Global real estate gears up for investment challenges

The current elongated cycle continues to trundle on but it looks like the global real estate market could be about to hit some speed bumps and not just from the ongoing battle between the UK and Europe over Brexit. So how are global investors still managing to find opportunities? “I think we’ve got a lot of things that will be changing and driving markets from trade disputes to shifting interest rates which you are starting to see in the US now,” said Damian Harrington, head of EMEA research at Colliers International.  Asian capital looks like it has pulled back a little bit from the States and what’s going on with trade might extend that trade. Jackie Newstead, global head of Hogan Lovells real estate, agrees that trade disputes will reshape global property investment. “There are quite a number of countries, the US in particular, where that move towards protectionism will have an effect on the destinations that people decide to invest in. “Recently the rules in the US have changed so people investing from overseas into real estate are largely, in a lot more cases, going to have to report under those rules and all those regulatory bits and pieces that go with investment that make it harder or just more of a pain will put people off.” China’s current stance on outbound capital is also having an impact on global property investment, but Chinese investors are starting to find ways around the current restrictions, Newstead added. “We’ve seen over the past year much less direct investment into real estate but a lot more investment into business platforms. “I was out in Asia earlier this year and it was clear from even the Chinese state-owned entities that they were still very keen on buying both in Europe, the UK particularly, and the US, but that they had to get round their restrictions which meant they were very much looking at those platforms,” she said. “And I think we’ll see more of that coming through.” “If you’re buying an operating business there are a different set of rules that apply and relatively recently there was an increase in the amount of capital available for that category of investment. It’s just looking at it in a slightly different way if you buy the operating business you get some of the investment assets with it, but it’s not like a dry investment.” Sir Edward Lister, chairman of Homes England and a senior adviser to the UK Department of International Trade Capital Investment team, has also seen the emergence of this investment route by the Chinese. “In many ways that’s actually a better route because I’m not sure that when they have bought assets they’ve done as well as they planned to do,” he said. “Buying in some expertise or some partners does seem the more logical way to move forward,” he added. “We’re not particularly interested in pure assets [at DIT] as that doesn’t particularly help UK plc. What helps UK plc is development of one form or another.” And Harrington points out that while Asian capital has withdrawn from the US a lot of money that’s come into Europe again this year is from Asia. “Asian volumes have gone up from about 15% to 30% cross border,” he said. Unknown issues However, for Allen Chiltern, head of funds, capital markets at Patrizia, Brexit is the more immediate issue. “At the moment it’s harming the UK. A lot of capital is not investing because of the unknown,” he said. “There are very few who think there’s an opportunity that the UK has maybe already taken on the Brexit equation and mispriced it. So a lot of investors are sitting on the sidelines and waiting. “The challenge for us is having the right product at the right time ready to take advantage of whatever comes out of the Brexit opportunity and the majority think that’s going to be London,” he said. “But the question is when and how, and that’s something we’re monitoring very closely.” And Lister admits that “Brexit does come up” in the conversations he’s having, but adds: “They’re saying they’ve still got confidence in the UK property market and maybe there’ll be a blip for a while. But as a long-term investment play I don’t think anybody’s doubting the that the UK economy will remain strong in the long-term. “It’s the short-term question and I think people are holding off a little bit at the moment. “They’re holding off and to some extent developers are holding off. Also people aren’t bringing projects forward to be funded and I think it’s having all those projects ready to roll. Once whatever Brexit deal unfolds you can immediately cash in on it,” he said. “If you look at UK regional cities and the yields they’re trading at compared to other European markets they’re very attractive, especially if you don’t have an awful lot of debt. Got to take on a bit of Brexit risk but yields are around about 5%.” But despite Brexit there are some signs that Japan has returned to the European and UK market with most recently Norinchukin Bank agreeing to buy a 50% stake in Leicester’s Highcross shopping centre for £236m, showing that in spite of the retail sector’s woes for the right asset at the right price a buyer can usually be found no matter the travails of the global markets. Even so, a fundamental shift is potentially going to take place in how countries of the world trade with a move toward moving in packs, Harrington said. “Economically I think we’ll see the globe working more in regional trading blocks. Asia, in response to everything that’s happened between China and the US, will probably form its own trading block and China’s already bringing its supply chains into other south-east Asian economies,” he said.“We still have Europe and the UK and there will be an agreement as there needs to be. He concluded: “I think as we turn to more regional global trading blocks we’ll see some more distinct differences in terms of how economies work and how occupier cycles move, and that will make investing a little bit more interesting as not everything will be moving at the same time.” The panel ■ Damian Harrington, director, head of EMEA research, Colliers International ■ Sir Edward Lister, chairman, UK Government’s Homes England and a senior adviser to the UK Department of International Trade Capital Investment team / former deputy mayor of London ■ Jackie Newstead, head of global real estate, Hogan Lovells ■ Allen Chilten, head of funds, Capital Markets, Patrizia ■ Damian Wild, editor, EG To send feedback, e-mail louise.dransfield@egi.co.uk or tweet @DransfieldL or @estatesgazette © Messe Munchen GmbH