Given the current turbulent political and economic times, and the subsequent impact we are seeing on the global real estate markets, it is important to understand what is driving global capital today and the trends we are likely to see in terms of capital moving across borders.
Asia-Pacific
For the past 10 years, Asian Capital has been a cornerstone investor in key global cities.
However, in increasingly uncertain times there is varied sentiment across the Asian markets.
China continues to experience capital controls, limiting the ability of Chinese companies to invest outbound.
The deleveraging that is happening in China is diverting the attention of some Hong Kong investors away from the markets in the West, because today they can command exceptional returns through lending to mainland Chinese developers on assets and projects that are much closer to home.
Hong Kong investors do, however, continue to monitor the American and European markets and some continue to buy, particularly in London, but the lack of any significant discounting has meant that they have not been major players so far this year.
In Singapore, the large institutional groups continue to look to the West for opportunities as they seek to diversify their portfolios. While caution is being employed, an acknowledgement that the uncertainty in the markets has reduced competition makes now a good time to deploy overseas.
South Korean overseas investment had a significant year in 2018, with more than £3.2bn of assets acquired by South Koreans in London alone (Savills advised on 55% of these deals). The expectation is that mainland Europe will be the focus of Korean capital this year, particularly Paris.
Although investors’ preference is still for tier-one cities, there appears to be a willingness to look at tier-two or three markets in order to meet their return requirements.
Japan has for a long time been subdued in terms of outbound investment, but it is considered to be the giant waiting in the wings.
Although the majority of initial investment is likely to be through indirect channels, it is anticipated that there will be an increase in the number of Japanese companies investing directly into key global cities across the US, Europe and Asia.
We are also witnessing an increase in appetite from Australian groups, in particular pension funds, to invest offshore, which is driven largely by their sheer weight of capital and domestic competition.
Europe and the Middle East
With increasingly competitive conditions in the core European real estate markets of France and Germany, 2018 heralded further evidence of extensive intra-European capital flows.
Of particular note is the movement of German capital into French property. Similarly, French SCPIs have bolstered their foreign presence with strong commitments to the Dutch, Belgian and German markets.
Some European investors have progressively ventured further afield. In 2018, South Korea registered as the most popular Asian destination for European capital, driven largely by M&G’s purchase of the Centropolis towers in Seoul for its Asia Core Fund.
German capital remains the most active European presence in North America for the fifth year in a row, followed by Switzerland and Norway. A lot of this activity is underpinned by a small number of powerful investors.
Middle Eastern investors have for a long time been active in the European and American real estate markets in an attempt to diversify their investments.
However, there has been a slight reduction in activity and appetite from some investors. Fears over the political situation, as well as issues in some of the Middle Eastern markets has created a polarisation in their outlook on overseas investment.
Mainland Europe is set to benefit from the political uncertainty in the UK; however, the expectation is that in the medium term, Middle Eastern investors will return to normal activity levels in the UK.
The Americas
North American investors comprise some of the largest and most experienced real estate owners in the world, with portfolios spanning the globe.
The large Canadian groups are consistent in their overseas investment. With vast experience and track records, their appetite is resilient despite the political and economic headwinds in some of their target markets.
Meanwhile, the exodus by Chinese investors from the US has left a void in some key markets, particularly New York, which has caused an adjustment to pricing and an opportunity for domestic investors.
With the investment returns in some key markets returning to attractive levels, some US investors are achieving their required returns at home and are not having to look abroad to international markets. There is a sentiment among some that the uncertainty in London and other European cities is not reflected in the pricing.
Rasheed Hassan is head of cross-border investment at Savills.