Real Estate Investor Magazine South Africa July 2018 | Page 56

INSIGHTS
INSIGHTS
Understanding Global
Real Estate Investment
Factors driving cross-border flows
T
he Knight Frank Active Capital Report 2018 was
recently released, focusing on capital superhighways
around the globe. The report aims to highlight which
factors draw investment to a country - by using their gravity
model.
According to the research, the real estate world is global-
ising: “The volume of cross-border transactions has grown by
80% over the past five years, but that increase has been heavily
concentrated within a limited number of locations. In fact, the
top five countries by capital inflows have typically accounted
for well over 60% of total cross-border investment over the
decade.”
The question at the core of the report is simple: why do
small, medium-growth countries like the UK (the top destina-
tion for cross-border capital for six of the past ten years) attract
more capital than larger, faster-growing economies?
Traditional notions dictate that countries with large and
high quality assets, transparency, and fair rule of law will be
more popular with investors. While this remains true, the re-
port sets out to highlight more quantifiable data such as de-
mographic trends and income growth prospects. “If we were
to account for these factors, would we expect some markets
to receive more inbound investment than they do at present?”
ELEMENTS LINKED TO A REDUCED
FLOW OF DIRECT REAL ESTATE IN-
VESTMENT INTO A COUNTRY
Whether the currency of the destination country
had fallen against that of the origin country in the
last three years
Whether the Index of Economic Freedom score in
the destination country is higher than that of the
origin country
Distance between population weighted centres
within the country - greater distance is linked to
lower flow
Whether the destination country had been a colo-
niser of the origin country
Whether the origin country and destination coun-
try had both been former colonies of the same
country
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JULY/AUGUST 2018 SA Real Estate Investor Magazine
That’s where the gravity model comes in. A popular method
in international trade, a gravity model helps to predict the flow
between locations based on economic factors. In the Knight
Frank Report’s case, the focus was on identifying key factors
that explained the most variation in direct real estate invest-
ment flows.
“Of course, some markets have well-understood reasons for
seeing a lower-than-expected volume of inbound investment.
In Canada, for example, the high number of sophisticated, lo-
cally based global investors can effectively “crowd out” demand
from foreign investors. Other countries operate constraints
such as ownership restrictions, which preclude investment
from non-domestic sources,” the report states.
The report further explains that traditional drivers of invest-
ment, including location, language, and colonial ties, will give
way to new drivers such as transparency, market liquidity, and
economic growth. The model used to determine these findings
managed to account for 80% of the variation in investment
flows, making it an interesting tool to use when looking for
new investment locations.
The report also highlights the top themes influencing global
real estate investment. In particular, it draws our attention to
three trends. First, the role of demanding investors: “Institu-
tional investors with long-term liabilities will remain one of
the key forces in global real estate investment, with INREV’s
capital raising survey indicating that global pension funds ac-
counted for over 35% of capital raised for non-listed funds in
2017, followed by insurance companies with 13.2%. Wheth-
er investing directly though their own real estate funds and
vehicles, or indirectly via third parties such as private equity
funds, their pursuit of performance in order to make up the
ground lost following the global financial crisis remains un-
diminished.”
The second factor to look out for pricing. Yields in devel-
oped markets have reached record-lows, prompting the as-
sumption that real estate yields are low because both central
bank interest rates and yields on much larger asset classes,
such as bonds, are also low. Applying the same logic in reverse,
should rising interest rates therefore indicate rising yields?
“Ultimately, yes: but the relationship is not so strong that real
estate yields will move in lockstep with interest rates or bond
yields. For a start, the gap between real estate yields and bond
yields remains large enough to offer a significant cushion –
bond rates can rise by many tens or even hundreds of basis
points before the impact on real estate yields is felt.”
The final point to pay attention to is a broader mix of as-
set classes. While residential and office properties have been
the leaders in cross-border investment, the report highlights
the emergence of classes like logistics. “Which sectors will the
next wave of internationalisation take in? Despite seeing in-
creasing volumes of domestic investment, sectors such as the
private rented sector, retirement living, healthcare and stu-
dent housing currently account for smaller volumes of global
cross-border transactions.
However, they all offer the key ingredient of structural oc-
cupier demand, which ultimately drives return. They will be
attractive sectors for investors who can access these markets
with sufficient scale, either through platform acquisitions or
portfolio creation.”
SA Real Estate Investor Magazine JULY/AUGUST 2018
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