Where will the next wave of investment come from?

COMMENT: The landscape of international investors is constantly changing, both in terms of where the money is coming from and where it wants to go, writes Rasheed Hassan, director and head of cross-border investment at Savills My year-ahead forecasts are focused on Asian and Middle Eastern investor activity as, when looking at transaction volumes and investor nationalities, the figures can be misleading in terms of the ultimate source of capital. In many cases, the origin of an investment manager is documented as opposed to the nationality of the actual capital. Often, many US and European fund managers are acting on behalf of a multitude of nationalities invested in their funds and/or separate accounts. However, this is not typically the case when tracking Asian and Middle Eastern investors who, on the whole, are investing truly domestic capital overseas. China Outbound investment will likely be subdued as investors get to grips with the recent regulatory changes, and I can see overall volumes falling. The main demand we see today is for investment assets in the alternative sectors such as healthcare, senior living, logistics and tech. However, we are yet to see any major examples of the ability of investors to actually deploy capital into these strategies in this new environment. Chinese investment: who’s in and who’s out? Hong Kong The importance of Hong Kong as a source of global capital has been increasing steadily over the last 10 years. Cross-border turnover has grown at a rate of more than 25% per annum over the period, reaching an all-time high of almost £60bn in 2017. We believe that this may be a short-term peak, partly as a result of Hong Kong-based subsidiaries of Chinese investors now also being captured by the Chinese government’s capital controls policy. That said, we are still seeing a steady stream of (new and existing) investors seeking outbound opportunities, although these buyers will not necessarily be able to fully fill the void. Can anything stop the flurry of capital out of Hong Kong? Korea Currency and interest rate movements have a significant influence on the competitiveness and appetite of Korean investors. Since 2010, the US has consistently been the most active market by a considerable margin, with the UK and Germany vying for second position. However, going forward we believe that mainland Europe will be the major focus, with selective activity in the UK. The current correlation between yields, debt and currency is making it hard for most groups to be competitive in the US market from an equity perspective. The South Korean investors eyeing up UK opportunities Japan There has been much talk of a deluge of Japanese capital set to be invested in global real estate. This has largely come from a small number of state-owned groups suggesting that they plan to increase their allocations to “alternative” asset classes, which includes real estate. For example, GPIF alone is so large that a mere 5% allocation would equate to circa £50bn of capital to deploy. Putting this into context, 2017 saw the second largest volume of outbound capital from Japan in the last 10 years, equating to only circa £2.3bn. While the potential future quantum from groups such as this is very real, we believe that the likelihood is that the majority of their capital will be deployed indirectly. When will the Japanese make their move? Singapore The current key trend is a desire for investment in scale, with some of the largest investors very much focused on portfolio or platform plays. Private investors are also executing far larger deals than we have ever seen historically. We are witnessing increased flexibility in terms of sectors, with some now considering alternatives such as multi-family/PRS, student housing and retail warehousing. I anticipate increased overall investment in the UK, mainland Europe and the US, with many achieving this through partnerships with local operators. Malaysia Over the last 10 years, Malaysian outbound investment has peaked at £3.1bn, but dipped as low as £760m in 2017. The influence of Malaysian capital has historically been largely predicated on the ability to spend outbound. In recent years, many Malaysian investors – similar to Taiwanese and now Chinese investors – have been subject to regulatory measures that have restricted their capacity for international investment. However, some of the largest funds are coming under major pressure to deploy capital and are heavily under-allocated to real estate. As such, I believe Malaysian investors are ones to watch this year. Europe and UK set to see continued Asian investment Middle East The state investors from across the Gulf are generally quiet in terms of direct overseas investment and I do not see this changing in the short term, with the exception of Abu Dhabi. There has been much press around Saudi Arabia’s PIF, which would be one of the main beneficiaries of the highly anticipated IPO of Saudi Aramco. However, like Japan’s GPIF, given the sheer scale of the money that they have to invest, we believe a lot of this will find its way in to real estate indirectly. Since the oil price crisis and Arab Spring, we have seen steady increases in the activities of private capital looking to offshore real estate to satisfy their desire for income diversification and wealth preservation. We predict a slight increase in activity from private investors from across the region focusing principally on the UK, Germany, the Netherlands, France and the US. There is an overwhelming theme of investor focus on office and logistics assets which provide enhanced cash on cash returns of 7%+. Middle East crisis hits London market All data and figures supplied by Savills Research and RCA