Asia’s love affair with property across Europe is showing few signs of coming to an end, writes Keith Breslauer, managing director of Patron Capital.
Asia’s love affair with property across Europe is showing few signs of coming to an end, writes Keith Breslauer, managing director of Patron Capital.
DTZ calculates that close to €9 bn was invested in European real estate by Asian sources in 2013, with Singaporean and Chinese capital accounting for almost 50% of this. London has always been an attractive market for Asian investment and recent landmark building purchases, such as China Life’s acquisition of One Canary Wharf and PingAn buying the Lloyds Building, have highlighted the important role that institutions from the Far East are playing in the UK commercial property market.
Other markets across Europe are experiencing significant investment too: research from JLL showed that Asian investment into German real estate markets – particularly Berlin, Frankfurt and Munich – increased by over 900% between 2011 and the end of 2013, when it stood at US$1.27 bn (€959 mln).
Asia’s role in Europe’s residential market is also an important one. Buyers from China, Malaysia, Hong Kong and Singapore are well known to be among the most significant overseas buyers of London new-build property and are increasingly looking to other cities: Knight Frank’s recent European Cities Review showed that Singaporeans were the number one overseas purchasers in Dublin’s residential market and were second only to the UAE in the Parisian market.
Asia’s interest in European property is driven by a convergence of factors, not least favourable exchange rates, booming property markets that make overseas investment look cheap, and the rapid growth of Asian economies which has led to a need to export capital.
China’s economy in particular has performed well for a number of years and has generated substantial wealth across the Chinese market, not just within the sovereign wealth funds but also institutions and high-net-worth families. In addition, Chinese banks have grown considerably and are actively providing financing for overseas investment, which is helping fuel this increased activity.
Chinese investors perceive the UK – and, increasingly, other territories across Western Europe – as an important diversification to their home market, where their capital is relatively safe and they can potentially drive high returns.
A CBRE research report last year said that as Asian institutional investors look to diversify into low-risk alternative asset classes, they are likely to increase their allocation to real estate, with Europe a major target. This could lead to a potential inflow of more than US$150 bn into property around the world, with Europe likely to be the main beneficiary.
This prediction has already seen some validation. According to CBRE, last year in excess of US$22.5 bn of Asian capital was invested overseas, mostly targeting prime international cities such as London, New York and Sydney. Of this, investment into Europe accounted for US$13.2 bn, up from US$6.3 bn the prior year – an increase of over 100%.
Core assets in gateway cities have, to date, been the most sought-after asset class, but as confidence returns following the downturn and more people look to profit from the reconstruction of Europe, there is increasing competition for investments, which is pushing prices higher and returns lower. Those keen to protect yields are therefore looking for new ways to invest that produce better returns.
Asian investors who favour direct asset investment are diversifying into areas where there is less competition but nevertheless a compelling investment case. Assets in secondary British cities such as Manchester and Birmingham are seeing increasing interest and data from CBRE showed that 13.5% of the total investment in the Irish hotel sector last year, for example, came from Asia.
For those willing to give up the direct investment approach, there are more options. Investment in listed firms provides greater liquidity and the flexibility to deploy smaller amounts in a diversified portfolio.
Another option is investing in assets where there is a distinct opportunity to add value. This is not an area where it is easy for overseas investors to participate directly unless they have knowledgeable on-the-ground teams that understand the local market. Real estate private equity firms can plug this gap, offering a net after-fee return that is still significantly greater on a risk-adjusted basis than direct investment in a core, yielding asset.
At Patron, we raised around €1bn for our most recent fund to invest in distressed assets in Western Europe. Almost 30% of this came from Asia and the Middle East, which, particularly when compared to a negligible contribution from these territories when we raised our previous fund in 2007, highlights the increasing appetite for investment in European distressed assets and the growing popularity of private equity as a route to achieve this.
It is a trend that we expect to continue.
Keith Breslauer is Managing Director of Patron Capital, the specialist pan-European opportunistic property investor.