ULI conference: Non-traditional sources of capital set to grow

Non-traditional sources of capital for real estate investment will grow in the coming years as traditional ones such as banks come under further deleveraging and regulatory pressure, a ULI trends conference in Amsterdam heard on Wednesday.

John Forbes, real estate funds partner at PricewaterhouseCoopers, said that sovereign wealth funds (SWFs) from Asia and the Middle East will become a growing source of new capital and a lasting force to be reckoned with. 'They are driven by raw material wealth and that will continue,' he said. One effect of their increased activity in Europe will be that the already short supply of core real estate assets is likely to dwindle even further, he said. 'Sovereign players such as the National Pension Service of Korea take core assets out of the market to hold as long-term investments, not to trade,' Forbes said. This will lead to investment capital 'drifting into other things', he noted. The challenge, he said, is to create more core real estate product.

On a broader note, Forbes said that world trade patterns in the coming two decades will see China overtake the US as the world's biggest economy by 2030 'and this will pile the money on SWFs', he said. Private investment from Asia will also increase. Forbes pointed to a PwC report published on Thursday which forecasts that Singapore will overtake Zurich and London as the world hub for private banking in the next two years.

In Europe, the barrage of regulatory change facing banks and insurers will lead to a 'prolonged period of uncertainty' for the real estate sector, Forbes said. The upcoming Basel III bank regulations and the Solvency II rules affecting insurers will 'dramatically change' the way these institutions treat real estate debt, he said. Signs that the introduction of the Solvency II regime may be delayed by a year to 2014 will add to the uncertainty in the industry. Moreover, banks still have to work through a huge amount of legacy loans and this will stifle any new lending to real estate, he said. 'A huge amount of capital is going to be sucked into existing assets, not into the creation of new real estate,' Forbes said.