Why the Flow of Global Capital Isn't Likely to Slow
In the last decade, foreign investors have poured increasing amounts of capital into the US property market, powering a massive increase in acquisitions last year. But now, with prices in many markets passing their pre-financial crisis peaks and a possible economic slowdown lurking, will the river of foreign cash begin to dry up, or flow elsewhere?
Not according to a panel of international investors at DLA Piper's Global Real Estate Summit on May 3, 2016, in Chicago. The panel, moderated by AFIRE Chief Executive James Fetgatter, displayed a diversity of views about global real-estate and investing trends. But the panelists were united in the belief that foreign capital will continue to gravitate toward the US — and a few argued that it could increase.
"There's a lot of money on the sidelines that could generate a fantastic year-end rally," said Martin Bruhl of Union Investment Real Estate GmbH. Many investors, Bruhl said, are waiting out the results of the British referendum on departing the European Union, known as Brexit. If Britain votes to leave the EU, many investors could divert capital from London to New York, he said.
Further political and social unrest in Europe, around immigration and economic issues, could also make the US more attractive to foreign investors more interested in a safe haven for their capital than in generating high returns.
And even as some investors have cooled on the US market due to declining returns, several of the panelists expressed confidence that those investors would be back — once they'd come to terms with the realization that the recent run of double-digit returns is likely coming to an end.
"We've all been totally spoiled by falling cap rates and incredible monetary easing, and it's going to stop," said William Tresham, president of Ivanhoe Cambridge. "Once expectations get reset, volumes will pick up."
Tresham was one of two Canadians on the panel, along with Peter Ballon of the Canada Pension Plan Investment Board. Both said they and other Canadian investors would likely continue with deals in the US, and in Europe, though Ballon noted that the political situation in Europe could make it less attractive.
"When you think of Europe, you don't think high growth, you think stability," he said. "But the minute you introduce instability, you've got the same growth factor with an added risk factor, and that's when pricing gets out of whack."
In both Europe and the US, some of the panelists said investors may get more creative as gateway markets and trophy properties become less attractive. Tinchuck Ng of Athena International Capital said she'd watch to see whether Chinese investors, in particular, will continue to move from trophy properties to other asset classes after their initial major gateway city acquisitions. But in any case, she expects that lower returns in the US won't deter many Chinese investors.
"They don't look at US real estate purely from a return perspective," she said. "There are other considerations such as capital diversification outside of China, corporate benefit towards other business lines."
Those investors could also continue putting capital to work in Europe, despite the current uncertainty, said Nils Hubener, chief investment officer at BNP Paribas Real Estate Investment Management. He said investors will continue to be attracted to the higher barriers of entry and the rule of law in Europe.
"There are a lot of dark clouds, but the interest from investors in coming to Europe is not broken," he said. "We see a lot more analysis, investors moving toward locations that are out of the spotlight."
The panelists' agreement on the continued strength of foreign investment represents the general consensus among CRE executives, according to DLA Piper's 2016 State of the Market Survey, which was released at the summit. Sixty-four percent of survey respondents said foreign direct investment in US real estate would be stronger than ever in the next 12 months.