graeme Newell of the University of Western Sydney, concerns the increasing pressures on pension funds in Asia to meet their future obligations by employing typically conservative asset allocations.
Newell points to increasing urbanisation and ageing populations, which will transform Asian demographics in one generation, as a reason to begin diversifying into high-quality, income-producing real estate investments.
The study is sponsored by the Asia Pacific Real Estate Association (APREA) and discusses the potential added-value role of real estate, which pension funds in other mature markets such as the US, Canada, Europe and Australia have been tapping into for some time.
Pension funds in Asia have typically pursued conservative asset allocations, focusing on domestic fixed income assets, and often been restricted by regulatory regimes, which in some cases have excluded real estate as a valid asset class.
Newell stressed the challenge this approach posed when attempting to produce sufficient returns over the long term.
More than $750bn (€547bn) is invested in real estate globally by pension funds, with funds typically allocating 7-10% of their portfolios to the asset class, and some major funds considerably higher.
In Asia, the level of exposure is much lower, although in some markets that is changing.
In Japan – where, according to recent surveys, 35% of pension funds do invest in real estate – the average asset allocation level is still around 1.2%.
In South Korea, the allocation of real estate in pension funds does seem to be increasing at a quicker pace, from 1% to approximately 10% in the last 10 months.
As part of the report, major pension funds in Japan, South Korea and China were surveyed in considerable detail in June 2010 on their real estate investment activities and strategies.
Overall, pension funds were found to be positive about investing in real estate, recognizing the benefits of diversification.
Peter Mitchell, chief executive at APREA, said: "Professor Newell's research is an extremely important addition to our understanding of this dynamic industry.