_Shifting capital flows - how cross-border transactions are rapidly evolving
Shifting sources
The global real estate market is reinternationalising. In 2017, 32% of all transactions by volume involved cross-border purchases, up from 25% during 2009-2011. However, this isn’t simply a return to the levels and mix of pre-global financial crisis trade. While Europe and North America continue to invest similar volumes of capital abroad, for the first time ever they were eclipsed by Asia-Pacific, from which US$90 billion flowed in 2017.
Which region will be the greatest exporter of cross-border capital flows in 2018? As we explore later, a slowdown in outbound capital from China and Hong Kong might suggest that Asia will slip back temporarily. However, we believe the extent of this fall will be countered by potential for greater investment from Japan, South Korea and other major Asian markets.
Much of this demand will emanate from mature institutions, used to acquiring assets globally, and more likely to consider opportunities beyond well-known gateway markets than investors looking overseas for the first time.
US investors will continue to acquire significant volumes of real estate overseas, although the impact of domestic tax changes will offer up compelling opportunities for investing at home. A similar situation will face European investors, who currently benefit from the prospect of strong returns in their local markets.
Outbound capital from the Middle East has slowed in recent years, but this may be about to change as rising oil prices boost revenues and sovereign wealth inflows. Although the overall volume of cross-border capital flows has changed little since 2016, there has been a clear shift in the type of investors active in the market.
In volume terms, the biggest increase has come from private equity funds, which after a period buil increased their cross-border investment by over 60% in 2017. We expect 2018 volumes will show them to be even more active: US$124 billion of fresh capital was raised in 2017, and many of theding up dry powder, North American funds behind the largest of these pools have a global or European remit.
Long-term investors such as pension funds and sovereign wealth funds have also returned to the cross-border market at scale, the latter doubling investment in 2017 vs. 2016. This is part of a structural shift which has seen growth in capital flows from these investor groups far outstrip other investor types over the past decade.
The most significant fall in cross-border flows has been from real estate investment trusts and other listed property companies. The volume of assets purchased has fallen by around half over the past two years.
Destination
When it comes to cross-border capital inflows, the US, UK and Germany held the top three spots in 2017, as they have done since 2010.
However, with a great variety of investors currently targeting continental European markets, it is no surprise to see the likes of Spain, France, Austria and the Netherlands rising up the ranks too. Continental markets will remain compelling as, despite strong pricing, opportunities to capture future rental growth remain.
Beyond the limelight, but no less interesting for that, are markets that are yet to see significant volumes of inbound real estate investment.
These are countries where the overall volume of capital inflows remain relatively low, and volatile, but are ultimately growing very quickly: India is perhaps the standout example of recent years, with investment growing by 600% since 2012 to reach US$2.6 billion in 2017.
The next part of our research is all about analysing these trends, both at the macro and micro level. We begin by identifying the ‘capital superhighways’ - the main sources and destinations of real estate capital at a continental and country level. We then use our in-house gravity model to determine locations that we believe could be set for higher inbound investment.