Global Capital Flows: Vaccines critical to investor choice

Investors have capital to deploy after the pandemic-induced hiatus. But where will it go? Nicol Dynes reports.

Foreign investors are poised to return to Europe as soon as travel restrictions due to the pandemic are lifted. But when choosing where to go, investors are likely to take into account the strength of the economy and how a country has dealt with the pandemic.

“I believe the economic stimulus will be more of a key factor over the longer term. In the short term, it’s about how the vaccination programme gets rolled out,” says Kim Politzer, director, head of research, European real estate, at Fidelity International.

At the moment, the UK is way ahead and there is some concern over how long EU countries are taking with their vaccine programmes.

“Our clients tell us that vaccine programmes are a big driver in the short term,” says Tom Leahy, director of market analysis, EMEA, at Real Capital Analytics. “But according to estimates the EU is two months behind the UK. Real estate is relatively slow-moving, so two months won’t make a big difference. The vaccine rollout will turn out to be more marginal than it looks now.”

Similarly, in 2020 investor decisions were guided by how governments were responding to the health emergency.

‘Japanese capital has a policy of America first, to coin a phrase. They like the transparency, the availability of data and having one language to deal with. They are risk-averse and cautious, so Europe is a harder call for them to make.’

Andy Watson, Europa Capital 

“Last year investors favoured Germany and the Netherlands because they acted quickly and provided economic support, and they held back from the UK and France that seemed more challenged,” says Politzer.

Domestic help

This year, however, the slow vaccine rollout and travel restrictions in Germany have made finding and concluding deals very difficult. “There are so many investors who want to come to Germany but can’t because of the pandemic and the quarantine rules,” says Tobias Schultheiß, managing partner of Blackbird Real Estate. “There’s a lot of money out there which can’t get in.”

Despite the problems in dealing with the pandemic France, like Norway and Switzerland, has benefitted from having a strong domestic investor base, while there was a sharper slowdown in investment activity in countries such as Spain and Portugal, which rely on foreign investors.

“Domestic investors represent two thirds of the Paris investor market and they have a competitive edge when it comes to closing transactions,” says Andy Watson, partner at Europa Capital. “Paris remains a great opportunity because it’s all about infrastructure and what it can do for real estate, with the Grand Paris project and the Olympics driving housing construction and creating logistics corridors.”

Meanwhile the US, under a new administration and with a huge stimulus package, is attracting attention. “There are forces in the US that are beneficial to real estate, signs of growth and inflationary pressure,” says Jim Costello, senior vice president at Real Capital Analytics. “If interest rates go up because there’s a strong recovery, that could drive demand for property.”

Rush for deals in US

Already in December 2020 transactional activity hit an all-time high, adds Costello, but “the reason was the rush to complete deals before the Biden administration came in, for fear of changes in the tax policy”.

And while cross-border activity froze last year in Europe, the US market did not see a marked change. “Foreign capital did not leave the US, where it was easier to get around than in Europe,” says Costello.

‘There are so many investors who want to come to Germany but can’t because of the pandemic and the quarantine rules. There’s a lot of money out there which can’t get in.’

Tobias Schultheiß, Blackbird Real Estate

Japanese investors’ preferred destination has always been the US and that is unlikely to change. “Japanese capital has a policy of America first, to coin a phrase,” says Watson. “They like the transparency, the availability of data and having one language to deal with. They are risk-averse and cautious, so Europe is a harder call for them to make.”

The UK market has seen five years of decline triggered by Brexit uncertainty. 2015, the year before the referendum, was the peak for investment volumes, while in the rest of Europe it was 2019, according to RCA data. 

“The UK is still number one for cross-border investments, but the pace slowed considerably and pricing was affected as well,” says Leahy. “While Paris accelerated, London was static because liquidity fell. It used to be first in the liquidity rankings, but now it is 16th.”

The negative trend could now be reversed, however, as the Brexit uncertainty is over and the vaccine rollout is going well. “The Brexit deal has brought some clarity and it will encourage investments, although I’m not sure that longer term it’s a positive for the market,” Leahy says. “London has lagged most other major real estate markets, so there’s an opportunity for some catching up this year, as it remains an attractive global city. We could be heading into the ‘roaring twenties’.”

Europe holds up, but US and Asia remain subdued

There are positive signs about the year ahead for European real estate. “Early indications for 2021 show that Europe is holding up better, helped by domestic activity, while the US is slow and AsiaPac is still weak,” says Simon Mallinson, executive managing director, EMEA & APAC, at Real Capital Analytics. “It’s early days but it’s a positive outlook so far.”

There is no distress to be seen in Europe yet, except in retail and hotels, prices are showing relative resilience, sellers are holding firm and lenders are showing forbearance, Mallinson adds.

“The supply/demand balance means that prices will hold or even increase, and there’s a lot of capital out there wanting to invest in real estate. Capital is plentiful, but opportunities are not.”

2021 follows 2020

The first glimpse of 2021 is in line with what happened last year, when volumes were down by 33% in the US, 26% in Europe and by only 23% in Asia due to some recovery in a few markets such as Australia and South Korea.

“Asia never got going in 2020, while the US started the year with a record January and ended with a record December, but was hit hard in April,” says Mallinson. “EMEA was resilient until the summer and then declined, because it has a longer pipeline of deals and longer times to conclude transactions than the US. Some markets were extremely strong, like Norway, which recorded a 140% increase.”

‘The supply/demand balance means that prices will hold or even increase, and there’s a lot of capital out there wanting to invest in real estate. Capital is plentiful, but opportunities are not.’

Simon Mallinson, Real Capital Analytics

The main positive is that, despite the severe lockdowns, there was no GFC-style liquidity crunch last year and deals still got done in the most difficult of circumstances, especially in the ‘beds, sheds and meds’ sectors.

Residential in its various forms, logistics, medical offices and life sciences all did well. The industrial sector was the best-performing sector with a 7% decline, while hotels were hit the hardest, dropping 65%.

Investors made different allocation choices. “In the US industrial overtook the office sector for the first time,” explains Mallinson. “In EMEA, apartments have cemented their number two spot behind offices, while in AsiaPac office is first, but industrial has overtaken retail to claim the number two spot.” 

Investment managers still dominate the field and the listed sector is still strong, but private equity nearly halved its activity in 2020. “Private equity tends to be more global now, their business model is skewed to cross-border activity, so they struggled last year,” he adds. “It is easier to underwrite a core deal from your desk than to find opportunistic, value-add deals.”