The MIPIM property show in Cannes is now a truly global affair. This year, the 25,000 delegates who will merrily traverse La Croisette will represent a more diverse geographical mix than ever before.
Russia will almost double its presence at the show this year the Latin American contigent will triple and Asia’s representation will be boosted by an increased number of Indian and Turkish real estate companies. The Middle East is raising its presence too, with exhibitors from Bahrain, Kuwait, Qatar and Saudi Arabia indulging, for the first time, in the festivities.
As a snapshot of the property business, the picture really does sum it up – give or take the odd relative that nobody knows, like the Republic of Tartarstan, for instance.
And UK players are beginning to take advantage of the opportunities.
Outflows of UK money
UK institutional money started flowing outwards in 2001, when Prudential poured £1.5bn into overseas investments, in locations ranging from the US, to Asia and Australia. Then players such as Scottish Widows and Matrix followed, applying expertise in immature, poorly managed real estate markets. Since then, a steady trickle of UK money has followed suit.
According to Jones Lang LaSalle’s report, Global capital flows 2007, total global transactions hit $682bn last year, a rise of 38% on 2005 and nearly double the volumes seen in 2003. Cross-border transactions accounted for 42% or $288bn (£148bn), and UK capital, which represented 8% or $18bn (£9bn) of cross-border purchase activity, has been invested mainly in established European markets, the US and Australia.
This is not to mention the unquantifiable amount of UK cash swirling through global funds, which are the vehicles for most of the UK capital invested in China, Japan and South America. JLL says that 39% of all cross-border transactions in 2006 were carried out by “global” players, whereas the sources of capital are multi-regional.
And it looks as if 2007 will continue in a similar fashion, with what appears to be a heightened interest in emerging economies, such as Brazil, Russia, India and China (the BRIC countries).
World’s largest development site
Three weeks ago, London & Regional revealed its plans to create one of the world’s largest development sites – the 2,750-acre former Howard Air Force base in Panama City, Central America, which it has been asked to turn into a £7bn new city district. The company has also revealed its intention to spend a further £2bn over the next two years in Central and South America.
In that same week, news emerged that HSBC was raising $1bn for what’s expected to be the biggest Chinese property development fund yet, which will be targeting 20% returns from Asia’s second biggest market.
Rutley Capital, Knight Frank’s private equity arm, is launching a fund that will invest in sub-Saharan Africa, where office rents are on the up in locations such as Cape Town, Lusaka and Nairobi. Rutley is also embarking on a $1.5bn venture to invest in offices, retail and industrial property in Russia, backed by Topland founder Sol Zakay.
India seems to be top of the agenda for most UK global investors. Last month, Topland launched a £1bn fund to develop residential property in India, in joint venture with Indian property company South Asian Real Estate. The jv, which plans to build 40,000 homes, is seeking to capitalise on new tax breaks that will encourage the public to take out mortgages.
REIT Asset Management, which is also driving £1bn of investment into the sub-continent, and Active Asset Investment Management, have also revealed their intentions to invest in the country.
Ian Henderson’s Ishaan, which listed on AIM last November, made its first investment in India in January. It has bought a 40% stake in the special purpose vehicle that is developing two shopping centres, in Pune and Hyderabad. It has also invested in a 900,000m2 mixed-used scheme in Bangalore which will include a 400-room hotel, shopping centre and IT park, and has bought a 40% stake in a special purpose vehicle developing IT parks in Mumbai.
And it’s easy to see why these companies have been tempted East. The improvement in these countries’ property fundamentals is giving investors greater confidence to take the plunge. Cushman & Wakefield’s recent report, Office space across the world 2007, shows that Mumbai, India, is the world’s fifth most expensive office location this year, up from 11th place in 2006.
Rents in the city rose by 107% over the year, thanks to a boom in financial services and IT, and prime rents now stand at £661 per m2. Eight Indian regions ended in the world’s top 10 locations for office rental increases in 2006, including New Delhi and Pune. Abu Dhabi also featured as the most improved city, with rents in the country increasing by 200% over the year. Moscow is also now one of the most expensive office locations. Vacancy rates in the city are now just 2.7%, the lowest in Europe.
Brazil is growing in popularity for UK investors. London & Regional is eyeing several projects in the country, as is UK logistics developer Gazeley, which has a “fact-finding” team working in South America, with a view to launching its business in Brazil next year.
Jason Mills, development director at L&R, says: “We see the Panama Pacifico project as the first of many investments in the region and are looking at opportunities in Brazil at the moment. “After China, it’s one of the fastest growing economies in the world with exciting opportunities, both in terms of investment and development.”
A strengthening middle class is a definite “pull” factor too. Mills says London & Regional was attracted to Panama to “capitalise” on what he terms a “boom” phase, in which the middle class has expanded rapidly in recent years: “Panama City is the new hub of the Americas.
“The residential market has grown in the past 12 months, with capital values increasing by between 25% and 60% over the past three years. In the past five years, there’s been an explosion,” he adds.
London & Regional has already taken the plunge into alien territory. Last September, the company invested in South Africa when it bought the V&A Waterfront development in Cape Town in a joint venture with Dubai-based Istithmar for £395m.
And Grosvenor has also invested in Brazil through the purchase of 50% of Sonae Sierra, whose Brazilian subsidiary Sierra Enplanta owns the 1.2m sq ft Parque Pedro, Brazil’s largest shopping centre and a total of 3.35m sq ft of property in the region. It also has a £366m portfolio of assets across Australia, Hong Kong, Singapore and Japan.
However, it is the competitive markets of UK and continental Europe that have forced investors elsewhere in the “search for yield”. Peter Hobbs, global head of real estate and infrastructure research at RREEF, explains: “Allocations to property are growing but there are concerns about pricing in the UK. As a consequence, UK investors have been quietly investing abroad for three years but investment levels have been increasing quite fast over the past 18 months or so.”
Investors get adventurous
Dr Paul Kennedy, head of European research at Invesco, agrees: “With what’s been happening in the UK in terms of yield shift and capital growth, people have been getting more adventurous. Investors have been looking to the peripheral European markets and we’ve seen major players doing that.
“Looking to the US, China, India, Brazil and Russia is an extension of that. It’s a reflection of a more sophisticated and global approach to real estate investment.”
Nevertheless, some are sceptical that global investment plans will be implemented quickly. Hobbs estimates that while $10bn of capital has been raised by various institutions for investment in India, only 5% of that money has been spent.
Ben Sanderson, director of property research at PRUPIM, believes that this disparity applies more to India than it does to any other country: “It’s extremely difficult to invest in India given the restrictions on foreign direct investment. Some have signed up with domestic companies to help them penetrate the market. That is sensible.”
Tony Horrell, chief executive of European capital markets group at JLL, says: “You hear news that someone is looking further afield but when you analyse what they’re doing you realise it’s going to take a while to get into those markets. You have to put in a lot of effort to feel comfortable enough to go up the risk curve.”
Hobbs says that there are numerous risks when entering immature markets. “People think of risks as being based on economic factors but actually they relate to a whole host of issues, such as corruption, lack of clarity about landownership and the ability to repatriate your capital. For these reasons, it’s better to invest in the BRIC economies as part of a globally diversified portfolio, rather than on a country-specific basis,” he says.
Kennedy agrees: “Executing deals is very, very difficult. It is difficult to find the right product in emerging markets. Sometimes, the product you want to invest in doesn’t exist so you have to create it and often the legal structure and availability of advice lags behind what investors are used to elsewhere.”
A joint venture can prove the remedy to many ills, however, says Hobbs. “You have to be cautious and invest incrementally. A partner is the right way to go but you can’t do it in one or two visits,” he says. RREEF took two years to find a partner it was happy to work with in Russia, for instance last May, it teamed up with RBI Holdings to develop residential property in the country.
This means that jumping into a BRIC country to make a quick profit is unlikely. In Brazil, lease contracts normally last no longer than five years and are heavily weighted in favour of tenants, who can break by giving three months’ notice. Horrell says that fully understanding the local laws of a market is a “crucial” aspect of reducing the risks.
Despite these challenges, the pressure to diversify is there. And as the market tightens at home, and emerging European countries such as Poland and Hungary start to look like yesterday’s news, investors will have to go further off the beaten track to find those riskier opportunities that offer both tempting returns and a chance to get out unscathed.
MIPIM and Europe Focus, p117
$682bn
of transactions were completed across the globe in 2006
$305bn
of deals were done in Europe in 2006
Asia Pacific: Japan Big, China Grows
Direct commercial real estate investment in the Asia Pacific region reached $94bn in 2006. Cross-border investors poured $30bn into the area, principally Japan which accounted for half of all transactions, according to Jones Lang LaSalle.
Investors were undeterred by China’s measures to cool its real estate market – $9bn of deals in total represented an increase of 69% on the previous year.
Jones Lang LaSalle says: “China’s heady growth is now in its 10th year, with 2007 growth forecast at 9%, making the economy a magnet for cross-border investors.”
Japan will be the major focus of PRUPIM’s and LaSalle Investment Management’s new Asia-Pacific open-ended property fund. The fund will target core to core-plus returns, and is starting with seed assets in Australia, Singapore, Hong Kong and Korea.
China, Thailand and Malaysia are on the fund’s “watch list” – so it may invest in these markets in the future.
In 2006, China’s real estate market recorded transactions to the tune of
$9bn
