The Trump effect

The election of Donald Trump to the US presidency could have a disruptive effect on capital flows, writes Lauren Parr.

Donald Trump

It’s too soon to gauge the full impact of the Trump presidency on US capital flows into European real estate, but as the new economic agenda plays out it could be that US investors see more reason to park money in their home market.

“If you look at the situation in the US, the general expectation is that there will be stronger economic growth on the back of a number of things,” says Jos Tromp, head of continental European research at CBRE.

“One is government spending on infrastructure like hospitals, trains and streets. Another is fiscal easing most likely allowing companies to invest more and consumers to spend more. Generally, it’s a good thing for the real estate market.

“US private equity is seeing potential upside in growth again. Some of what was allocated in Europe will most likely be targeted at the US off the back of this.”

Will Rowson, who leads Hodes Weill’s real estate advisory and capital raising activities across Europe and the UK, adds: “A lot of US investment capital comes from state funds, and those funds listen to the people depositing money into retirement plans or insurance policies. Many of these people will have voted for Trump and want their capital to be invested in the US; everyone is saying he will inflate the US economy through infrastructure spending, increasing US GDP, increasing returns.”

Right now, US money seems to be adopting a wait-and-see approach as far as European allocations go. US investors are still very active in Europe, accounting for 12 percent of overall investment according to Cushman & Wakefield. Various layers of US capital look outside the US towards Europe, the driving factor being diversification. “There is more focus on that around the world for US investors than there has ever been as a result of maturing investment plans,” says Rowson.

The very big global diversifiers led the way, first putting money into large opportunity funds in Europe like Blackstone, Lone Star, Starwood and Kennedy Wilson from 2009. From 2013 onwards these investors got more confident and bigger US investors such as big state plans started to do direct or joint venture deals in Europe.

“Today we’re seeing smaller state or city plans in Europe carefully balancing their risk exposure between pan-European open-ended core funds and value-add risk, rather than sector or country-focused investing,” Rowson says.

A major driver of US capital targeting European real estate has been the currency advantage.

“The euro-dollar rate just made Europe cheaper which is encouraging better educated investors to seek a home in Europe,” he continues.

The high-net-worth investors that broker Seaford Finance advises are less calculated than institutions but “they do have past experience and keep talking about currency gain, even though it’s changed post-US election”, says Morris Rothbart, managing partner. “It appears they are happy to pay a slight premium on capital value because of it.”

As a source of funds, however, US capital in Europe has been waning. Commercial property spending dropped by close to half during 2016 (near €29 billion), Cushman & Wakefield figures show.

“We’ve seen a slowdown of US money coming into the UK, as well as France and Germany,” says Nigel Almond, head of Cushman’s EMEA capital markets research.

“Undoubtedly some of this can be attributed to Brexit in the UK. However a number of the US opportunistic funds have been less active, reflective of fewer opportunities as the market advances through the cycle.”

Another explanation for this slowdown is that US opportunity investors’ required returns are no longer achievable, at least in the UK.

Returns in the US, meanwhile, are relatively attractive and do not require currency risk or hedging.

Rowson believes that Trump’s protectionist rhetoric is of limited influence on investors’ decisions about where to put their money.

“As long as the status quo remains with regard to the way capital leaving the States is repatriated from a European and US tax point of view, I don’t see it making a huge difference to the way US capital will look at Europe,” he says.

Rather, European political risk remains investors’ chief concern.

“There is a lot of talk at the moment about how stable from a long term point of view Europe is. Do you want to take euro risk at this point in the real estate as well as political cycle?” Rowson asks.

“Even if the euro breaks up, investors want to be in Germany; it’s safer going to the safe haven of Germany in any scenario rather than Spain or Belgium, for example.”

Rowson’s expectation of how the ‘Trump effect’ will play out is that “most investors investing large amounts of capital in Europe and the US will keep going and hedge, but will focus on the big funds; be that value-add funds, big open-ended core funds, and the strongest and safest economies – Germany, the Nordics, Netherlands and possibly the UK”.

“Prime assets with good credit leases are extremely hot; outside that it cools off quickly. That’s why managers in the UK are thinking ‘value-add’ and looking to the US to raise that capital.”

Christoph Wagner, director of debt strategies at TH Real Estate, says that the firm’s US parent company, TIAA is pursuing no change of course: “There is lots of opportunity in debt in the UK market and in Europe. We are aiming to be a bigger asset manager of debt this year than we have been in the past.”

European debt investments are popular among US investors, Rowson points out.

“Private debt funds are being fed by capital from such investors who are more comfortable with the asset class,” he says.

“The outlook for 2017 is capital is seeking safety as well as diversification and debt provides that.”

Europe to benefit from capital flows diverted from the US

European real estate stands to be the beneficiary of various capital streams previously bound for the US, potentially targeting Europe instead.

Political uncertainty is driving long-term, stable money towards safe havens, with Japanese and Chinese investors selling down their US debt, for example.

“Middle Eastern capital and some of the Asian capital is wondering how welcome it will be in the US. If you’re a Saudi private investor wanting to invest somewhere safe do you go to New York or Washington or do you go to London? The view is London will be more welcoming even after Brexit as an investor than the US will be over the next four years,” says Will Rowson of Hodes Weill.

Natalie Howard of UK debt fund AgFe says Trump’s election is having the effect of driving more capital to the UK “as a result of uncertainty over the way people are being treated”.

Traditionally skewed towards the UK, Middle Eastern capital is expected to “shift focus towards core eurozone in pursuit of sector and geographic diversification, with regional UK markets also growing in interest”, notes Iryna Pylypchuk, senior research analyst at
Fidelity International.

Risk outweighs the prospect of better returns for European investors looking at the US, likely therefore to “keep capital close to home”, in Rowson’s view. Even those that want to put money into the States may struggle to get in early enough to take advantage of what has been dubbed the short-term “sugar rush” delivered by Trump’s policies.

“The Trump effect of capital coming into Europe could divert some of the world’s lower risk-taking capital away from the US and there aren’t many places to go than the stronger, deeper markets in Europe,” says Rowson.