CBRE has released the Q3 update of its Global Capital Flows App1 looking at cross-border purchases of commercial real estate (CRE) investments. Over the last year or so some substantial changes in both the sources and destinations of cross-border2 transactions have emerged that show through strongly in the app's data.
The Rise of Chinese Capital3
One trend that stands out is the growing importance of Chinese capital to the global CRE market.4 Prior to the global financial crisis there was virtually no Chinese investment in CRE elsewhere in the world, just the odd transaction particularly by state enterprises. This started to change in 2009, with the first significant cross-border purchases in the Europe, Middle East and Africa (EMEA) region and Asia Pacific (APAC) totalling around US$600 million. Since then the growth has been almost exponential, totalling nearly US$20 billion in 2015.
A notable development since the start of 2015 has been the growing emphasis on the Americas (and particularly the U.S.) in Chinese investments, although cross-border purchases within the APAC region have also been substantial.
Over the last four quarters (to Q3 2016) the total of US$21 billion suggested that Chinese cross-border purchases are stabilising at around this level. However, since then Anbang Insurance's purchase of Strategic Hotels & Resorts has completed. With a number of other major transactions either already completed or in the pipeline for Q4, 2016 is likely to be another record year by a substantial margin.
In addition to these substantial flows into commercial investment properties, Chinese capital has also been active in residential and development.
Looking forward to 2017 and beyond, there are reasons to believe that in the future, growth in Chinese cross-border investment might slow or that we are close to the high water mark. On 28th November 2016,5 the National Development and Reform Commission, the People's Bank of China, and the Ministry of Commerce and the State Administration of Foreign Exchange issued a joint statement affirming that all outbound investment transactions remain subject to existing registration and filing procedures. Authorities also indicated that they would scrutinise cross-border investment deals more closely to better manage risks. There has also been speculation that authorities are drafting new restrictions on outbound investment; however, the restrictions being suggested would have affected few recent transactions–we estimate about 8% of the US$55 billion of Chinese cross-border investments since the start of 2014.
The Drop in U.S. Capital Flows
The nature of capital flows out of the U.S. has always been different because the vast majority is spent by fund managers on behalf of collective investment vehicles. Over the last five years, the top cross-border investors from the U.S. have been Blackstone, CBRE Global Investors, LaSalle, Lone Star and Hines, according to RCA data. In contrast, the leading cross-border investors from other countries are typically principals investing on their own behalf (Government of Singapore Investment Corporation, Qatar Investment Authority, Canada Pension Plan Investment Board, etc.). As a result, capital flows out of the U.S. are more cyclical than those from most other countries. U.S. purchases in other countries fell from well over US$60 billion in 2007 to less than US$5 billion in 2009.
The U.S. has been the largest source of cross-border purchases of CRE investments in seven of the last ten years6 and may still top the table in 2016. However, the level of U.S. acquisitions has fallen away sharply over the last couple of years from US$58.7billion in 2014 to US$31.6 billion in the four quarters to Q3 2016.
There are a number of possible explanations for this, all of which are likely contributing to an extent:
- Political uncertainty in Europe, coupled with the fact that Europe has historically been the dominant destination for U.S. investment;
- US$ exchange rate volatility that makes investment in non-dollar markets more unpredictable;
- Low yields/cap and higher lending cost that make it more difficult for (typically) leveraged U.S. capital to compete with equity buyers; and
- Growth in direct investment by global institutions, in particular through platform acquisitions where the investor acquires not just real estate, but the infrastructure to both manage it and expand their holdings.
Looking ahead there is considerable uncertainty over what 2017 holds in store, in terms of both total investment turnover and the pattern of capital flows. As a result of the growth of Chinese outflows, Asia has (just) overtaken North America as the largest source of global capital over the last four quarters. The gap is likely to expand in 2017 and may become a long-term fixture if outflows from Japan follow the expected pattern. Meanwhile, capital flows from the Middle East (US$21.4 billion in Q4 2015-Q3 206) will continue to be important as the region's sovereign wealth funds remain eager to increase their real estate allocation and private investors are also keen on global real estate.
1. The CBRE Global Capital Flows app is available free for iPad through the Apple Store.
2. Cross-border in this context refers to transactions where the country of domicile of the purchaser is not the same as the location of the property involved in that transaction.
3. In the context of this report capital originating in Hong Kong is not treated as Chinese and Hong Kong is treated as a cross-border destination for Chinese capital.
4. This topic was addressed in more detail in the CBRE report "In and Out Asia 2016".
5. See CBRE China MarketFlash from November 30, 2016.
6. The exceptions are 2008, 2009 and 2010 when it fell to second place behind Germany.