2014 Game Changer: Capital Flows

The biggest U.S. cities became a real estate battleground in 2013. Armies of wealthy offshore investors invaded core markets, determined to get a slice of the glistening trophy assets that grace their skylines—at almost any price. Despite the soaring asking prices and the prospect of rising interest rates, the battle is expected to continue this year and spread further afield, with more investors, owners, financiers, and agents from all corners of the globe. In 2013, Asian buyers won the upper hand, snapping up a number of trophy assets in key U.S. markets. Their appetite for global property is surging as the global property market has bounced back from the years of stagnation that followed the global economic downturn. Adding to the competition for assets is the rise in the overall volume of private capital available for investment in prime property as investors raise their allocations to the asset class, becoming more comfortable with both investing overseas generally and in real estate specifically. With the increased focus, however, comes concern that core assets are becoming overpriced. Investors are looking beyond the high-profile trophy as- sets in gateway cities, with interest intensifying in tech-focused cities, including San Francisco’s Bay Area, Boston, and parts of New York. Joe Kelly, director of market analysis at Real Capital Analytics, says that on a 12-month rolling basis, global capital (capital being invested outside its own continent) has continued to recover and is now around $80 billion. “Still about half of what we saw at the peak of the cycle, but it’s continued to recover quite rapidly,” Kelly says. “Investors are looking to diversity not within their own continent but further afield. That’s quite an interesting trend.”

Following the Money Flows

Pamela Wright, managing director of Greenhill Real Estate Capital Advisory, says interest has been coming from a variety of offshore markets, including China and Korea. Manhattan’s towers held the strongest lure among U.S. cities for Asian real estate investors during 2013, Real Capital Analytics figures show. In 2012, the city attracted a little more than $1 billion in Asian capital. In 2013, it was the second-most-popular global destination, with $3.653 billion spent on nine deals. (London was the preferred city for Asian capital, attracting $9.230 billion in 50 deals.) Singaporean groups had the biggest appetite for U.S. commercial real estate in the year to late November, snapping up nine properties worth $3.221 billion, according to RCA figures. Most of these deals can be attributed to the state-owned Government of Singapore Investment Corp (GIC). Chinese investors followed, with $2.366 billion spent on 17 properties; investors out of Hong Kong have spent $6.666 billion on 79 properties. South Koreans spent $1.376 million on 27 assets, most of them funded by its sovereign wealth fund, the National Pension Service.

Behind the Numbers

Real Capital Analytics executive managing director Simon Malinson says Chinese capital has overtaken Middle Eastern capital in volume terms for the first time during 2013, particularly into Europe. In an important shift, during the final months of 2013, the market witnessed some of the first trades by non–state-backed Chinese groups, he says. Insurance companies and pension funds have been granted permission to invest outside China and are now rapidly deploying their capital, as they aim to diversify their portfolio and acquire better assets. This is particularly pronounced in Europe, Malinson says. “We’ve seen it in the U.K. particularly. It’s now expanding outside the U.K. And I think in the next few years the Chinese capital is going to be the ex- plosion. We’re going to see a huge wave of capital from China that’s investing across the globe,” he says. Chinese groups have a preference for well-located assets with strong lease terms and good tenants, primarily from the banking sector, Malinson says, pointing to the recent sale of London’s Deutsche Bank headquarters to a Chinese buyer. Japanese buyers purchased only $72.9 million worth of U.S. property during the year-to-date. However, Tokyu Livable, Inc. managing director Charlie Haase says there is finally some appetite for offshore investment emerging in Japan. Haase says there are institutional reasons for the stagnation, but some of the nation’s sleeping investment giants, like the Japan National Pension Fund, are starting to wake and are contemplating getting involved in the fight for trophy assets. “These guys are finally looking at alternative investments, potentially including real estate, and on a global basis,” he says. Jones Lang LaSalle international director Bruce Miller says that though Asian buyers have been more active, there are a number of other major offshore players fighting for U.S. real estate, with Canadian, European (particularly German), Israeli, and Middle Eastern capital all joining the fight for prime property in key global markets. RCA’s Kelly said that around 2009, North America was the primary destination for Chinese investors. However, in recent years the United Kingdom and continental Europe had been the preferred markets amid concerns about tax laws, which had been a hindrance to cross-border deals. “That basically taxes their profits relative to their income quite heavily,” says Kelly. “So that can be a bit of a drawback.” However, he says that they are still keen to get a foothold in major U.S. metropolitan markets, “looking at geographies and assets that can provide those larger lot sizes where they can build up portfolios reasonably quickly.”