Investors see bifurcation in Asia real assets exposure - AVCJ Forum

Grant Kelley, co-head of Asia Pacific at Apollo Global Management, drew a distinction between real estate and infrastructure in this context: while the former is time-sensitive and government-independent, the latter often appears immune to cycles but is highly influenced by government policy.

"There is a prevailing view that real estate is all about location, but it's not. It is about timing," he said, adding that investors who put their money into Asian infrastructure during the troughs that have followed each peak have typically generated 2.5x returns over a five-year period. "The mindset is of a trader is essential for real estate success. Infrastructure is much more about long-term gains."

Vijay Pattabhiraman, managing director and CIO for global real assets - Asia infrastructure at J.P. Morgan Asset Management, also highlighted the role that land prices play in these differing outlooks. He estimates that land accounts for less than 5% of the overall cost of power projects, which means volatility has little impact on returns. In real estate, the forces are reversed.

J.P. Morgan is increasingly looking a hybrid projects that offer a combination of stable infrastructure returns, with associated real estate providing additional upside.

These opportunities are particularly prevalent in transport infrastructure: toll roads that generates fees from drivers plus income from properties built on portions of land alongside the roads; and airports that rely on government-set land rights for regulated returns while duty free shops, on-site offices for logistics providers, car parks and hotels can bolster and diversify revenues if managed effectively.

What remains at issue is whether LPs are comfortable with these kinds of blended returns. Andrew Yee, managing director and global head of infrastructure principal finance at Standard Chartered Bank, noted that although investors may want exposure to real estate and infrastructure, they don't necessarily want them together.

"They say, ‘I am an infrastructure investor and I don't want unregulated risk - give me 10%, 12%, 14% and I am happy,'" Yee said.

The broader question is how investors choose to access real assets. This applies to infrastructure in the sense that some larger players are shifting away from traditional co-mingled funds in favor of separate accounts or other bespoke products that offer more flexibility on geographical exposure, fees and length of deployment.

As for real estate, Nicholas Grambas, a Singapore-based partner with Sidley Austin, observed it is more about the entry point and "not so much equity and debt but different slices in the capital structure."

Kelley added that Apollo is already seeing strong demand in Asia for its mezzanine products and he expects to see further upheaval in terms of credit formation as regulators pin back investment banks' exposure to the asset class.

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