PGIM: Cross-border flows to rise again

In the face of political uncertainty and higher pricing, investors slowed cross-border capital investments in 2016, but volume will pick back up this year, PGIM Real Estate said in its annual investment report.

The Madison, New Jersey-based real estate investment manager projected an 8 percent increase in foreign direct investment in 2016, to $377 billion. Cross-border investment hit a 10-year high in 2007, at $434 billion, and grew by an average of 5 percent annually over the last five years.

However, cross-border capital flow dropped by 18 percent in 2016, to just under $350 billion, from $426 billion the year before. That decrease “simply reflects a normalization after an unusually strong 2015,” PGIM said in the report.

Last year, home-biased investing increased, with the share of cross-border investment decreasing to just under 30 percent of global volume “in response to factors such as heightened market volatility at the start of the year, concerns about China’s growth outlook, forecast downgrades and surprise election results,” the report said.

The UK’s vote to leave the European Union, along with “perceptions of elevated pricing and a lack of stock availability” led to a 41 percent drop in cross-border investment. By region, the volume of capital going into the area from Europe and the US decreased. Asia markets however, particularly the office and apartment sectors, benefitted from a 16 percent jump in FDI driven by intra-regional trade increases.

In the new year, PGIM predicted that 2016’s trend of decreased FDI will reverse.

“Return correlations have fallen sharply, which should encourage investors seeking diversification,” the report said. “Paradoxically, the emergence of so-called ‘de-globalization’ – as some key policymakers move towards increased protectionism to reflect shifting political preferences – implies greater opportunities for investors willing to look beyond domestic markets.”

PGIM also predicted that investors will take more interest in value-add strategies, along with non-traditional real estate strategies like self-storage and data centers, as investors look for income-yielding investments.

The firm managed $66.9 billion as of September 30, according to its website.