How are global capital flows changing?
Global capital flows for H1 2020 were 23% lower than the same period in 2019 as the economic effects and physical restrictions imposed by the pandemic spread. Just over 26% of transactions were cross-border – a similar level to 2019. However, this is largely due to a combination of locations outside the initial epicentre of the pandemic seeing strong first-quarter inflows, and transactions commenced before Covid-19 disruption bolstered the figures.
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Even before Covid-19, global capital flows and demand for real estate were already facing a range of structural changes, from changing demographics, responses to climate change, and evolving technology, including the growth of e-commerce, to changes in employment patterns and a focus on supply chain resilience amid a heightened trade war rhetoric. This has opened up investment opportunities in a multitude of new and emerging sectors. Our prediction is that the onset of Covid-19 is likely to accelerate, rather than change the impact of these structural changes on real estate.
Illustrative of this, in last year’s Active Capital, we used an augmented Black Litterman portfolio optimisation model to simulate future optimal commercial real estate allocations for global private equity investors. The model predicted a rotation over time towards non-traditional real estate sectors, such as student housing, data centres, various types of income-producing residential assets, and industrials, with somewhat reduced weightings over time towards retail and office.
The office sector will continue to play a prominent role in global allocations, however, particularly in global gateway markets. Looking back over previous cycles, investment flows into specific office geographies have demonstrated particular resilience. The most historically resilient office location is the UK, which has uniquely been in the top five destinations of global cross-border capital in every quarter but two since before the GFC.
The US office sector dipped out of the top destinations during the early part of the GFC, but by Q3 2009, demand recovered. Similarly, office transactions in France and Germany led cross-border capital in the recovery from the Eurozone crisis.