Investors from China, Hong Kong, South Korea, Malaysia, and Singapore are leading a transformational change in European property markets that will have as much impact as the high-tech revolution, a group of experts said at the ULI Real Estate Trends Conference in London.
An East-to-West investment drive, twice the level of capital flowing in the other direction, is set to be a long-term source of equity for Europe, panelists said last month.
Real Capital Analytics reports that Asia Pacific investors have plowed €21 billion (US$28.6 billion) into Europe this year through March, and a desire to diversify assets overseas is predicted to continue apace as the Asia Pacific region builds exposure to real estate as a defensive play against relatively high exposure in bonds and equities.
Real estate services firm CBRE estimates that 1.7 percent of total allocations by Asian institutions are to the real estate sector, compared with 6 percent for U.S. insurance companies. If Asian investors increase their allocation only to 2.5 to 3.5 percent in the next five years, it could mean an additional $150 billion in direct and indirect investment in real estate globally, CBRE said.
Paul Boursican, head of international capital markets at property services firm DTZ, said significant purchasers over the coming months would be Singaporean real estate investment trusts (REITs), which have been looking to Japan after failing to find adequate assets in their own market and are now looking to Europe.
Chinese life insurance companies, following a liberalization of rules in October 2012 that allowed them to invest overseas, will also feature prominently in big-ticket investments in the coming months, Boursican predicted.
Direct Asia Pacific investment in Europe is a recent phenomenon: only a handful of groups, such as the Government of Singapore Investment Corporation and Temasek, have established a track record in the region. Previously investors would typically invest via funds if looking to allocate capital to Europe.
“This is transformational [for the market]. It will have as big an impact as technology,” said Peter Hobbs managing director of research for real estate analysis firm IPD. He said he knows of ten Chinese life insurance companies seeking assets in London.
“Chinese life insurance companies are the fastest-growing segment of Asian capital in real estate,” said Boursican. “I would not be surprised if these groups invested another £2 billion [US$3.4 billion] in London by the end of the year and perhaps another £1 billion [US$1.7 billion] in France.” Industrial conglomerates from Hong Kong as well as Taiwanese investors will also become a prominent feature of the market in the months to come, he said.
Recent significant deals by Chinese life insurance companies in Europe include the £260 million (US$446 million) purchase of the Lloyds building in the City of London by Ping An in April 2013, the first major deal by an insurance company in Europe.
But Chinese investors are focused on more than simply acquiring real estate assets: they are seeking property that confers an additional brand-building advantage.
“They are seeking angles. They don’t just want assets, they want platforms. That is important,” said Boursican. “When Dalian Wanda Group says it will develop a hotel, it is because [it has a] hotel brand it wants to export. When the Chinese moved to take over resort operator Club Med, it was because they want to create Club Med in China.”
Chinese conglomerate Dalian Wanda revealed plans in March to develop a 250,000-square-foot (23,000 sq m) luxury hotel project at One Nine Elms in Vauxhall, south London—its first hotel outside its home market. It is thought the move is linked to the growing numbers of wealthy Chinese tourists in the U.K. capital. At the same time, Dalian Wanda purchased luxury yacht maker Sunseeker last year, further bolstering its reputation as a luxury brand.
The panel said Europe is attracting more new investment from the Asia Pacific region than the United States because it presents a greater opportunity to take advantage of market inefficiencies. “I am selling Europe really hard compared to U.S. colleagues,” said Michael Cochran, senior managing director at Wells Fargo–owned broker Eastdil Secured. “We see Europe as a bit more of an opportunity from that perspective: as markets are not as efficient as in the U.S., that allows us to introduce Asian players to this market.
“A lot of the time, it is difficult to create investment platforms here, so many new investors here want to have [a joint venture] partner,” added Cochran. “We see pricing here relative to U.S. is better; [internal rate of return] is less of a focus.”
In terms of where people would invest, Cochran said London is currently the focus of 75 percent of potential investment capital, ten times the figure for Paris, but added that was unlikely to be sustained.
As an example of this diversification away from London, Hong Kong–based Kai Yuan Holdings in June announced plans to buy the five-star Marriott Hotel Champs Elysées in Paris for €345 million (US$475 million).
“There’s a lot of capital to be put to work. It is a matter of how to deliver it,” Cochran said. “China tripled its activities in the last year alone and will dwarf other players.”