The weight of global capital seeking deployment in global real estate markets has risen over the first six months of this year – up by an estimated $20bn to $340bn according to DTZ – but the tipping point for the asset class’s relative attractiveness compared to other asset classes looks to be drawing near.
DTZ’s latest assessment of global capital flows chasing real estate investments, in its biannual The Great Wall of Money report, reveals a $10bn increase in global equity seeking deployment over the first six months of the year, to $167bn, which reflects a 20% annual increase on mid-2012, or $28bn.
The continued upward trend of capital seeking investment in global real estate markets reflects a number of variables, all supported by a broad improvement in economic outlook in the major economies as well as rising investor confidence as downside risks subside.
One of the most significant factors which have driven this tide of positivity towards real estate, particularly in select European markets, is one which runs the risk of receding before too long: namely, sustained low bond yields.
Hans Vrensen, global head of research at DTZ, said: “With bond yields remaining low, most global property markets offer historically attractive relative returns. This attractiveness has helped funds raise an additional $24bn in fresh capital over the last six months.”
While Vrensen’s comments explain the continued trend over the first six months of this year, the period covering the latest DTZ research published today, the extent to which current market dynamics endure is open to some debate.
Central bank policies such as Quantitative Easing (QE) have artificially increased the attractiveness of real estate, relative to fixed income on a relative-value basis, in the eyes of multi-asset class investors.
The large scale asset purchase programme of predominantly gilts and government-backed securities increased the value of the assets purchased, which lowers their yield.
The eventual unwinding of QE in the US and throughout Europe is likely to reverse this positive trend, to some extent, with bond yields once again rising, reducing real estate’s relative attractiveness, which is also expected to push out property yields, particularly in prime markets which have benefits from considerable yield compression in recent quarters.
Indeed, co-authors of the report – Nigel Almond, DTZ’s head of strategy research, and analyst Lulu Yang – pointed to this probable outcome of QE unwinding: “The current attractiveness of real estate markets globally reflects the current low bond yield environment.
“Under a scenario in which we see a stronger than expected economic recovery, we could see Central banks respond by pulling quantitative easing sooner than planned with bond yields rising more quickly. Under such a scenario2 rental growth could suffer and yields could rise towards the end of our forecast period making markets less attractive as expected returns fall. This could impact the deployment of capital and fresh equity raising.”
US capital leapfrogs Europe on greater leverage appetite
The three major regions which comprise the headline $167bn in available global equity are all up over the first six months of the year, with the EMEA region coming out on top, at $66bn, followed by the Americas at $57bn, while Asia Pacific makes up the balance with $44bn.
However, an increasing appetite for leverage within the Americas, relative to Europe, sees total capital chasing deployment in the US, Canada and South America leapfrog the EMEA region – with total capital chasing investment in the Americas at $129bn, compared to Europe’s $120bn, reflecting average leverage intentions of 56% and 45%, respectively, according to DTZ.
While these trends are interesting at the global level, these averages, arguably, mask more than they reveal.
The composition of the universe of equity capital captured by DTZ’s The Great Wall of Money The Great Wall of Moneycomprises private equity funds, sovereign wealth funds, listed property companies, segregated and pooled institutional funds, fund of funds, as well as direct holdings by pension fund and insurance companies.
The differing leverage appetite between these types of investors within each region is vast, which is disguised at the average level. For example, opportunity funds’ average leverage is around 60% LTV – but this in itself encompasses a gearing spread of zero to 90%.
Value-added funds are at just under the 60% mark on average – containing a spread of 25% to 80% – while core funds are much lower, at around 40%.
More than half of the total estimated $340bn capital raised, at 55% or $187bn, is targeting a single country, of which the US remains substantially the dominant market, with $149.6bn, or 44% of total capital seeking deployment.
In tied second place are the UK and China, for which around $30.6bn, or 9% of the global total, of capital is currently seeking deployment, followed by Japan, at $20.4bn or 6%, and Germany, at $17bn, at 5%.
Across Europe, close to 60% of capital is focussed towards non-core opportunities with less than a third targeting core.
DTZ’s analysis is based on data derived on nearly 3,000 individual funds.
Asian, Middle Eastern and Canadian sources of capital are now more prevalent in the European market replacing the traditionally dominant US and international players.
Asian investors have been the key net investors into Europe with net flows of €10bn, according to DTZ, accounting for Nearly 60% of the €48bn of foreign capital since the beginning of 2009.
DTZ Almond explains: “Two thirds of this was invested in Central London alone. Central London has been the top city destination for foreign capital flows into Europe, absorbing over a third of all inter-regional investment since 2009.
“Outside of the UK, France and Germany are the next major targets with over 80% of inbound investment into Europe having been concentrated in these three core markets.”
Vrensen adds: “We expect this pattern in inter-regional investment to continue for the foreseeable future. But, we also foresee this new generation Asian Pacific institutional capital playing a more integral role in a wider range of European markets.
“As risk aversion reduces, we expect more investors to diversify away from the limited number of core markets, with plentiful opportunities in mid-sized European markets still offering both attractive pricing and liquidity.”