Institutions and private funds are stepping up their pace of entrance into global real estate markets. While the stock markets have experienced heightened volatility over the past few years, the relative stability of income provided by real estate related investment is attractive to investors. Over the coming decade we would expect a larger proportion of long-term investment capital to flow into real estate than has been witnessed in recent decades, along with the growing recognition of the attractiveness of real estate within the context of a multi-asset portfolio. Also, pools of capital which are being collected for investment in new markets and non-traditional sectors will be substantially enlarged above and beyond present levels.
Real Estate Capital Is Going Beyond Home Markets
Going global is becoming the mainstream in the real estate investment market, as growth in the volume of cross-border transactions is fuelled by a number of phenomena:
- The rise of international institutional investors with heightened participation across different regions;
- Economies of the BRIC Group (Brazil, Russia, India and China) are growing at a rapid rate, and this phenomenon is attracting an influx of international capital into emerging markets; and
- The growing power of the petrodollars, which are increasingly flowing out of the Middle East and towards global real estate markets.
Funds from North America and Australia are penetrating into the global market at a rapid rate - in 2006, North American investors made about US$45-billion notable investments outside of the Americas, with allocation increased by 131% for Europe and 95% for Asia y-o-y. In the same year, Australian Listed Property Trusts (LPTs) invested A$13 billion (US$10 billion) abroad, up from A$8.5 billion in 2005. The strong growth stories in the Asian markets have attracted the attention of international investment funds. Emerging giant China is now among the top destinations for global real estate capital in Asia. European investors continued to predominantly engage in cross-border transactions in Euro zone, with intra-regional investment led by UK and German funds.
Increased Institutional involvement in Real Estate Investment
Institutional investors of almost every type are playing an increasingly dominant role in real estate investment worldwide, along with the growth of real estate private equity funds, real estate investment trusts (REITs) and stronger interests from financial institutions and unlisted trusts. In the second quarter of 2007, Morgan Stanley announced its intention to acquire Australia's massive listed vehicle Investa and US-based Crescent Real Estate Equities. The investment giant also teamed up with Government of Singapore Investment and Soros' hedge fund Quantum to acquire stakes in an Indian real estate developer, Anant Raj Industries, pointing to the potential for new batch of mega mergers and acquisitions occurring at a global level.
The strong desire of individual investors to accumulate real assets through investing in trust products and equity funds is also fueling the boom in institutional real estate investment. In particular, the launch of REIT or quasi-REIT products in several new jurisdictions is infusing substantial fresh capital from smaller, retail investors into the real estate investment market.
This trend towards enlarged institutional involvement has also been paralleled by the recent emergence of mega-private equity funds, mostly based in the United States, a number of which have financial clout on the order of Blackstone to acquire even the largest public real estate portfolios. In addition to the emergence of these mega funds, globally the range and nature of real estate investment vehicles being offered by investment managers is generally on the rise.
Widening investment targets with marked shift towards active investment strategies
The universe of investable real estate is expected to grow in tandem with the prolonged growth of real estate investment markets worldwide as opportunistic funds are set to increase allocations to emerging markets and non-core property sectors so as to avoid concentrating on the already over-crowded mature markets and are prepared to seek higher returns at the expense of bearing more risk.
Asia is expected to remain the net recipient of real estate capital being targeted at emerging markets, with China and India being the leading beneficiaries but with more investors seeking suitable investments in small but fast growing economies such as Vietnam and the Philippines. In Europe, significant change in the ownership of commercial properties is taking place with more owner-occupied properties transferred to the hands of investors who are more active in seeking out potential investment opportunities in countries outside the UK and Sweden, the traditionally most liquid European markets. At the same time, a number of less mature Eastern European markets are already experiencing very high level of investor interest - albeit that they remain a relatively small part of the European market overall, accounting for less than 5% of investment turnover in any one year. In the Americas, there is growing interest in Mexico, Brazil and Argentina, although not as yet generating the degree of excitement which has been created by emerging markets in Asia.
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