Prospects of a shift in central banks’ monetary policy, rising bond yields and return of equity market volatility signal that big-money investors must get used to a changing world.
However, the global growth story means few will become defensive overnight. The hunt for yield continues and European commercial real estate will remain popular with investors from outside the region.
Real Capital Analytics data show that €90.5 billion of the €265 billion invested in the top 10 European real estate markets in 2017 came from purchasers based elsewhere. European property provides international investors with yield – relative to alternatives, at least – as well as portfolio diversification, security and steady income. As more firms from outside the region partner with local stalwarts, relationships develop and repeat business happens. Cross-regional momentum is building.
There are sub-plots to this capital flows story. After pulling back in 2016, US investors rebounded last year. The search for opportunistic returns has led some into markets including the Netherlands, Spain and Poland. Some expect to see a shift towards secondary segments of major cities, or build-to-core strategies. On the other hand, Blackstone – a high-return player – is reportedly raising a core-plus European fund in a bid to capitalise on investor demand for such product.
Asian money remains focused on Europe. Having fixated on London’s trophy assets, some expect Hong Kong players to follow South Korean and Singaporean investors into other prominent European cities. Relatively untapped sources of Asian capital are also tipped to follow, including Japanese money.
Such is the depth of global investment into European property, a repeat of 2017’s volume is a real prospect. RCA figures show a decent start to the year, overall, with €25 billion closed in the first two months and €32 billion pending, which could put volumes within touching distance of Q1 2017’s circa €60 billion.
What does all this mean for debt? Although there is a larger volume of equity pointed at Europe, money managers’ biggest problem is deploying it in suitable deals in a late-cycle market. That is as much a challenge for lenders which face increased competition to source sufficient business within their risk parameters.
Also, although real estate is an increasingly global business, lending remains a largely regional affair. This can mean overseas buyers banking in their home nations, as shown by some of the Chinese purchasers of European assets. Increased capital flows into Europe do not always translate into more deals for European lenders.
For debt markets, the biggest impact of unrelenting global capital flows into Europe is that a growing volume of it is being put into lending strategies. As the increased weight of equity puts pressure on property prices, more investors are opting to put their allocations into debt vehicles, to access property returns with an element of protection if values dip.
Our data show that money into private debt vehicles focused on Europe raised more than $10 billion last year and money managers routinely report that North American and Asian capital are crucial elements of their fundraising.
In a series of upcoming features, Real Estate Capital will examine capital flows into the European property markets. As external capital floods into European property, expect to see a larger proportion of it take the form of credit.
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