Asian investors push global real estate investment to USD1.8 trillion
Asia is fuelling the growth in the global property market, both as a destination for investment capital and a source of capital according to a new research report by Cushman & Wakefield.
‘Winning in Growth Cities’ is an annual report, which examines global commercial real estate investment activity, assessing cities by their success at attracting capital. The report reveals that investment in the global property market has grown 18 per cent year-on-year to a new record high of USD1.8 trillion, up from USD1.5 trillion in 2017, and it is Asia that is acting as the main thrust of that growth, with investment in Asia accounting for 52 per cent of all activity.
Moreover, the report finds that Asian buyers continue to dominate cross-border investment into real estate assets, accounting for a 45 per cent market share over the 12 months to Q2 2018. Among investors from this region, those from Hong Kong were the most prolific as volumes from this source increased by 20 per cent year-on-year to represent 49 per cent of all Asian international investment.
Commenting on these findings, the report’s author, David Hutchings, Head of Investment Strategy, EMEA Capital Markets at Cushman & Wakefield, tells Property Funds World: “I’m not really that surprised. It’s part of a structural change in terms of the growth of investment funds in the APAC region. The middle class is growing, pension funds are growing, all of which creates extra cash to invest which will be allocated increasingly to global as well as domestic and regional markets.
“Over the last few years there has been increased cross-border expansion among Asian investors, who are pushing into other global markets, partly in response to changing regulations on investment. I think that will continue so it will be no surprise to see Asia staying on top.”
He says that there are clear, and many would say growing, risks in the macro environment, but there is little to suggest the cycle is set to end or that a recession is looming. “Inflation is proving to be less of a threat than feared as we continue to enjoy steady economic growth. However, price signals will be enough to keep central banks in a tightening mood in most areas and the slow but sure rise in interest rates, and reduction of quantitative easing driven liquidity, will therefore continue,” he says.
In respect to overall volume of investment, New York remains the most sought after city, although total investment contracted slightly by -3.4 per cent on last year to USD60 billion. Los Angeles, London, Paris and Hong Kong make up the rest of the top five international cities for investment.
Perhaps more revealing is that New York slipped out of the top five cities for cross-border investors to rank 6th overall for the first time on record.
“I was not expecting New York to drop to that level. It is surprising how quickly things can change but at the same time it is still the world’s biggest market by volume. What you’re seeing is that some overseas capital has been priced out by domestic buyers – with still plenty of US domestic demand keeping overall volumes high. However, with a strong dollar and increased hedging costs, the market has been less competitive for foreign capital than was the case in 2017.
“At the same time there are still new sources of international capital that want to invest in US real estate in gateway and tier 2 cities, often in a broader range of sectors such a logistics,” says Hutchings.
Geopolitical tensions was another contributing factor as to why Asia and Middle East investors pulled back, meaning no US city featured in the top five.
By contrast, Hong Kong shot up 14 places on the previous year to second place, behind London, remaining the top international city for investment for the ninth time in 10 years. Hong Kong’s rise was buoyed by several large scale transactions by Chinese investors, with continental investment in the city rising by 259.4 per cent year-on-year, the report finds.
“There were a number of exceptionally large deals that lifted Hong Kong up the rankings, which partly explains this,” says Hutchings. “But at the same time, it is part of a global trend for investors to really focus in on gateway cities around the world. If you look within the Asia markets, there are four or five to pick from and Hong Kong is clearly a key city. Hong Kong and Singapore are, however, quite cyclical. They tend to move quite quickly.”
In Hong Kong, deal flow was up 68 per cent on the previous year and is the first Asian city to rank within the top five for three years.
Investment into Asian cities was predominantly the reserve of domestic capital, although continental investors increased their market share over the year.
After London and Hong Kong, Paris, Amsterdam and Madrid made up the top five global cities for cross-border investment. Hutchings confirms that there is a lot of Asian money in London compared to Paris “but basically you’ve got a similar cohort of investors from the US and Canada, from China and the Middle East ready to look at all these markets, including Paris, Madrid, Berlin and Amsterdam.
“Where we are starting to see more variation is the risks they are taking in specific countries. A lot of the biggest commercial RE investors have London, Frankfurt, Paris on their buy lists but they are not looking at regional investments within the UK, Germany or France. But if you look at US opportunity funds, they are much more open to invest in a wider range of countries,” comments Hutchings.
London is dominated by Asian capital, with investors from the region having increased their investment there by 46.9 per cent over the year. Offices are the primary target for these deals, as the sector achieved a 94 per cent market share of APAC flows into London, the report finds.
A lot of it comes down to availability and the ability to do a deal at scale, says Hutchings.
“This automatically draws investors to a market like London that can offer very large deals and has a proven ability to execute those deals. It has a long history of not having any problem with foreign capital too, which is another important factor. Nobody knows what Brexit is going to mean, but a lot of the Asian capital and some of the Middle Eastern capital is prepared to look through that and take a longer term view.
“London has proven to change and adapt and investors have faith the market will evolve and remain in good shape,” concludes Hutchings.