Asia Pacific Real Estate investors’ focus is broadening
26 February 2019
Recently, we touched on the transfer of risk that’s underway from West to East, driven by the rising demand for UK and European assets from investors based in the Asia Pacific region. We wanted to further examine the nature of the interest and demand from Asian capital and at how investment strategies are being shaped both by investor focus on diversification at a global level, and also by supply and demand factors specific to the UK and European markets.
Against the complex, varied and fast-evolving background described in our Real Assets piece, both global and local factors are helping to fuel expectations of a rising tide of investment in Real Estate from Asia Pacific – as highlighted by our Emerging Trends in Real Estate: Europe 2019 study, conducted jointly with the Urban Land Institute. Of the 885 real asset professionals we interviewed across 22 European countries, more than two-thirds – 69% - of real estate professionals said they expect capital flows into the UK and Europe from Asia Pacific to increase in the next year.
The UK has been, and is likely to remain, a key beneficiary of this capital flow. However, we also expect strong interest in some of the European countries, for instance, Germany, France, Spain and the Netherlands as Asian investors look to broaden their investment footprint.
…and a varied landscape overall
So, what is driving the ongoing expansion in Asian investment, and where will it go? There’s no single clear-cut answer to these questions.
The common theme across the Asia Pacific investment community is diversification both geographically and as a means to spread risk, boost resilience and bolster returns, but the assets being targeted by these investors vary significantly depending on the particular investor’s strategic objectives.
Many of these investors continue to invest in their home markets and intra-regionally in Asia Pacific. Generally speaking, however, their historical exposure to the UK and European real estate investment has been limited, and this presents the opportunity for these investors to now diversify into these markets.
In terms of the UK, the sterling’s depreciation is playing a role, but in our view it is not the driving factor for investment decisions. Likewise, Brexit is a consideration but these investors are taking a long term view and are looking to the UK and Europe as part of their long term global strategic plan.
There will still be some degree of demand for trophy assets such as landmark London office buildings and five star hotels. But more generally, we see the focus for the Asian investors is broadening, in line with the wider trend towards moving up the risk curve, and seeking real assets with operational characteristics.
“Beds and sheds”
Together, these shifts are seeing real estate investors from Asia focus increasingly on what traditionally were “alternative assets” such as housing and hotels – especially student accommodation. We also believe there is potential for this interest to migrate into the private rented and senior living sectors especially as Asian investors become more familiar with these asset classes in UK and Europe.
The interest in logistics and industrial assets also remains very strong. The interest in logistics and industrial sectors in the UK and Europe reflects consumers’ strong move towards internet retailing which is driving a rising need for warehousing to accommodate storage and delivery of the goods being sold online to the final delivery destination.
These asset classes are perceived as being relatively resilient in the event of a potential Brexit-related slow down in the economy as the fundamentals supporting these assets are grounded in demographics, affordability and the changing nature of the consumer.
Local expertise and talent key to success
For investors who are less familiar with the UK and European markets, accessing local expertise and talent will be essential to ensuring they understand the key trends and developments, as well as the risk & regulatory structures, before developing their market entry strategy into this fast changing but exciting market.
This is reflected in the shift towards these investors seeking partnerships and strategic joint ventures as well as strategic stakes in existing platforms as a means to access pipeline, build scale and achieve efficiencies.
Over the next few years, as the rising volumes of Asia Pacific investment flow into the UK and Europe, we believe we will continue to see diversification, the convergence between real estate and infrastructure, and a move up the risk curve into operational assets, especially as these Asian investors become global investors in their own right.