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With Asia accounting for half of the top ten fastest-aging countries in the next five years, insurance and pension funds in the region are set to invest as much as $300 billion into global real estate markets by 2020 as they assess their ability to meet future obligations.
South Korea, Singapore and Hong Kong are the world's fastest-aging countries; Thailand is ranked sixth and China is number 10, based on recent numbers from the UN. The prospect of a shrinking working age population has already caused governments in the region to implement pension reforms and encourage personal savings.
"As the working age population shrinks in the coming years, global savings investment will surge," explains David Green-Morgan, JLL's Global Capital Markets Research Director and author of a new report on the correlation between demographics and real estate investment. "This is particularly noticeable in China where the drop off in the size of the workforce mirrors that of Western Europe, the U.S., Canada, Japan and Australia."
"In most Asian countries (ex-Australia) pension assets as a percentage of GDP remain below the global average," he says. "Looking ahead, we will see increased allocations by the region's pension funds into real estate as a result of the ageing population, pension reforms and capital market developments."
Real estate investment markets have witnessed several new trends over the last 10 years as the sector has become truly global, helped by the asset class' stable income stream and the attraction of diversified portfolios, lower risk and a hedge against inflation. The definition of mainstream real estate investment has widened considerably and now includes healthcare, aged care, student housing, residential development, public and private real estate debt and the establishment of a multifamily sector outside of the United States.
Part of the reason for this expansion in the investment sector, which has pushed volumes close to previous peak levels, has been the unlocking of new capital sources from all over the world.
Asian buyers, notably sovereign wealth funds, pension funds and insurance companies, have been a major force behind climbing real estate values in the U.S. and Europe. Last year, the biggest sources of real estate capital were from the Middle East and Asia Pacific. Qatar and the UAE dominated Middle Eastern movements while, from Asia, capital came from China, Singapore, Hong Kong and South Korea. Among the most active buyers in recent years have been Chinese insurance groups, including China Life, PingAn and Anbang Insurance. Their global strategies have been supported by a change in domestic regulations in February 2014 that now allow Chinese insurance companies to increase their maximum real estate allocation (both domestic and foreign) from 20 percent to 30 percent of total assets.
Among Asian emerging economies that are implementing changes to currently inadequate pension systems are Vietnam and Indonesia while the Singaporean bank DBS and Manulife recently announced a 15-year regional distribution deal that will market insurance products to Asia's rapidly aging middle class.
"The shift in Asia's demographic profile means that more and more people are now planning for retirement than at any other point in history, and more and more capital is being deployed into private pension funds especially in Asia's emerging economies where they remain a relatively new phenomenon," says Green-Morgan.
As China develops its capital markets, it is also changing its pension system. According to media reports, China plans to create a unified pension system for residents in both rural and urban areas by 2020. At present, China's pension contributions vary across provinces and the lack of a central record-keeping system has made worker mobility difficult.
Japan's restructuring of its $1.1 trillion Government Pension Investment Fund (GPIF) – the largest pool of retirement savings in the world – in which holdings are mostly low-yielding Japanese government bonds, is also expected to increase real estate investment allocations. GPIF has announced a new investment strategy and, among other changes, plans to create a new 5 percent allocation to alternative investments, including real estate.
Other public and private Japanese institutional funds are likely to follow GPIF in rebalancing their portfolios, which will boost demand for real estate.
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