Global Capital Flows are Transforming European Real Estate Markets
Europe witnessed significant inflows of global capital during 2011: net flows to Europe were USD 18.4 billion, compared with just USD 1.6 billion in the Americas and USD 1.5 billion into Asia Pacific. There are a number of reasons why Europe has been attractive to international capital: (1) the selection of politically stable and developed economies, (2) the well-established real estate services industry, (3) the highly transparent markets, (4) investor-friendly regulation and (5) opportunities derived from different views on currencies.
Although demand for real estate in Europe has always been international, in previous cycles, this demand was characterised by only one country or group at a time. However, the underlying ‘globalisation’ of real estate markets has been accelerated by the opportunities derived from the 2008 credit crunch, where the resulting restricted debt environment across Europe has given equity rich investors and purchasers with access to financing a strong competitive edge.
These conditions have encouraged the emergence of three fast-growing buyer groups. The first are Sovereign Wealth Funds (SWFs), which are a huge source of new capital. Alongside these are large pension funds from North America and Asia, which are increasingly adopting global strategies for their real estate allocation. Finally, Ultra High Net Worth’s (UHNWs) originating from Asia have already been evident in the market, but UHNWs from other emerging markets are now beginning to target the UK, as illustrated by the South African purchase of Tower 42 for over GBP 282 million.
The new buyers tend to have longer investment horizons, which can sometimes be over ten years, notably longer than the typical UK real estate fund turnaround of three to five years. This will have clear implications for real estate markets: longer trading cycles mean the tradable market will decrease, market transparency will deteriorate as properties exit benchmark indices and overseas development funding will change the kinds of products that are being built.
In addition, the preference of global capital for liquid sizeable assets to fit their large global portfolios will push them towards ‘large cap’ markets and assets. This could mean that geographic polarisation will increase with domestic investors priced out of their local markets, and the gap between prime and secondary assets will widen as the required level of liquidity is more typically found in the prime segment. The need for scale and liquidity could also drive investors to imitate direct real estate exposure via alternative instruments.
Despite these implications, the benefits of this increased globalisation of demand should outweigh the negatives. A wider geographic spread of investors beyond traditional boundaries should enhance market liquidity and make it less vulnerable to regional economic shocks, whilst development funding can be supported by overseas equity even in times of restricted local financing. Finally, for the very core assets, globalisation could result in a lower and more stable yield average.
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