Moving the money around

While we’re operating in a tight economic environment, and confusion remains across European markets, money is flowing from high saving countries with relatively strong currencies. There are major pockets of activity in key Asian markets – Singapore, Malaysia, Hong Kong and Korea – and Australia is a beneficiary.

Les Koltai, a partner at law firm DLA Piper, says there has not only been a flight to growth, but also to core markets. While Europe is generally a “no-go zone”, Paris and London are still hot, he says, because people are only interested in investing in the “absolute best assets in the best locations”.

Dominic Brown, head of national research, Australia at DTZ, says London is seen as a relatively well-priced safer haven for Middle Eastern and European capital following the problems in Europe, and it also offers liquidity for property investors.

“Anecdotally it appears as though some of Australia’s superannuation funds are targeting the US and London’s West End for their initial offshore investment forays,” he adds.

Gráinne Gilmore, head of UK residential research at Knight Frank, says, on a global scale, the safe havens can’t be underestimated. Looking at their effect on prime residential markets, she says prime prices in Miami in the US were up 20 percent in 2011.

“And that is because newly created wealth from South America, especially Brazil … sees Miami as a real key focal point,” she says. People who have recently amassed great wealth and are looking at the prime markets, and may be facing regime change or corruption at home, would like to go somewhere “very transparent, politically secure [and] economically secure”.

“Toronto and Vancouver saw big prices because Chinese investors like to go there.”

In terms of the global investment narrative, it’s important to make the distinction between private investors and sovereign funds, says Simon Storry, director, international investments, Jones Lang LaSalle (JLL).

“Hard assets, such as property, have always been viewed as an investment for capital preservation. High net worth individuals from the Middle East and Russia have always sought ways to move funds out of their home countries – with London a favoured destination,” he notes.

“The risk of Greece exiting the Euro and the re-instatement of a highly devalued drachma has been the catalyst for wealthy Greeks moving funds out of the country.”

Capital flows are also finding their way into core US markets such as New York City and San Francisco, the latter attracting a lot of capital on the back of the tech boom, says Koltai.

He says there are a variety of sources of funding – from pension to sovereign wealth funds.

“There’s actually no shortage of capital out there trying to be placed into real estate. What’s interesting is what’s attracting them. Asia’s certainly become far more important for global investors in real estate in terms of getting an allocation to one of the few markets globally that are actually in a growth phase …

“And, interestingly, Australia is probably rating well above what it should be – it’s a very small market.”

Koltai says Australia is considered to be part of Asia, but it is “a well-regulated, transparent place to do business in and global investors are attracted by that story” because of the attractive returns.

Money, money, money

According to JLL data, the largest cross-border investors in 2010-11 were Singapore (US$13 billion), Canada (US$7 billion) and Hong Kong (US$4 billion).

“On the sell-side of the ledger – in 2010 and 2011 – Australian investors divested round A$14.9 billion of offshore assets (including hotels),” says Storry.

“By a considerable margin, this represents the largest offshore liquidation of any country, equivalent to sales of the next two countries (UK and Ireland) combined.”

Meanwhile, Singapore has been “extremely acquisitive”, says Marc Giuffrida, managing director, capital transactions – Asia Pacific, at Knight Frank. In terms of their investment focus, Sydney features quite prominently, as is the case for Malaysia with Melbourne, Perth, Sydney and Adelaide.

“They’re generally looking for things they can’t get in their home markets,” he says.

The key drivers behind private wealth investment, he says, are safe havens and the connection factor – Australia offers a suitable lifestyle or may have been a place of education.

“We know they’re looking for yields and yield spreads which they can’t find in their home markets … in Asia we’re going through a period of negative real interest rates.”

Brown says Asian investors are the most active foreigners in the Australian real estate market, accounting for 66 percent, or $2.43 billion of foreign direct investment in real estate in 2011.

“The remainder of foreign investment over the two years comprised investors from the USA, Switzerland, Canada and Germany.”

Storry says JLL recorded $12.4 billion worth of transactions across the office, retail, industrial and hotels sectors and offshore investors accounted for 29.4 percent of the transactions by value.

“We expect that offshore investors will remain active over the medium term. However, there is a deeper buyer pool for good quality assets. A number of domestic wholesale funds successfully completed capital raisings over the past 18 months and will be looking to deploy this capital into the market.”

Brown says a key issue remains the low availability of quality (institutional grade) stock on the market.

Domestic flows

According to data from DTZ, within the Australian context, cross-border direct real estate investment totalled $3.70 billion in 2011, accounting for 31 percent of total direct real estate investment.

The figure is slightly down on the 2010 estimate of $5.16 billion (45 percent of the total), but still represents a significant investment in Australian real estate by foreign entities, says Brown.

The first quarter of 2012 saw the trend continuing with a further $615 million invested – nearly 25 percent of total direct investment in real estate.

“In the near term it is likely that foreign capital will maintain its interest in Australia, which will continue to help bolster investment volumes,” says Brown.

Australia is receiving a disproportionate share of global capital, says Storry. However, he identifies some interesting sector-by-sector trends.

“The Australian retail sector is heavily institutionalised. Regional centres are tightly held and rarely trade. However, when a 50 percent share of Northlands Shopping Centre was offered to the market, the Canadian Pension Plan Investment Board (CPPIB) acquired the asset for A$450 million.”

The industrial sector, meanwhile, is being re-rated by offshore funds, he says.