Asian investors in European real estate are parking their money in a greater number of sectors and locations. Real Capital Analytics’ Tom Leahy examines the data.
The main story to have emerged during the recovery and post-recovery stage of the current European real estate cycle has been the establishment of the direct investment market on a truly global stage. In the last two years, almost €160 billion has been spent by players from outside Europe on the continent’s real estate.
The increase in capital coming into Europe from Asia especially has changed the market significantly, increasing competition and driving up pricing in target markets. While it looked like the tap might have been turned off during the first six months of 2016, there was a surge of acquisitions by Asian investors in Q4 2016, which pushed the quarterly deal volume to a record figure of €6 billion. Another €1.4 billion of deals have already completed in Q1 2017, with €2.5 billion more in the pipeline.
Singaporeans have been in the market consistently over the last decade and were the most acquisitive of the Asian buyers over this time period. But new sources have emerged; China obviously, but also investors from Hong Kong and South Korea are much more active.
Initially, these new sources of capital were focused on relatively few locations. In 2012, just 16 cities received investment from Asian buyers, but that rose to 65 in 2015, before falling back slightly to 58 in 2016. In 2012, London accounted for almost 77 percent of all Asian investment into Europe. However, with the growth in investment in other markets, the UK capital’s position of dominance has been diluted, so that it accounted for 36 percent of Asian capital in 2016.
One thing has not changed and that is the preference from Asian players for offices over all other asset classes. Indeed, in every year since 2012 more capital has been invested into European offices than in the other asset classes combined. However, in 2016 there was a significant increase in industrial investment, and a big reduction in retail volumes. Clearly, the purchase of the P3 Logistics Parks portfolio by Singapore’s GIC has boosted industrial volumes, but there has been investment into individual logistics units too, in Germany, Poland and the UK.
In comparison, the pool of capital targeting the retail sector shrunk in 2016, as did the number of target markets. The total of €500 million was the lowest since 2012 and just three countries saw investment, with London accounting for almost €300 million of this. This reflects a wider trend in Europe, where investment into the industrial sector held up the best of all the main asset classes in 2016, while retail was the worst, volumes falling by approximately 30 percent.
If offices remain the sector of choice, where then did Asian buyers acquire them in 2016? Central London obviously, but Asian investment there is at a four-year low. Elsewhere, Paris saw investment volumes increase to almost €900 million in 2016, while Berlin and Amsterdam attracted similar amounts.
This increase in investment in some of the other core markets reflects how investors have started to look elsewhere as the risks in London have increased. The activity of the South Korean players is a good example of this: in the last two years there has been a clear focus on Germany and some of the other core continental European markets, largely excluding the UK.
In 2015 Vienna was the top market, and in 2016 it was Berlin, with the acquisition of the mixed-use Potsdamer Platz complex by KIC in a joint venture with Brookfield pushing it to number one. There are also more than €1 billion of office acquisitions by South Koreans under offer in Frankfurt, notably the Commerzbank Tower to Samsung, and another €470m office in Paris under offer to Hyundai M&F Insurance.
The number of South Korean investors buying into the market is also increasing. In 2014 we recorded eight active players, which increased to 10 in 2015 and 14 in 2016. Moreover, eight of the 14 South Korean buyers in 2016 are new entrants to the direct market in Europe, demonstrating how appetite for European real estate is spreading.
Examining Hong Kong buyer activity in more detail, there is a significant difference in target markets: London offices account for over 80 percent of the €2.5 billion of acquisitions in 2016. Investors accelerated their buying activities in London post-June 23, taking advantage of the devaluation of the pound, and RCA recorded over €1.4 billion of purchases in the second half of 2016. This has continued into 2017 with almost €1 billion already spent, through the acquisition of office buildings at 7-8 St James’s Square by Shun Tak Holdings, One Kingdom Street in Paddington by CC Land Holdings, and the Ampersand Building in Soho by the Emperor Group.
Chinese investment into Europe has fallen over the last 12-18 months from the highs in late 2014 and early 2015, nevertheless €3.8 billion was invested this year. Of this 40 percent was spent in London, while Amsterdam, Berlin, Marseille and Dubrovnik in Croatia saw their first major injection of Chinese capital. Even though RCA recorded a fall in Chinese investment activity in Europe, there is a widening pool of experienced Chinese capital in the market, with 20 firms having recorded transaction activity of more than €100 million and four of over €1 billion. Anbang Insurance made its first European purchase in 2016, with a portfolio of Dutch offices from Blackstone, eschewing some of the usual entry points in London, Paris or the German ‘A’ Cities.
Looking ahead to 2017, the early signs are that the increase of Asian capital coming into Europe at the end of last year will be maintained. In addition to new capital from South Korea, we still haven’t seen either the Australian or Japanese investors scaling up their involvement in the direct market, and there remains huge potential among the Chinese insurance and life funds to invest billions more into the global real estate market.
Of course, with the possibility of capital flows from China coming under greater government scrutiny, the downside risk is that this potential will not be realised, but it is too early to see evidence of a slowing just yet. Moreover, market volatility seems to be only an election away in Europe, which could present opportunities for the equity-rich capital coming out of Asia.