Allianz Real Estate seeking to expand in Asean

Group to explore investing in Thailand, Indonesia, Malaysia property markets, leveraging on its sizeable insurance presence there.

Kalpana Rashiwala
Published Sun, Dec 30, 2018 · 09:50 PM


ALLIANZ Real Estate (ARE), which recently acquired a 20 per cent stake in Ocean Financial Centre in the Singapore CBD for S$537.3 million, is seeking to expand in Asean in 2019.

The Asia-Pacific CEO of the property investment arm of global insurance giant Allianz, Rushabh Desai, said in a recent interview with The Business Times: "We would like to explore Thailand, Indonesia and Malaysia as a start ... because Allianz has fairly fast-growing insurance businesses there which are now of a sizeable presence. As a result, we can leverage on their presence - their relationships, understanding of regulations - to see if we can invest in real estate in these three countries."

The group is exploring the logistics, office and retail property sectors to ride on the "fast-growing consumption stories" in these three countries.

Currently, Singapore is the only country in Asean where ARE has invested in. Its first direct investment here was in 2017 when it participated in Gaw Capital Partners' acquisition of PoMo, an office and retail property along Selegie Road.

Apart from Ocean Financial Centre and PoMo, ARE has indirect exposure to the Singapore office and retail property markets through investments in funds.

Market watchers expect the group to continue shopping for suitable opportunities in Singapore, particularly for stabilised office assets in core CBD locations - given the ongoing office rental recovery.

Asia-Pacific - the region under Mr Desai's purview - is expected to account for about three billion euros (S$4.7 billion) or nearly 5 per cent of ARE's global net asset value (NAV) estimated at 62-63 billion euros as at Dec 31, 2018.

This is up from 1.6 billion euros or almost 3 per cent share of the global NAV of 56 billion euros as at Dec 31, 2017.

The goal is to grow the Asia-Pac share to 10 per cent, hopefully within the next three to five years; but this will also remain a long-term target, with the US accounting for 20 per cent and Europe, 70 per cent.

"We have to keep in mind that Allianz is an insurance company with a majority of its liabilities in Europe. So Europe will always be core to what we do in terms of the real estate investing," says Mr Desai.

Premiums paid by policy holders are liabilities to an insurer since it has to pay them back at some point in time - whether they are for long-dated liabilities such as the life and health insurance businesses, or shorter-dated liabilities, such as property and casualty insurance.

In order to do so, insurance companies need to earn money and typically invest in four buckets - fixed income, equities, private equity and real estate.

It used to be that Allianz insurance businesses in various countries did the property investing in their respective countries until the insurer decided to merge all the property investments into a single portfolio to be managed centrally - resulting in the formation in 2008 of Allianz Real Estate.

Being headquartered in Munich and Paris, ARE was initially focused on Europe; it later expanded its property investments to the US. In 2016, ARE decided to revamp its efforts to grow its presence in Asia-Pacific, and it brought on board Mr Desai to lead that initiative.

Currently, ARE invests only on behalf of the various insurance companies in the Allianz Group; it does not invest the monies of third-party investors. However, things are set to change. In September 2018, the group announced the launch of a Luxembourg-regulated debt investment fund which will also be open to third-party investors in 2019. Market watchers expect the group to extend the third-party capital model to other geographies as well as to real estate equity investment.

Mr Desai declined to reveal the sort of internal rates of return being targeted for the group's Asia-Pac investments.

Providing a geographical breakdown of the estimated three-billion-euro NAV as at end-2018, Mr Desai said that 40 per cent is invested in China and 15 per in India. These two markets along with Asean (excluding Singapore) are what he terms "fast-growing economies". "Currently we have no exposure to Asean (ex-Singapore) but this is something we would like to explore in 2019."

Singapore is categorised as part of a trio of "Tiger Cities" - along with Hong Kong and Seoul. Singapore and Hong Kong each account for 12 per cent of the Asia-Pacexposure.

ARE hardly has any exposure to Seoul. "We looked at a few transactions in 2017 and 2018 but were priced out," said Mr Desai.

The "advanced markets" of Japan and Australia each have 10 per cent share.

In terms of property sectors, offices account for 45 per cent of the Asia-Pac NAV as at end-2018, followed by logistics, at 25 per cent, and retail (20 per cent).

Among the investments ARE has made in the region in 2018 is the acquisition of its first office asset in Beijing - ZLink, located in Zhongguancun - in an all-cash deal.

It also joined Gaw Capital to buy two out of the four office blocks in the Sky SOHO development in Shanghai's Hongqiao District.

ARE also anchored Scape Australia's second development joint-venture vehicle targeting the purpose-built student accommodation market in Australia.

The group partnered with ESR (e-Shang Redwood) Group to set up a logistics investment platform in India targeting eight key cities.

Mr Desai noted that the Indian logistics industry received a big impetus from the introduction of the Goods and Service Tax in 2017. This uniform national tax replaced a convoluted web of state and national levies, facilitating the efficient movement of goods and services across different states within the country. This has resulted in a structural shift to the logistics sector with small, fragmented networks being consolidated into bigger distribution chains with centralised hubs. "Post-GST, a large number of foreign investments have been announced in the Indian logistics space, which in turn is helping to institutionalise this asset class," said Mr Desai.

He expects the office and logistics sectors to remain the mainstay of the group's property investing strategy in the Asia-Pacific for 2019.

ARE has aligned its property investments with five secular mega trends in the region: changing demographics, accession of the middle class, continued urbanisation, new retail trends, and the rise of data and technology, he added.

With the middle class becoming more affluent, especially in fast-growing economies, domestic consumption has increased along with higher demand for office space as more people are getting educated and working in cities.

Technology has spawned new retail trends and e-commerce - which is driving demand for logistics space.

"It is mind boggling how Chinese people have taken to e-commerce. Everything happens on WeChat and Alipay. I think it is one of the most advanced countries in terms of adoption of technology, especially for shopping. E-commerce continues to be an attractive thing; so investment in logistics makes a lot of sense."

Only about 40 per cent of ARE's exposure in Asia-Pacific is in core investments, which refers to the strategy of buying a stabilised asset with predictable cashflow and using relatively low leverage level. The objective is to secure stabilised income or yield for the long term.

The majority or 60 per cent of NAV in Asia-Pac is in the value-add and opportunistic categories. A value-add strategy entails buying an under-optimised asset and repositioning it with a view to selling it in the medium term to lock in capital gains, while an opportunistic strategy involves high-risk/high-returns play with relatively high leverage levels and shorter holding periods.

Mr Desai estimates the leverage on the Asia-Pac portfolio at around 50-55 per cent.

He notes that a major challenge in real estate investing is the competition for assets - which is driving up prices and compressing yields.

"A lot of funds have been raised in both core and value-add categories, so there is higher competition on every asset. Nowadays, it is difficult to buy value, so you have to find ways to create value.''

Prior to joining ARE, Mr Desai spent about a year as managing director at Lone Star Funds focusing on property investments in the South Asian region.

Before that, he had accumulated over 12 years of diverse global experience with General Electric Company (GE), rising through the ranks to become CFO at GE Real Estate Asia-Pacific and later on becoming its managing director. While at GE he lived in six countries - India, the US, Japan, Germany, Czech Republic and Australia.

The energetic 39-year-old says he plays chess as a "medium of relaxation".

He and his wife, Shruti, have a 14-month-old daughter. "I sometimes joke that I have to use the same skills at work and at home. Growing a business as well as raising a child requires a lot of patience."

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