Asian institutional investors who are investing in real estate are increasingly seeking properties in second- and third-tier cities in Europe as core cities offer fewer opportunities amid a shortage of investment products available there currently.

There is huge demand for Europe's real estate assets overall from Asian pension funds, insurance firms and similar financial institutions amid regulatory changes as well as low yields from conventional sources of investments.

"The (real estate) industry is becoming more institutionalized across the world and what happens in Asia is very much hand in hand with that. Partially, it's a regulation change that's one driver. Another driver is yield. When sovereign spreads come down further, our spreads would likely come in further because everyone is looking to pick up some kind of yield," says John Boyles, global head, real estate finance, ING commercial banking, ING Bank.

ING real estate finance (ING REF), the real estate unit of ING Bank, is a commercial real estate financier with a pan-European and Asian platform which provide tailor-made real estate financing solutions for global and local institutional investors.

This platform currently covers eight countries outside Asia including France, Germany, Italy, Netherlands, Poland, Spain, the UK, and the US. In Asia, ING REF covers Hong Kong and Singapore. ING REF currently runs a book of Ä25 billion.

"We have teams in eight markets and this gives us an edge over some of our Asian or European competitor banks. Having teams on the ground makes a lot of difference. They speak the local language, they know the culture, and they know the legal environment. We're not just fly-in bankers. We have people who can close transactions for the clients as well as help first-timers enter into any market we cover whether they're looking for appraisers or asset managers," Boyles adds.

Recently ING REF representatives have been spending more and more time with Asian investors who are seeking properties in the UK, Germany and the Netherlands.

"We're not just looking to do transactions with them but also to help them after the transaction. Our real estate platform is an integral part of our sector based lending business and an integral part of our clients' coverage business. We're looking to extend our relationships with clients by doing deals but also helping them in Europe when they first arrive, when they're still figuring out where to go and where not to go," Boyles says.

ING REF is also seeking to enhance both the inbound connectivity and outbound connectivity of their Asian clients to their European platform.

"That strategy actually worked out extremely well and what we have seen over the past few years is that not only corporates and family offices, but also more non-bank financial institutions are going overseas to acquire real estate in overseas markets including in Europe and Australia - it is fair to say that this is a new group of investors that complements the existing investors," says Robert Scholten, head of REF Asia Pacific, ING commercial banking, ING Bank.

The most popular investment strategy for Asian investors is what is known as the A-B-A strategy.

"They would consider core locations in "A" cities, "A" locations in "B" cities as well as "B" locations in "A" cities. I think that everything is in a state of natural evolution because before Asian investors were traditionally focusing very much on London, Frankfurt, Amsterdam, and other "A" cities. Now they are also looking at "B" cities such as Berlin. They are branching out," Scholten says.

Non-bank financial institutions prefer to invest in commercial property and office buildings while corporates and family offices invest in a mixture of office and residential buildings.

Other forms of investments are in financial instruments particularly senior debt, mezzanine debt and subordinated debt that use real estate as underlying assets. Such assets would include retail, office, logistics and residential property.

"Looking at the yield pick-up, you can get in overseas markets coupled with diversification of the asset classes, we see Asian investors are moving into Europe. That adds a lot of new capital flows be it from China, Korea or Singapore into Europe or into Australia," Scholten says.