Capital flows 2: Feast from the East

In the second part of REC's series on capital flows, Lauren Parr looks at the growing importance of Asia.

Asian capital was an important driver of European real estate investment growth in 2017, with inflows surging 125 percent year-on-year to $35.5 billion, according to CBRE.

Inflows have been led by Chinese, Hong Kong, Singaporean and South Korean capital in recent years, boosted by deregulation of outbound investment and growth in private wealth, among other factors.

“Another big driver is that those countries’ pension funds and sovereign wealth funds are younger than they are in the West, so they are building up exposure to long-term asset classes like real estate,” says Henri Vuong, director of research and market information at the European Association for Investors in Non-Listed Real Estate Vehicles.


1. Global capital is targeting Europe

Investors are looking for diversification, having accrued wealth over the past decade. “Asian private investors are generally risk-averse and traditionally have acquired big ticket, often trophy assets or portfolio transactions that generate stable returns, since they are already taking risk by investing outside their domestic markets,” says Catella partner Jeremy Waters, formerly of Knight Frank’s global capital markets team. This is most true of investors’ first foray into Europe.

The UK still attracts the lion’s share of Asian capital, although more has moved into Continental Europe.

“London continues to attract considerable capital from Hong Kong and mainland China owing to its relative safety. It’s all about having trust and understanding of the UK real estate market and legal structure,” says Waters.

In July 2017, for example, Hong Kong investor Lee Kum Kee spent £1.28 billion (€1.43 billion) on London’s Walkie Talkie office tower from Land Securities and Canary Wharf Group in the UK’s biggest ever single asset deal.

Hong Kong capital accounted for 39 percent of the £6.6 billion spent on London offices overall last year, according to Knight Frank. Such capital continues to dominate active requirements for London offices, with noticeable interest also coming from Japan, South Korea and Singapore.



After London, the next stop on many investors’ agenda is Paris, followed by the top five German cities. “The Asian markets are large economies, which is why major European cities are favourable; if you have a large amount of capital to put away these are likely to be more liquid and will hold their value over time. It might take longer to find the right stock, however, since Western Europe is late in the cycle,” Vuong says.

However, property markets in Singapore and Hong Kong are very expensive, with yields of 2 percent to 2.25 percent for prime stock in Hong Kong, meaning Europe looks relatively attractive.

“We’ve reached a stage where Asian money is definitely looking across Europe into French, German and Dutch markets,” comments Waters.


Asian buyers’ activity has ramped up based on a greater requirement for diversification and an acquired knowledge of European markets. For example, Singaporean developer Mapletree has been active in the business parks and student housing sectors in the UK and has become acquisitive on the continent since opening a London office.

Brexit has been a catalyst for some to explore the continent. “Anecdotally, the question about the impact of Brexit gets asked constantly. Many private Asian investors that might have only bought in Australia and London are now reviewing their investment strategy targets and are fast-tracking their knowledge on the German real estate markets,” Waters says.

Typically, Asian capital in mainland Europe looks at prime offices in the major gateway cities, as well as prime logistics with international occupiers and long leases. Last October Singapore’s Global Logistics Properties bought logistics platform Gazeley for €2.4 billion. “Investors are still looking for core assets but could take on a little more occupational risk given that vacancy is likely to reduce as economies improve,” says Vuong.

In Germany, where core office yields can be very low at sub 3 percent, Waters suggests that “Asian money is not just buying in the core sectors. It will look at student housing, hotels and infrastructure with which investors are familiar in their local markets and where operators may be international”.


The amount of Asian capital targeting European real estate overall is substantial, despite capital controls on Chinese outbound investment. Observers had expected a loosening to be announced at the Chinese National Congress last October, but were disappointed.

However, while controls are curtailing some Chinese investment, groups are being encouraged to go overseas when it dovetails with China’s One Belt, One Road initiative, meaning government-backed entities are becoming the country’s biggest international investors. CBRE estimates that Chinese sovereign wealth funds invested $13.2 billion in H1 2017, up from $3.4 billion in H2 2016. Last June, China Investment Corporation spent €12.25 billion to buy Blackstone’s Logicor logistics business.

Meanwhile, INREV’s latest Global Investment Intentions survey identifies South Korean investors as the most ambitious globally when it comes to target allocations to real estate. Currently they have an average allocation of 6.8 percent but are looking to increase this by 5.7 percent globally in two years. Some Korean investors are targeting allocations of up to 15 percent – up there with the biggest institutional real estate spenders globally, according to INREV.

Japanese investment is also expected to rise. Last November, JLL’s Japanese business said investors from the country invested $2.12 billion in overseas real estate in the first nine months of the year – up 60 percent year-on-year – as they struggle to generate yields in their home market.

“Asian capital tends to be deployed at a slower pace than European capital, after a thorough diligence process that can span several years, but Japanese and Korean investors, in particular, have now reached a point at which they are ready to invest,” says Vuong.

Limited spoils for European lenders

Increased Asian investment in Europe does not necessarily translate into debt mandates for Europe’s banks.

Some sovereign wealth funds are cash buyers, while Korean pension funds tend to cap leverage low. However, there are opportunities.

“There is part of the market that wants to buy stable buildings and accepts these will trade at relatively tight net initial yields, and to make returns work will seek to apply an element of leverage. These investors are happy to source debt on a non-recourse basis from international or domestic lenders,” says Christoph Wagner, director of debt strategies at TH Real Estate.

TH Real Estate recently provided financing for Korean investor Samsung SRA
Investment Management for the £315 million acquisition of 200 Aldersgate in
the City of London, at less than 65 percent LTV.

“We are financing more Asian deals than we did five years ago,” says an originator at a German bank.

Asian institutions are typically investing with joint venture partners in Europe, with whom European lenders are more likely to have connections.

“Normally when a JV partner is involved we tend to see more debt investment partly due to incentives which mean the partner wants to ramp up returns by putting debt into a business plan,” he says.

Often, however, Asian investors seek financing from banks they have relationships with in their home market.

“There’s a feeling at times that the term sheets we are asked to quote on are taken back to local banks for them to match.

Investors like to know the people that are sitting opposite them and have more
influence in terms of beating them down on pricing,” says the originator, who estimates that 70 percent of the deals involving

Asian buyers it looks at are lost to Asian banks.

“On the other side, we often look at things where the investor has been exploring what the debt options are and has decided it’s not worth while borrowing money,” he adds.