During our regular conversations with clients, many Asian investors are actively diversifying their real estate exposure away from their home markets.
Some investors diversify for tactical reasons, as their existing exposure in Asia has generated capital gains and diversification would effectively rebalance the portfolio to other regions.
In addition, as both institutional and retail Asian investors become more sophisticated, some investors may also be considering diversification for the first time to reduce their home bias.
Australia has the most developed REIT regime in the Asia-Pacific and that presents a wonderful investment opportunity for investors.
Over time, an international real estate allocation, executed either via direct assets or REITs, benefits investors by offering a diversified portfolio, which increases return without taking on additional risk.
In our previous research, we showed that, from 2001 to the end of 2014, investors could achieve additional total return without additional risk by adding a 20 percent Australian REIT allocation to an Asian REIT allocation.
When investing internationally, investors should carefully evaluate their geographical exposure.
Real estate investment is the most effective over longer time horizon, which means that an economy’s long-term transparency and perceived stability are important considerations.
We believe that Australia, with a relatively transparent and solid real estate market, represents one such investment target.
Investors from Hong Kong also benefit from a familiar legal regime, as Australia is a common-law jurisdiction and shares many common features in its laws.
In addition, Australia’s public market is well regulated and has good representation from professional investors.
Its REIT regime is the most developed among Asia-Pacific markets and allows investors better access from the stock market.
Currently, Australia’s real estate cycle is also at a more attractive point than Hong Kong’s.
When investment into its mining sector slowed in 2011, Australia saw an economic slowdown, but the economy has largely stabilized by 2013, and since then, Australia entered a real estate upcycle.
While the residential sector looked expensive when compared to historical average, many subsectors, such as non-prime office and retail assets, are still trading at above historical average yield.
For reference, Hong Kong’s current real estate upcycle started in 2010 and most sectors are more expensive than historical average.
Another factor that concerned Hong Kong investors is the upcoming US interest rate increases.
While we believe that the rate at which Federal Reserve increases interest rates will be mild – perhaps twice in 2016 – it is no doubt that Hong Kong’s real estate market will eventually face a higher interest rate.
Australia, however, has an independent interest rate regime. In 2015, in fact, the Reserve Bank of Australia has lowered interest rates, and if there is a need, it can continue to cut interest rates.
As such, investment in Australia is relatively more shielded than assets in economies exposed to US interest rate hikes.
An added benefit of Australia’s independent interest rate regime was that, in the last 24 months, the Australian dollar weakened against the US currency, and now the Australian dollar looks fair against long-term historical average.
Substantial investors can consider buying commercial assets directly in Australia.
Non-prime assets in the office and retail sectors continue to offer value, but investors would need operational expertise to operate these assets.
Alternatively, investors can also consider structures such as REITs and related assets that are transparent and well-regulated.
These assets are monitored in the public market, and can help investors to diversify their exposure.
In 2012 the Australian government announced the introduction of the Significant Investor Visa.
The visa is designed to attract overseas investment and provide a streamlined pathway to permanent residence in Australia for business people from around the world.
The investment requirements for the visa were updated and effective from 1 July 2015.
Some Australian private banks and family offices are providers of investment advice and can assist clients with the establishment of appropriate investment structures under Australian law.
If you are applying for a Significant Investor Visa 188 you will need to invest at least A$5 million (US$3.68 million).
The investment is split into three parts; A$500,000 into Venture Capital and Growth Private Equity Funds, A$1.5 million into Emerging Companies (market cap less than A$500 million), and A$3 million into a Balancing Investment (eligible managed funds, LICs ASX-listed securities, eligible corporate bonds or notes, annuities and real property subject to 10 percent limit on residential real estate).
To get this done, you will need advice from an experienced private bank or family office that can assist with your investment obligations which must comply with the strict regulations and implement strategies to assist in reducing the higher level of investment risk you are now required to take.
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