Knight Frank launches the Active Capital report which examines capital flows into the world’s Super Cities and the degree that the markets are driven by overseas capital.
- The global real estate market is moving towards a new phase where the strengthening global economy will cause interest rates to rise and some currencies to appreciate.
- As economic performance and currencies shift, we expect to see more focus on emerging markets from both global and local players. This should lead to a move towards more opportunistic capital chasing emerging markets such as Chinese Mainland, India and parts of Central and Eastern Europe.
- Chinese Mainland has quickly become one of the most important sources of global capital. While some Chinese investors may find it difficult to obtain foreign exchange clearance for now, those that can plus investors with Hong Kong or Singapore listings will maintain a steady investment flow.
- In many advanced economies we expect a shift from ‘trading’ to ‘holding’ strategies as capital becomes harder to redeploy. This will support pricing and, in turn, will drive further sales from opportunistic owners tempted by the yield compression this lack of stock will drive.
Global capital flows:
- New York attracted the most overseas capital in 2016, $16.3 billion, but remained largely driven by domestic buyers, who accounted for 60 per cent of total investment.
- London is ranked second in terms of overseas investment, but the $15.9 billion of foreign capital represented 80% of total volumes, making it the Super City most driven by overseas capital.
- Shanghai attracted $6 billion of foreign capital constituted 18% of total volumes, whereas Hong Kong attracted $4.9 billion of overseas capital, accounting for 72% of total volumes.
- Asia investors accounted for $67 billion of overseas investment in 2016, versus $19 billion in 2007. In contrast, UK investors are placing less capital overseas, accounting for $16 billion on overseas investment in 2016 versus a 2007 high of $61 billion.
Chinese global capital:
- Chinese capital was responsible for 11% of all global cross-border real estate investments in 2016, second only to the United States (19%).
- Over the last few years, Asian real estate investors have become one of the most important global capital exporters, with Singapore (7%), Hong Kong (5%) and South Korea (3%) also in the top ten.
- Chinese appetite for mega-assets seems insatiable. However, some target locations are beginning to feel uneasy around the sustainability of Chinese investment as questions are being raised on the government’s latest capital outflow controls and the health of the domestic economy.
- The Chinese cross-border activity has increased by 26-fold over the last ten years. In 2016, Chinese capital accounted for $26.6 billion of cross-border real estate transactions, accounting for nearly 40 per cent of all Asian capital invested. And also more than half what was invested domestically in the Mainland.
- Chinese investors still focus on gateway cities such as London, New York and the other Super Cities given their stability and depth. Other key locations including cities on the “Belt and Road” route, e.g. Singapore and key Southeast Asian hubs, will also continue to attract significant investor interest.
- Buyers from Hong Kong have purchased £2.2 billion of offices in the City of London over the first half of the year. Significantly above the £458 million recorded over the same time period last year. This steep rise is somewhat unsurprising given deals such as the Leadenhall Building transaction (£1.15 billion) in Q1 2017. The recent Lee Kum Kee Group purchase of 20 Fenchurch Street, a London office tower (£1.285 billion), reflects a continuous appetite for London commercial real estate.
- Paul Hart, Greater China Executive Director and Head of Commercial at Knight Frank, comments, this wave of Hong Kong money actually consists of Hong Kong local capital and capital from Hong Kong based and listed arms of Chinese Mainland entities. Both are exploring the unique advantage offered by the Hong Kong’s financial market, e.g. the freedom of capital flow, access to international markets and prospect of raising capital. Hong Kong based Mainland firms in particular are able to launch their overseas bids from Hong Kong, where they are less affected by Mainland’s capital outflow controls. On the other side of the coin, Hong Kong’s commercial property market has also attracted investors both locally and from the mainland who are drawn to its value growth prospects.
- David Ji, Director and Head of Research and Consultancy, Greater China at Knight Frank says, “Only a couple of years ago the global marketplace was crowded with big name Chinese insurance firms, large developers and State Owned Enterprises. However, since 2015 we have seen more determined advances by private conglomerates and developers, many have become familiar names in these markets.”
- “This group of investors and developers are nimble, are able to make decisions quickly and often transacting higher up the risk curve. We expect to begin to see less of a rush for trophy assets and more methodical behaviours that are commonly observed from mature players,” he says.
The rise & rise of private investors:
- Private investors are an increasingly important force in the global real estate marketplace. As our latest Wealth Report notes, 27% of all global commercial property transactions in 2016 involved a private buyer. And a quarter of private wealth is held in real estate investments of some kind (excluding primary residences and second homes).
- Asia is starting to challenge the US in terms of the largest regional population of UHNWIs. While China will continue to lead the way in Asia, places like Vietnam, Sri Lanka and India will also see substantial expansion.
- Risk mitigation, control over assets, currency diversification, portfolio globalisation, together with individual investor specific drivers, will continue to attract private investors towards global real estate. The top markets targeted will primarily be those exhibiting solid fundamentals including tenant demand, liquidity and transparency, with the Super Cities1 top of the list.
- Overall, property as an asset class remains high on the agenda of private investors.
Locations to watch:
- Investors will continue to target the US but we note an increasingly cautious attitude as issues such as policy uncertainty, rising borrowing costs and increasing construction activity in both the mainstream commercial and multihousing markets rise up the watchlist.
- We expect that transaction volumes will be lower than the last few years but should remain steady with a deep pool of buyers from across the world including, but not limited to, China, Korea, Japan, Canada, Qatar, Saudi Arabia, UAE and Norway.
- In China, we continue to see increasing interest from larger global investors attracted by the increasing liquidity and transparency of the real estate sector and economy with the core cities and sectors the primary beneficiary.
- The ‘Core Coastal Cities’ will continue to be driven by the demand from global investors. In addition, we expect a strong performance from the ‘Momentum’ cities that have an attractive mix of attributes for creative and tech industries and the associated real estate asset classes, including Austin, Miami, Denver and Seattle.
- In Europe, the European Union revolution is over and the threats of collapse are now fading into the distance. The region is beginning to show wider and more stable economic growth and along with modest inflation expectations and a low interest rate environment, investors are increasingly looking wider than the core locations of London, Paris and the main German and Nordic cities.
- Gradually more global investors will be looking to Central & Eastern Europe as these markets look more attractive not only on a relative pricing basis but also due to improving fundamentals.
- We continue to like the Super Cities and in particular look to the new neighbourhoods being created by limited core stock and tenants looking for value and ‘interesting’ locations. However, given the maturity of the cycle, we are watching closely for signs of overdevelopment.
*The Knight Frank Super Cities are Los Angeles, New York, London, Paris, Berlin, Shanghai, Hong Kong, Tokyo, Singapore and Sydney.