Globalization of office market demands lower entry barrier on foreign capital
By Shawna Yang
It will be surprising for many people to find out that prime office in Singapore is more expensive than in Lower Manhattan. Singapore is known to have a very low political risk, a strong export economy, and a well-known presence as the hub of the South East Asian region.
Countries with positive fundamentals and relatively lower barriers of entry for foreign investors become magnets for foreign capital, resulting in more competition among foreign investors. The Singapore real estate market is such an example. Coupled with positive fundamentals, Singapore’s real estate market practice is considered to be the most transparent Asian market where English is the main language. Pan-Asian real estate funds and European pension money rushed into the Singaporean office market prior to the global financial crisis and drove the prices up in a short period of time.
The Seoul real estate market, perceived to have a stable growth and positive economic fundamentals, will also be further investigated by the various types of growing global real estate investment capital in the near future. The market will be able to attract more foreign capital, as the practices and property management system evolve to become more graspable by foreign investors.
Increasing cross-border investment
Major foreign capital real estate investments began in the Seoul market around the Asian financial crisis of 1998. Investors such as Lone Star (U.S.) and the GIC (Government of Singapore Investment Corporation) invested into distressed core properties. Since then, German, Dutch, Chinese, Japanese and other investors have entered the market either directly or via real estate funds managed by international management companies.
Having witnessed the first generation of foreign real estate investors’ success in Seoul, local Korean institutional investors began investing in the early 2000s. Armed with more information and project sourcing capacity, Korean investors have become more competitive in the current market.
They are also looking for opportunities to own real estate assets in overseas locations. The National Pension Service (NPS) of Korea recently made acquisitions of prime buildings in the key global cities of London, Tokyo, Sydney, Berlin and Paris. Others have invested in Kuala Lumpur, San Francisco, Shanghai, Hong Kong, Singapore, and Sao Paulo real estate.
There is a saying that real estate is all about location, location, location. Sourcing a good-location investment opportunity at competitive pricing requires local expertise. But though it used to be perceived as a very locally-driven industry, real estate has been undergoing globalization for the past 10 to 20 years.
So, why is globalization happening in the field of real estate investment?
First, it’s the increasing amount of investment capital available.
As the world population ages, pension funds, insurance companies’ principal investors have accumulated more capital over the years. Also resource-wealthy countries’ sovereign wealth funds have become substantial. The amount of capital available for investment from these sources has become so immense, and investment managers need to search for alternative targets around the globe. In efforts to diversify their investments, managers have allocated more capital toward “Alternative Investment” (alternative to traditional investment targets such as stock markets and fixed income returns).
A good example close to home is the NPS. It is the fourth largest pension fund in the world and is one of the most active global real estate investors since the global financial crisis of 2008. As of 2010, out of approximately 320 trillion won in assets under management, over 6 trillion won is invested into real estate, representing close to 2 percent of total asset allocation. Compared with less than 1 percent allocation in the pre-global crisis period, this represents a huge increase.
Second, there is a growing need for diversifying the return profile on real estate investments.
European and North American investors’ domestic real estate investment provided them with stable but moderate returns. Higher returns were expected from large emerging and fast growing economies of Asia.
The investors from stabilized economies began seeking for higher return opportunities in foreign countries in the 1990s. China began offering more lenient policies to attract foreign capital for development of infrastructure and real estate projects. India began opening its doors to foreign investors in the mid-2000s.
On the other hand, Asian investors from fast growing economies with accumulated wealth have recently been seeking for stabilized core real estate assets in cities such as New York and London. The volume of global investment activities have seen an increasing trend since the 2000s, peaking in 2007 prior to the financial crisis. Since then, activity has slowly rebounded and is expected to gain momentum soon. (See chart)
Out of global investment volumes, the share of cross-border transactions ranged between 8 percent and 35 percent among four regions in 2010. Cross-border activity is taking an increasingly significant share of real estate investment.
Real estate investment transactions take place in off-market situations, where information and resources are not readily available as they would be in open and transparent stock markets. Sourcing a “good deal” requires a professional local network and access to relevant information. Understanding of each key local market is a must for cross-border investors to win deals in an increasingly competitive global market. Local capital tends to be better armed with such information and with enough funding power, poses strong competition to foreign capital.
Capital chasing real estate investment opportunities are no longer geographically bound.
For iconic prime office buildings in key global cities, it has become very common to attract bidders from many different countries. Global real estate capital will continue to venture into unfamiliar territories for better returns and for a diversified investment portfolio.