Everyone wants to know where the smart money is going, and if you’re a novice or somehow slightly green investor, the “smart money” is what seasoned, more heavily involved investors say it is. Like Knight Frank’s annual Wealth Report, Colliers International produces its Global Investor Sentiment Report each year to help determine which direction investment winds are blowing, and how strong they are.
Prognosticators have already spoken about what the global real estate landscape is likely to look like this year. Overall volumes are expected to rise despite a slowing Chinese economy and deflation fears in the Eurozone. But often overlooked is the emphasis on local capital. Institutional and individual alike, staying close to home is what 74 percent of investors plan on for 2015. Only 14 percent of Colliers’ survey of international respondents planned to look abroad. That said, 46 percent of total global investing originates in Asia.
Which is not to say Europe, North America and emerging markets in South America and Africa aren’t getting any attention. According to Colliers, investors looking away from home are in search of liquidity making the UK, France and Germany leading locations in Europe, and the United States still the prime location in the Americas.
Risk, however, is the most curious trend for those in the know in 2015. Almost 60 percent of Colliers’ respondents said their appetite for risk was higher than in the past — as was the expectation for higher internal rates of return (IRR). The biggest gamblers? African and Middle Eastern investors, who also expect returns over 11 percent. A pipe dream? Perhaps, but continuing low interest rates in the immediate future and a tolerance for debt by institutional investors could make risky investments pay off.
Weak sentiment for Central and Eastern Europe — Russia and Ukraine — is expected, but Poland, the Czech Republic, Romania and Serbia are all poised to have banner 2015s. Office space in central business districts and residential property will be the focus in the coming 12 months. Though still a preferred target, high prices in the UK have hurt yields in some cases and investors are increasingly looking beyond central London to other parts of the city and the country. Even still, the majority of investors (63 percent) expect the UK to remain the world’s prime investment location. In South America office and retail space will dominate the markets despite concerns over the continent’s economic performance faltering and logistics is the way to go in the US, where momentum is carrying major urban centres along for the ride. Sentiment is strong with the US and the market as a whole is expected to have a strong year.
But as has been the case for the past five years or so, Asia is where a lot of the activity is happening. Seventy-four percent of Asian investors plan on expanding portfolios within the region, and risk isn’t out of the question either. Strong market fundamentals and long-term economic growth are fuelling the interest in Asia, and even with a managed slowdown, China is still the top destination for investment.
Behind China are Japan, Australia, Hong Kong and Singapore, which, like London, remain strong investments because, “Transparency and liquidity are there … [They] rate high on transparency and that keeps them popular,” says Simon Lo, Colliers head of research and advisory in Hong Kong. Also notable is that, “Lots of HNWI are relocating to Singapore. It’s become the Switzerland of the East,” says Terence Tang, managing director, capital markets and investment services. Office and residential property are the preferred sectors, and, “Interestingly, globally investors like logistics for the steady returns,” adds Lo.
“Over the last ten years, Asia has presented a lot of growth because of China. Most investors are comfortable looking at new builds in China and emerging markets. But with the slowdown we’re seeing a lot less new interest from equity funds,” remarks Tang. As Tang sees it, new builds offer slightly better IRR, but gone are the days of 20 percent returns; 10 percent may be the new standard, hence the rush to innovation. “More [investors] are looking at that 10 percent in 2015. This is happening everywhere. The world is levelling out,” he theorises.
Singaporean and Hong Kong investors are among Asia’s most active globally, and Chinese players are increasing their presence as well. So what do their crystal balls tell them? For Chinese buyers, global gateway cities (London, New York, San Francisco, Sydney) dominate, while more experienced Hongkongers are investigating those cities’ fringes, and Singaporeans are bullish on Tokyo. For those curious as to where inbound investment to that trinity is heading, keep an eye on office property (core and non-core), revitalised industrial space, business parks and logistics. Asia is still attractive because average cap rates are roughly 5.4 percent versus bond rates (1.5 to 2.8 percent), so real estate still makes investment sense. Tang is quick to note that challenges for this year will be combating cooling measures, finding strong returns and the smart investments. “These apply to every investor in the world … All investors are finding it difficult to find a return that is attractive to them. They need to be innovative and find new approaches and value add to make it work. Good sourcing and behaviour are related.”