Until recently, both Asian and Middle Eastern investors had been ramping up their real estate presence in Europe considerably.
In fact, Asian investors had only put to work €1.1 billion in Europe in 2008, but that number shot up to a peak of €13.1 billion in 2013, according to data from Real Capital Analytics. The figures also reveal that Middle Eastern investors have been keen on the European growth story, upping their exposure from a low of €2.8 billion in 2009 to €8.3 billion in 2015 year to date.
However, speculation is rife that the volume of real estate capital flowing into Europe from these two regions might tail off in light of macroeconomic turbulence back home.
Middle Eastern sovereign wealth funds have scaled back in the market today due to low oil pricing, chief executive of London-based industrial property firm M7, Richard Croft, told delegates at PERE’s Global Investor Forum: Amsterdam.
He said there appears to be a strong correlation between oil prices and global cross-border real estate investment flows from the Middle East into Europe, as the investors are “less visible” in the latter region.
Data seems to back Croft’s contention: as global oil prices have plunged in the last 15 months, European investment volumes from Middle Eastern investors plummeted from €7.4 billon in the first half of the year to €750 million in the third quarter, according to the RCA data. This might be a blip in the market, but could also be the start of a longer term slowdown, given the assumption of a lag between movement in oil prices and investment.
Many market commentators have expected to see a similar slowdown from Asian investors, especially the Chinese, as the country grapples with an unsettling economic and financial environment and the government imposes limits on outbound investment.
Anecdotally, PERE heard that Asian investors were pressing the pause button on overseas real estate investing.
“Deals wobbled during the China stock market volatility and Asian investors were more cautious. We did see some big deals complete during this time, but they were already a really long way down the track,” said Tim Horrocks, head of continental Europe at TH Real Estate.
Yet, despite the negative sentiment, investment from Asia has actually increased, with the region seeing the strongest third-quarter volume – €4 billion – of investment into Europe in the past two years, said the RCA data.
Future Asian investment into Europe could be coming in the form of platform deals. At the conference, Collin Lau, founder of Bei Capital and former head of real estate investment at China Investment Corporation, told delegates in Amsterdam that minority stakes in international real estate platforms would be a smart move for Chinese institutional investors.
In the keynote speech at the conference, Lau said that Chinese investors are less interested in real estate fund investing than they are in partnering with third-party managers or investing directly in property.
“They should continue to explore partnerships with like-minded LPs for club deals, or in minority stakes in platforms,” said Lau. “That would help Chinese investors learn a lot.”
However, Lau stressed a minority stake in a platform would be the more suitable route, as there are invariably issues on ensuring a smooth cultural fit when a Chinese investor becomes the majority owner of a property.
“It’s a challenge to get the right alignment and not see resignation after resignation,” he said. “It is much better to go in as a strategic partner.”
Some Chinese investors have already been active in platform investing. Back in July, Fosun Property, the Shanghai-based real estate investment and management platform of the Chinese conglomerate Fosun Group, acquired a majority stake in the London-based private equity real estate firm Resolution Property in a bid to expand its overseas property holdings.
One European fund manager at the conference told PERE they had been approached by Chinese institutions for similar deals, and had heard that rival groups also had meetings about potential tie-ups.
“It wasn’t right for us at the time,” said the fund manager, speaking under the condition of anonymity. “But, it will become more common and there will be those who start thinking about how to work with these investors.”