Asian money and London real estate have been happy bedfellows for some time. But brace yourself. That is set to change.
No it’s not going to reverse, every indication suggests it is going to become even more significant.
Talking to investors and advisers in Hong Kong this week, it was clear that more capital will flow from the region into the US and Europe. According to JLL, the volume of capital leaving Asia increased by almost 60% year-on-year in the first three quarters of 2015. There are several persuasive factors that indicate that there will be further growth and more money flowing into the UK.
China’s astonishing growth story means there is excess capacity and no shortage of capital that needs a home.
Meanwhile, the Chinese renminbi has been devalued twice this year and could fall further. In this climate, domestic investors will seek the security of stable assets, in strong cities backed by stable currencies.
And, crucially, this expatriation is supported by the government.
For more than a year, the team at DTZ-Cushman & Wakefield (and, yes, that brand is right: DTZ’s strength in China means the name won’t disappear there any time soon), has seen investor interest in acquiring real assets overseas double on a monthly basis.
They don’t expect that accelerating interest to reverse.
And neither does the Urban Land Institute.
“Many Asian financial institutions have either no allocation to real estate or have yet to export capital at all,” according to the Asia Pacific edition of the ULI’s Emerging Trends in Real Estate report, published this week. “Of those that do, allocation averages just 2%, compared with between 4% and 6% globally. And one nationality so far conspicuous by its absence is Japan.”
If Japan’s $1.2tn (£803bn) Government Pension Investment Fund – the second largest in the world – makes its long-mooted move into overseas real estate, that would be a game-changer.
But it is not just institutions which are poised to act. Fabulously wealthy Chinese business people are also looking to invest. Alibaba founder Jack Ma is currently putting together a family office to manage his personal wealth and that of other executives resulting from the e-commerce giant’s $25bn IPO last year. With an expected focus on long-term returns, it is inconceivable that this and other similar offices are not invested in overseas property.
And where will the money go? According to CBRE, Chinese capital inflows into US real estate reached $3.7bn in the first half of 2015 – almost four times the level in 2014. But the UK is also attractive to Chinese investors, according to Justina Fan, head of outbound investment in China for DTZ-Cushman.
Yes, there is concern that London is expensive. But the city remains a big draw because of perceived stability, liquidity and returns. An investor in residential or offices is unlikely to look beyond London, says Fan, but the appetite for industrial and some regional retail is there.
An Asian fund manager is quoted in the ULI report. His comments speak volumes: “In five years’ time we are not going to look back and say, ‘Mother, that was a lot of capital coming out of the region in 2015.’ Because in 2020 I think it is going to be so much larger.”
• There were notes of caution in Hong Kong too. If there is a rockstar investor on the island it has to be Goodwin Gaw. Speaking at MIPIM Asia this week, the head of Gaw Capital was mobbed as he left the stage. He had the event’s starkest warning for investors: Society faces a war on three fronts – the environment, terrorism and class. This industry will not be immune from the consequences.
