Asia attractive to capital as Europe battles ‘polycrisis’

The rash of economic difficulties that now confront the real estate business amount to a “polycrisis”, according to  Alex Jeffrey, the Singapore-based global chief executive of Savills Investment Management.

Speaking at Real Asset Media’s recent event, Outlook 2023: Europe & Asia – Capital, ESG & Key Investment Drivers, staged at Apex Group’s Singapore offices, he explained: “These are all individual crises but they are inter woven. It’s probably one of the most complex pictures that we’ve seen for many years” he said, referring in particular to inflation, interest rate rises, the energy crisis in Europe, and the war in Ukraine.

“As you try and forecast ahead and see what GDP growth is going to be, what inflation will be, it’s almost impossible. I think we should really be kind of humble and honest that it’s almost impossible to make those forecasts.”

“You could say that there’s going to be a recovery in the second half of next year, but we don’t really know, let’s face it. So our view is that investors should probably look at the long term and look at the aspects of real estate that have fundamental supply/demand dynamics.”

“I think there will be pain over the next couple of years that’s undoubtedly the case because equity real estate is generally negatively correlated to rising interest rates in terms of valuations and returns,” Jeffrey said.

Inter regional capital flows are similarly hard to predict but there have been distinct pre- and post-covid trends, according to Valérie Mantot-Groene, regional managing director – Asean Apex Group, Singapore. “The last two or three years have shown that there is more inbound capital, so more coming from outside Asia to Asia than the other way round.”

Inbound capital refers in particular to that from North America. “They are still the leaders in terms of injecting capital into real estate in Asia, they have been doing that for a few years and they just continue,” she said.

However, there has been a fall in the amount of capital originating in Europe, Mantot-Groene said. Furthermore, she said European capital is much more sector and geography specific because most of the capital coming from Europe is institutional capital with a slightly lower risk appetite than that of the pool of money coming from North America.

Geographically, it is the usual suspects benefiting from European Capital, Japan and Australia and no longer China.

North American capital has more diverse targets. “You will obviously see Japan, Australia and Korea but also India is becoming more and more interesting,” she said. India is starting to attract capital that was previously targeting China.

Eric Cheah, Head of Investment Management Asia Pacific Union Investment Real Estate gave the German investor’s perspective.

“We’re looking for more core investment so it’s the yield base is one point of difference and then the perspective of the geographic focus. To take a step back, if you put your money in the bank right now you’re actually getting an interest rate, if you buy a bond you’re actually getting more of a yield than you did before, so that idea of the reallocation of capital is actually taking place people have choices when they’re actually putting their money to use, so I think that kind of environment is really one distinctive change that’s taking place.”

Cheah said that looking at strategic reasons for investing in the Asia Pacific region, the idea of diversification remains valid. “The idea of having a lower correlation relative to your home market still exists, people want to take the benefit of that.”

He said that he believes that there is now more reason for optimism in the region. “It’s not that we are immune to inflationary depression, it’s just that we can be less exposed to the same pressures that are either in Europe or the US.”