Record year predicted for APAC cross-border real estate investment in 2022

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Cross-border real estate investment will reach record levels in 2022, according to new research from Knight Frank. The 2021 Active Capital Report, now in its sixth year, uses data and proprietary modelling to predict global real estate investment trends for the year ahead. For the first time, the capital gravity research model uses cutting-edge machine learning to identify country-by-country capital flows, type of investors behind the capital and the key sectors within different destination countries.

In 2020, Knight Frank’s Active Capital research accurately predicted that the US would be the top destination for global cross-border real estate capital in 2021, followed by the UK, Germany, Australia, and France.  

This year’s Active Capital research suggests a resurgence of investment flows into real estate, hitting record pre-pandemic levels into key sectors including offices, logistics and residential, signalling a marked return of investor confidence. 

The US, UK, Germany, France and the Netherlands are forecast to be the top destinations for cross border real estate investment in 2022, with the US, Canada, UK, and Germany predicted to be largest deployers of cross border capital in 2022, led by investment managers, institutions and private equity investors.

Asia-Pacific is set to see investment volumes grow by a third, with the top sources of capital coming from the US, Singapore, Canada, UK, and Germany, according to Active Capital.

Investment will be driven, predominantly, by a re-emergence of US Investment Managers and Private Equity interest in offices. 

In total, the APAC office sector is forecast to attract over half of inbound investment into the region, the most popular locations being Greater China, Japan and Australia. Industrial will be the second most invested sector in 2022. Despite the challenges, retail will remain third for investments in the region.

For outbound investment, the US will be the favoured destination for APAC buyers, driven by the opportunity for scale across sectors. For example, Singaporean Government-linked companies acquiring platforms in the multifamily and data centre sectors. 

There is also predicted to be a big increase in Asia-Pacific capital deployed into the UK as borders re-open and business travel can resume. Offices in the UK and gateway cities in Europe will remain in strong demand, as will pan-European logistics.

Neil Brookes, Head of Global Capital Markets at Knight Frank, says: “The results from this year’s report are welcome sign of the continuing recovery in the region, linked to the resurgence of global cross-border investment into real estate. 

“Indeed, as the world moves into the next phase of living with the pandemic, we could see a roaring 20’s effect for real estate in 2022.

“Thanks to the latest AI and machine learning technology, this year we have a much deeper dive on the likely trends emerging on where, what and how capital will be invested in the year ahead. As such, it provides a timely and actionable set of insights to help investors navigate the post-pandemic global real estate market, allowing them to stay one step ahead.”

Using price modelling tools, Knight Frank has for the first time, identified the contribution to sales price that is uniquely from a building’s green rating. The results found that prime Central London office buildings with a BREEAM* Excellent rating enjoy a 10.5 per cent premium on sales price compared to equivalent unrated buildings, while those with a BREEAM Very Good rating enjoy a 10.1 per cent premium. 

Prime office buildings in Melbourne and Sydney with a NABERS** rating of 5+ enjoy a 17.9 per cent premium on sales price compared to equivalent unrated buildings, while those with a lower NABERS rating enjoy an 8.3 per cent premium.

Emily Relf, Head of Global Capital Strategies at Knight Frank, says: “The pandemic has accelerated the adoption of ESG agenda in investing and business decisions. 

“Our findings in Active Capital indicate that demand for green buildings is a global phenomenon and is likely set for continued growth. This is a stark reminder that ESG considerations are not an issue to watch in the future, but rather are a very real consideration for investors today. 

“As the risks of holding on to older assets become more pronounced, adapting and repurposing assets will gain traction. This scope and opportunities for asset repurposing in Asia-Pacific remain significant and integrating ESG elements not only sits well with investors, but is also a core strategy to generate alpha for asset owners.”

Knight Frank’s research has identified London, Shanghai, New York, Paris and Washington DC as the world’s top five green-rated cities for real estate. Cities were measured on a range of factors, such as well-developed public transport networks, urban green space, and a high number of green-rated buildings. Notably, these top five cities also have universities which are benchmarked against UN Sustainable Development Goal 11, which measures the strength of research into sustainable cities and communities. 

Yet, while these cities are making strides in supporting carbon reduction (at least on a relative per person basis), none are immune to climate risks. None of the 286 global cities surveyed scored much above 6 out of ten for resilience against climate risks such as extreme weather events. 

Victoria Ormond, CFA; Partner, Capital Markets Research at Knight Frank, adds: “We are rapidly seeing sustainability and ESG drive institutional real estate investment strategies.

“For the first time, we have also been able to identify the price premium on green-rated buildings across hemispheres. This is a strong signal that demand for green buildings is an international phenomenon and one that is likely to grow in significance.

“The research has shown that whilst the world’s cities are making strides in supporting carbon reduction, none are immune to climate risks. Investors, almost universally, need to be accounting for the risks of increased weather events and broader climate risk in the future.”

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