Over the first half of 2019, Asian outbound direct investment into real estate amounted to approximately $20bn, led by Korean and Singaporean capital. While this sum reflected a moderate decline from the same period last year, drawing further conclusions with respect to investment preferences, trends and future direction is a more complicated matter. A dive below the headline numbers reveals a complex picture and seemingly contradictory developments. Long gone are the days when Asian capital could simply be characterized as chasing trophy office assets in US gateways and European capitals. Today, outbound investment flows from Asia vary not only by country and institution type, but risk tolerance and structural preferences are rapidly evolving and can change course quickly.
While Korea and Singapore were the two most active sources of outbound direct investment from Asia in the first half of 2019, at $6.8bn and $5.7bn respectively, investors from these countries took very different paths by geography and product type. In general, Korean institutions continued to focus outbound activities on continental Europe and debt, reflecting concerns over both dollar hedging costs and late cycle investing in the US. Insurance companies nevertheless still looked to the US for direct debt opportunities. SWFs and larger quasi-pensions have sought to align themselves with like-minded counterparts across the globe forming joint ventures targeting specific debt and equity strategies. For example, POBA recently established a joint venture with a Danish pension fund centered on Europe, having created similar programs in the past with CalSTRS and Texas TRS for the US.
However, the most pronounced Korean buying activity has come from securities companies acquiring single assets in Europe and holding these on balance sheet to sell down to Korean institutions over time. This form of investment constituted the bulk of the $6.8bn in direct investments, with securities companies undertaking numerous acquisitions in Paris and Frankfurt, and also venturing further east to Prague, Vienna and even Bratislava. In recent auctions, securities companies have dominated the bidding rounds, often pitting themselves against one another. While voices of concern have been raised over the underwriting and pricing of some of these deals, offshore commitments by Korean investors are expected to grow further in the near term. Moreover, we would not be surprised to see a sizeable portion of further investment activity over the balance of this year being redirected to the US again, given that there has recently been a significant decline in the cost of hedging between the Korean won and US dollar.
Singaporean investors, who a year ago were preoccupied with large portfolio deals in the US and Europe in the industrial, multifamily and student housing sectors, pivoted back towards Asia in 2019. In fact, over the past nine months of 2019, over 70% of Singaporean capital was deployed in APAC with the majority of this in the office sector. This development may to some extent be attributable to more favorable investment opportunities emerging in China as a result of the tightened liquidity position of developers and asset owners. It is worth noting that despite the negative headlines about the trade war, China was the second most actively transacted market globally in 1H 2019, largely for this reason.
Japanese institutional capital, primarily from pension funds and a select few banks, is mostly going into open-end core funds in the US and Europe. These flows are difficult to track by volume, but anecdotally, we see that activity is beginning to pick up in terms of the number of institutions investing, ticket sizes and pace of commitments. The direct investment flows that do get captured in the statistics are mostly attributable to large listed Japanese property companies investing into specific projects in the US, Europe and Asia, and this activity is also growing.
Not surprisingly, direct Chinese outbound investment flows hit a seven-year low in the first half of 2019, given ongoing capital controls in China and the divestment activities of large investors, like Anbang and HNA. However, Chinese capital is still being deployed offshore, albeit selectively, in the form of fund commitments and joint ventures by SWFs. In addition, a small number of Chinese institutions are committing to projects in government policy sectors like senior living and in Belt & Road countries.
We expect to see Korean, Singaporean and Japanese outbound capital flows grow in the coming years. Furthermore, the intra-Asia portion of these investments will remain an important feature of the outbound picture, especially once regional frictions between China, Japan and Korea subside. Australian institutions, which have been largely absent from the international markets since the GFC, barring a few notable exceptions, could potentially become more active going forward. The larger superannuation funds are doubling every 4-5 years and are already beginning to outgrow their domestic market, which in turn is slowing. This will lead them to look for diversification and growth offshore, adding yet another dimension to the Asian outbound mosaic.