Despite mounting uncertainty in the global economy as a result of the Chinese stock market collapse, a tightening of monetary policy, improved occupier conditions and a lack of investment asset alternatives could stimulate an extension to the current EMEA property investment cycle into 2016 and beyond, according to Colliers International’s Q3 EMEA Capital Flows Report for 2015.
Richard Divall, Head of EMEA Cross Border Capital Markets, said: “While pricing may continue to tighten, especially in core markets which continue to be crowded, the global search for income and security will only serve to drive the market on, resulting in an extension of the EMEA investment cycle.”
European Capital Flows…
Colliers’ Q3 2015 Capital Flows Report shows that over the past 12 months, strong inflows to European retail funds and the ability of European REITs to raise capital through bond issuance, as a result of recent restructuring, has resulted in European-domiciled capital taking a much stronger position in Europe, accounting for 52 per cent of European investment activity between H2 2014 and H1 2015.
Colliers International goes on to predict that strong inflows of capital to Europe from domestic and international investors will result in record volumes being achieved in 2015 with these high levels of investment likely to continue on into 2016. H1 2015 investment totals reached €135 billion, 37% ahead of this time last year. The second half of the year typically represents a busier trading period, so European real estate investment levels should surpass those reached at the previous 2007 peak.
Richard Divall said: “The strengthening of occupier markets is starting to drive more significant growth outside of core markets, despite some economic concerns, which will help support investment returns in 2016. It is worth noting that Asia Pacific-domiciled capital accounted for only 5 per cent of European transactions from H2 2014 to H1 2015, so any short term withdrawal would have a minimal impact on a market which is buoyed by a diversity of North American and, increasingly, ‘domestic’ capital. In fact, it may actually take some much needed heat out of the market.”
No sign of the ‘Asian wave’ diminishing…
While the market may see a change in the sources of Asian capital engaging the European market, there is no sign of the ‘Asian Wave’ of capital diminishing any time soon, according to Colliers International’s report.
Richard Divall, said: “Although we are starting to see some Chinese capital ‘pulling out’ of existing transactions in Central London, we are seeing other forms of Chinese capital continue to pour into European real estate – a prime example being Xinjiang-based Hauling Industry and Trade Group’s £1.2bn (€1.6bn) investment in to three of Scarborough Group’s UK property schemes in Manchester, Leeds and Sheffield in mid-September. So we have very mixed messages, and a market with very limited understanding of how the Chinese stock market collapse will affect the Chinese Insurance Companies, State Owned Enterprises and private investors.”
The report shows the Asian investment into European real estates increased notably from 2010, with the pace of acquisitions accelerating from €4.2bn in 2010 to reach a peak of €13.1bn in 2013.
Damian Harrington, Head of EMEA research, explains: “This surge has been fuelled by new entrants and sources of capital. This, in turn, has been stimulated by factors such as deregulation, portfolio diversification and regional asymmetries in economic and property cycles. The composition of Asian investment has changed, and will continue to, as a result.”
Colliers’ research goes on to identify three distinct waves of Asian investment into European real estate: Long-term players such as Singapore, Hong Kong and Japanese capital; Mid-term entrants including Malaysian and Korean Pension Funds, as well as the China Sovereign Wealth Funds; and thirdly, ‘Fresh Capital’ which includes the likes of Chinese and Taiwanese insurance companies as well as more recent Thai investors and Singaporean-listed Indonesian developers.
Richard Divall adds: “While recent deal postponement looks likely to be a short term trend, there is evidence that more established Asian investors are switching strategies, seeking to crystallise solid returns in core markets, underpinned by strong pricing levels.”
Asia’s changing strategies…
In order to understand if and how Asian investors’ strategies have evolved over time, Colliers’ report compares the European investment track records for the different generations of Asian institutional capital.
Richard Divall explains the findings: “We are seeing Asian capital form part and parcel of the European investment cycle. Early entrants into the market are capitalising on strong returns and re-investing into markets, providing a stronger yield compression story and allowing for greater diversification.
“New entrants continue to take their place, with the usual cities like London, Paris, Madrid and the main German cities acting as gateway locations. This is primarily due to the fact that few of the ‘fresh capital’ operations have local offices in Europe – they also have relatively small teams which means they lack the resource to understand all European markets well enough to have comfort in a wider investment strategy. It is only Asian capital with local offices in Europe, like Fosun and Gingko Tree or more established players like GIC, which have the resource and understanding of the intricacies of local European cities to buy in second tier markets.”
The macro position…
Looking forward, Damian Harrington concludes: “At the last count, the Fed suggested a rate hike will happen in December, in response to a burgeoning domestic US economy, which has given markets some comfort that we’re heading back to a normalisation of monetary policy. It is therefore unlikely that a UK rate hike will happen before the Fed raises rates, putting this back to 2016.
“This delay in rate rises and a weakening Euro, coupled with a 50% reduction in oil prices, is filtering through to provide a positive impact in the US now, and should bolster consumer driven economic growth in Europe. However, the Chinese attempt to move from productive economy to a consumer and service based economy is a very challenging risk.
“So there may be a few bumps in the road ahead, but the consensus is that present conflict between politics, financial markets and the real economy should normalise through to summer 2016.”
Monday, 05.10.2015
