Cross-border capital funds: the dealmaking race is on

COMMENT Real estate markets have been relatively resilient as investors “look through” the Covid-19 crisis. Capital inflows into Europe in 2020 reached €255bn (£219bn) – only 3% behind the 10-year annual average. Cross-border capital has not retreated like it did in past periods of disruption. Indeed, many firms have raised capital and are looking to deploy. This is happening against an expected return to economic growth. The European economy is forecast to expand by 4.4% in 2021, followed by 4.7% in 2022. Growth will be spurred on in Q3 2021 as the rollout of vaccination programmes gathers pace, lockdown restrictions are eased and the impact of monetary and fiscal policy stimulus feeds through. For real estate buyers, this means competition remains strong, and a lack of product presents challenges for those looking to execute their strategies from a distance. The best opportunities are being snapped up very quickly. This is a challenge for cross-border capital, particularly if they do not have a local partner to help them execute their strategies. Muddying the waters Europe is home to a number of global gateway cities, such as London and Paris, while also offering a plethora of choice across numerous other European gateway cities, including Munich, Berlin, Milan, Dublin and Madrid, to name a few. Europe offers a breadth of product and cross-border investors have plenty of choice, depending on their particular strategies and investment objectives. The old view that in times of disruption longer-term institutional cross-border capital focuses on defensive sectors and lower-risk assets that offer long-term stability of income still holds. Similarly, the view that others, for example private equity investors, are looking more towards distressed opportunities in sectors most impacted by Covid-19, also remains true – albeit we haven’t really seen much distress yet and pricing has generally held its ground. What we have seen recently, however, is a muddying of the waters, driven by the lack of product and increased competition. Some institutional investors are moving up the risk curve, while some private equity firms are buying core or core-plus assets for new lower-risk-profile funds or using higher leverage and expectations of creating portfolio premiums to achieve their desired returns. Alternatively, they are buying platforms to build scale on the back of particular thematics – just think logistics and healthcare. Either way, many firms are having to be more creative in their approach. Local partners Irrespective of their chosen strategies, most cross-border investors face the same challenge. How do they source product and deploy capital when the opportunities come and go so quickly? In a market where everyone wants the same thing, which of course makes it expensive, an ability to source off-market undoubtedly provides you with an advantage. However, if you don’t want to invest in a listed vehicle or an existing fund, you need someone on the ground and cross-border investors are increasingly teaming up with local partners in order to act quickly and decisively. The other strategy cross-border capital will increasingly look to will be value-add or opportunistic repositioning opportunities. If you can’t source the product, building it has the added advantage of creating an asset that is “future proofed” in terms of ESG requirements and space planning. Either way, it’s hard to do from afar and, again, we are seeing cross-border investors team up with local partners to find the right opportunities and avoid all the usual pitfalls. Robert Cotterell is head of investment, Europe, at Cromwell Property Group