BY Chris Prasad
International real estate firm Knight Frank predicts that more than 30% of total worldwide real estate transactions will be cross-border by 2018.
In its inaugural Active Capital report released last month, Knight Frank foresees that the globalisation of real estate will accelerate next year, suggesting that the significance of national borders is beginning to fade among property investors who are now keen diversify their property portfolio and utilise it as a hedge against the performance of local economies.
Knight Frank’s Active Capital report is an examination of capital flows into the world’s Super Cities, identifying the degree in which markets are driven by overseas capital.
The report found that New York attracted the most overseas capital in 2016 with US$16.3 billion (RM69.8 billion). However, the New York market remains largely driven by domestic buyers, who account for 60% total investment. By contrast, London is ranked second in terms of overseas in investment and the US$15.9 billion (RM68.2) of foreign capital represents 80% of total transaction volume. This makes it the Super City that is most driven by overseas capital.
In other parts of Europe, Paris and Berlin attracted overseas capital totalling US$9.7 billion (RM41.6 billion) and US$6.8 billion (RM29.14 billion), respectively. In Berlin, this constituted 69% of total investment activity, whereas in Paris, domestic buyers are more active and account for 61% of total transactions.
Of particular note is the fact that Asia Pacific markets, such as Shanghai, Sydney and Hong Kong are on the Top 10 list of global cities that attract inbound capital from overseas.
According to RCA (real capital analytics) data, the rise of Asian investors as capital exporters has been clear trend. The data shows a 244% increase in Asian cross-border capital over the last ten years – the largest regional growth globally.
Asian overseas investments amounted to US$67 billion (RM287 billion) in 2016, versus US$19 billion (RM81.4 billion) in 2007, which is recognised as the peak of the previous real estate cycle.
Knight Frank’s Asia Pacific Head of Research Nicholas Holt said significant amounts of capital have been heading out of the region, we should expect more intra-regional flows in the coming years as core Asian markets become deeper and more liquid – spurred by increased transparency and relative political stability.
“While As the weight of Asian capital looking for real estate continues to grow, we also envisage that more secondary or emerging markets will begin to be targeted by the more opportunistic groups,” Holt said.
“The Super Cities have been and will continue to be the core focus for most institutional investors. For investors who are less risk averse or opportunistic, we are gradually hearing more conversations around emerging markets, especially relating to those along the Belt and Road,” he added.
Meanwhile, European investors have not returned to the levels of overseas investment seen pre Global Financial Crisis. In 2007, European investors placed US$118 billion (RM505.7 billion) overseas, which plummeted to a low of US$22 billion (RM94.4 billion) in 2009, before recovering to US$78 billion (RM334.6 billion) in 2015, and US$64 billion (274.5 billion) last year. Similarly, UK investors are placing less capital overseas, accounting for US$16 billion (RM68.6 billion) over overseas investment in 2016 versus a 2007 high of US$61 billion (RM261.7 billion).
Also, Knight Frank points out that as a new global economic cycle begins, active capital flows are likely to change direction and emphasis. Emerging markets are likely to attract more interest as mature locations see performance moderating and opportunities becoming harder to find.
Investors who have been attracted to developed economies by the positive currency arbitrage, or due to weak performance in their own markets, are more likely to explore opportunities closer to home as domestic conditions improve and foreign exchange movements work against them.
Nonetheless, whilst the weight of capital will shift depending on domestic markets and economic conditions, there will be other investors with the ability and the appetite to focus on the Super Cities.
Knight Frank believes that whatever the economic conditions may be, Super Cities and other gateway locations will continue to attract significant capital.
Knight Frank’s Asia Pacific Head of Capital Markets Neil Brookes explains that while core assets in major gateway markets have been increasingly thinly traded, the volume of active capital means that there continues to be off-market and value-add opportunities that could meet many investors’ criteria.
“The US, Australia and the UK remain the top target markets of many Asian-based clients, although assets in mainland Europe and in certain prime Asian markets are likely to become increasingly in demand,” said Brookes.
Concurring, Executive Director of Capital Markets James Buckley that Malaysia has attracted Malaysia has attracted overseas capital totalling US$2.6 billion since 2014. Singapore accounts for 43% of foreign investment, followed by Australia at 19% and China at 17%.
“The volume of overseas investors investing in Malaysia has dropped significantly since 2016 and although the market fundamentals are healthy, they are being somewhat overshadowed by the domestic political situation. I expect the level of uncertainty to fall and sentiment to improve once the general election takes place. On a regional basis, Malaysian property offers incredible value,” said Buckley.
In terms of outbound capital, Malaysia has seen a steady outflow of capital into overseas real estate with US$9.7 billion (RM41.6 billion) invested overseas since 2014. The key markets being Singapore (28%), United Kingdom (28%) and Australia (16%).
Knight Frank notes that Malaysians are increasingly seeing the importance of diversifying their wealth to mitigate political, economic and currency movements.