We are delighted to present this second edition of
                                     Active Capital, in which we share our analysis, insight
                                     and opinions on the trends shaping global real estate.

                                                            Drawing on local expertise from across our
                                                            global network, we explore the emerging capital
                                                            superhighways, and identify the factors exerting
                                                            the greatest gravitational pull on a country’s
                                                            inbound capital flows, before turning to active
                                                            purchasers and the property sectors on which
                                                            they are focused.
                                                            This is a marketplace supported by a recovery in
                                                            global growth that is still in full swing. It is one
                                                            that is re-internationalising as it attracts ever-
                                                            greater investor demand.
                                                            However, it is also a mature cycle in many locations
                                     Andrew Sim             and, with macroeconomic change on the horizon,
                                                            we believe it has never been more important to
                                     Head of Global
                                     Capital Markets        understand both the nuances within the sector as
                                                            well as the wider financial market context.
  Active Capital
                                                            Knight Frank remains at the forefront of global
  2018                                                      capital markets. We hope you find this edition of
                                                            Active Capital even more thought-provoking than
  Commissioned by:                                          its predecessor, and enjoy reading it as much as we
                                                            enjoyed compiling it.
  Andrew Sim

  Written by Knight Frank’s global
  research team, including:
  Anthony Duggan
  Will Matthews
  James Roberts
  Flora Harley
                                                            It has never been more important to
  Liam Bailey                                               understand both the nuances within
  James Culley                                              the sector as well as the wider financial
  Nicholas Holt                                             market context.

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                                                                                                                                                       Dynamic                                                  28-31

                                                                                                                                                                                                                the world

                                                                                                                               Front cover artwork:    24	
                                                                                                                                                          Take five: what to watch out for in the
                                                                                                                                      Johanna Pikver      Asia-Pacific logistics markets
                                                                                                                                                             Logistics property is one of the hottest sectors
                                                                                                                                                             in commercial real estate. While the opportunity

Data and                                                       8-11
                                                               Mapping the capital
                                                                                                                                                             in Western markets is focused on capturing
                                                                                                                                                             evolving retail trends, in Asia-Pacific

capital flows
                                                                superhighways                                                                                markets there is much more in the mix, from
                                                                                                                                                             manufacturing to infrastructure to global trade.

                                                                                                                                                          Building the world
  Shifting capital flows
                                                                                                                                                             Growing demand from investors for properties
         Cross-border investment grew by more than                                                                                                           overseas has been one of the defining features
         10% in 2017 and, for the first time ever, the Asia-                                                                                                 of the world’s leading urban housing markets.
         Pacific region was responsible for more of it than                                                                                                  Where the investor has led, developers have
         anywhere else. What can the emerging trends of                                                                                                      followed. We provide our view on the outlook for
         the past year tell us about the outlook?                                                                                                            cross-border development in a selection of the
                                                                                                                                                             world’s leading cities.
  Mapping the capital superhighways
         Which regions and countries are the most prolific
         exporters of real estate capital? Where is this
         investment directed, and what sort of assets is it
         targeting? We analyse the major capital routes
         of the present, and give our predictions for those
         of the future.

   From the Knight Frank Data Lab:
   the rules of attraction
         Real estate investment is increasingly global,
         but the bulk of cross-border purchases still take
         place within a relatively small group of markets.
         Is this narrow focus still warranted given the
         often intense competition for assets in these
         locations, and increasing levels of transparency
         seen elsewhere? Using our in-house gravity
         model, we identify a number of markets that we
         believe deserve to see higher volumes of inward
         investment than they do at present.

                                                                                      Sources                                                                                                                               The
                                                                                      of demand                                                                                                                             outlook
                                                                                         Titans at the gate: private                                                                                                        32	
                                                                                                                                                                                                                               Strategic direction:
                                                                                         equity raises the stakes                                                                                                              the outlook for global
                                                                                                                                                                                                                               real estate investment
                                                                                           Huge amounts of private equity
                                                                                           capital has been raised in recent                                                                                                         What are the themes that will shape the
                                                                                           years, in ever-larger funds: over                                                                                                         increasingly international market over the
                                                                                           a quarter of a trillion dollars is now                                                                                                    coming years?
                                                                                           waiting to be spent on real estate.
                                                                                           What is behind this rise in scale,                                                                                               38	
                                                                                                                                                                                                                               Global economic trends
                                                                                           and what does it mean for the                                                                                                       and risk radar
                                                                                           future of real estate equity funds,                                                                                                       A decade on from the global financial crisis,
                                                                                           both great and small?                                                                                                                     how sustainable is the maturing recovery and
                                                                                                                                                                                                                                     what are the risks on the horizon?
                                                                                         The wealth of nations
                                                                                           With economic recovery in full                                                                                                   42	
                                                                                                                                                                                                                               About Knight Frank
                                                                                           swing, global wealth is on a
                                                                                           seemingly unstoppable rise.                                                                                                      43	
                                                                                           More of it is being invested
                                                                                           in real estate, either directly,
                                                                                           or via allocations from asset
                                                                                           managers. We analyse data from
                                                                                           our Wealth Report to understand
                                                                                           where future growth in private
                                                                                           wealth will come from over the
               Titans at the gate:                                                         next five years, and identify three                                                                                              20-23
 private equity raises the stakes                                                          trends for the year ahead.                                                                                                       The wealth of nations

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                                                                                                                                                                                                                                          Global investment volumes

      capital f lows
                                                                                                                                           When it comes to cross-border capital inflows,
                                                                                                                                           the US, UK and Germany held the top three spots
                                                                                                                                           in 2017, as they have done since 2010. However,                                                    Cross-border
                                                                                                                                           with a great variety of investors currently targeting
                                                                                                                                           continental European markets, it is no surprise
                                                                                                                                           to see the likes of Spain, France, Austria and the
                                                                                                                                           Netherlands rising up the ranks too. Continental
                                                                                                                                           markets will remain compelling as, despite strong                                              $1,100bn

                                                                                                                                           pricing, opportunities to capture future rental
Globally, total real estate investment activity edged up by a
                                                                                                                                           growth remain.
modest 3% during 2017, belying a market that felt far more active,
and with good reason: while volumes traded saw little change,                                                                              Beyond the limelight, but no less interesting for
                                                                                                                                           that, are markets that are yet to see significant                                              $1,000bn
the source, destination and even the rationale behind cross-                                                                               volumes of inbound real estate investment.
border capital flows is evolving rapidly.                                                                                                  These are countries where the overall volume of
                                                                                                                                           capital inflows remain relatively low, and volatile,
                                                                                                                                           but are ultimately growing very quickly: India is
                                                                                                                                           perhaps the standout example of recent years,                                                  $900bn
                                                                                                                                           with investment growing by 600% since 2012
SHIFTING SOURCES                                                                 Long-term investors such as pension funds and             to reach US$2.6 billion in 2017.
The global real estate market is re-                                             sovereign wealth funds have also returned to the                                                                             Beyond the
internationalising. In 2017, 32% of all                                          cross-border market at scale, the latter doubling         The next part of our research is all about                         limelight, but no
                                                       For the first time                                                                  analysing these trends, both at the macro
transactions by volume involved cross-border                                     investment in 2017 vs. 2016. This is part of a                                                                               less interesting,
                                                       ever, Europe and                                                                    and micro level. We begin by identifying the
purchases, up from 25% during 2009-2011.                                         structural shift which has seen growth in capital                                                                            are markets
However, this isn’t simply a return to the levels
                                                       North America                                                                       ‘capital superhighways’ - the main sources and
                                                                                 flows from these investor groups far outstrip                                                                                that are yet to
and mix of pre-global financial crisis trade. While    were eclipsed             other investor types over the past decade.                destinations of real estate capital at a continental
                                                       by Asia-Pacific,                                                                    and country level. We then use our in-house                        see significant
Europe and North America continue to invest
similar volumes of capital abroad, for the first       from which                The most significant fall in cross-border flows           gravity model (see page 13) to determine                           volumes of
time ever they were eclipsed by Asia-Pacific,          US$90 billion             has been from real estate investment trusts and           locations that we believe could be set for higher                  inbound real
from which US$90 billion flowed in 2017.               flowed in 2017.           other listed property companies. The volume of            inbound investment.                                                estate investment.
                                                                                 assets purchased has fallen by around half over
Which region will be the greatest exporter of                                    the past two years.
cross-border capital flows in 2018? As we explore
later, a slowdown in outbound capital from China
and Hong Kong might suggest that Asia will                                                                                                 The evolving sources of cross-border capital
slip back temporarily. However, we believe the         Cross-border capital outflows by source, 2017
extent of this fall will be countered by potential                                                                                              Asia-Pacific                    Europe                        Middle East
for greater investment from Japan, South Korea                                                                  Source: Knight Frank/RCA                                                                                                  $500bn
and other major Asian markets. Much of this            US$1.1bn                                                                                 North America                   Others
demand will emanate from mature institutions,          South America
used to acquiring assets globally, and more likely
                                                                                                                         US$4.1bn          US$120bn
to consider opportunities beyond well-known
gateway markets than investors looking overseas
for the first time.
US investors will continue to acquire significant
                                                                                                                        US$9.1bn           US$100bn

volumes of real estate overseas, although the                                                                          Middle East
impact of domestic tax changes will offer up
compelling opportunities for investing at home.                                                                                            US$80bn
A similar situation will face European investors,
who currently benefit from the prospect of strong
returns in their local markets. Outbound capital                                                                    US$80.9bn
from the Middle East has slowed in recent years,                                                                   North America           US$60bn
but this may be about to change as rising oil prices
boost revenues and sovereign wealth inflows.
Although the overall volume of cross-border                                                                                                US$40bn
capital flows has changed little since 2016, there
has been a clear shift in the type of investors                                                                                                                                                                                           $100bn
active in the market. In volume terms, the biggest                                                                      US$83.3bn
increase has come from private equity funds,                                                                               Europe
which after a period building up dry powder,
increased their cross-border investment by over
60% in 2017. We expect 2018 volumes will show                                                                                              US$0bn                                                                                         $0bn
them to be even more active: US$124 billion of



















fresh capital was raised in 2017, and many of the
North American funds behind the largest of these                                                                      US$90.0bn
pools have a global or European remit.                                                                                Asia-Pacific         Source: Knight Frank/RCA                                                                       Source: Knight Frank/RCA

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Mapping the capital
                                                                                                                Our detailed analysis of capital flows
                                       Inbound capital
                                       Investment volumes in 2017 by major region                               begins by looking at where investment
                                                                                                                has taken place globally.


                                             Domestic                                                           At the continental level, North America continues
                                                                                                                to see a greater volume of activity than anywhere
                                                                                                                else, although the vast majority is from domestic
                                                                                                                investors, with less than 15% of volume accounted
                                                                                                                for by purchasers from abroad.
                                                                                                                By contrast, more than half of the investment
                                                                                                                that took place in Europe involved a buyer from
                                                                                                                a different country. Part of the reason for this
                                                                                                                is the high volume of cross-border trading that
                                                                                                                takes place between European countries: intra-
                                                                                                                continental trade in Europe reached US$65 billion
                                                                                                                in 2017. But that is far from the whole story. In
                                                                                                                particular, it is clear that Asia’s role is growing
                                                                                                                rapidly, both as a source of outbound capital flows,
                                                                                                                and as a destination for inward investment. Indeed,
                                                                                                                both Asia-Pacific investment into Europe and
                                                                                                                European investment into Asia-Pacific doubled
                                                                                                                during the year.
                                                                                                                In the longer term, we predict the share of
                                                                                                                overseas investment in Asia-Pacific markets will
                                                                                                                gradually begin to catch up with that seen in
                                                                                                                Europe. However, in the short term, so strong
                                                                                                                is the focus from both Asia-Pacific and North
                                                                                                                American investors that Europe’s cross-border
                                                                                                                share could also continue to grow.

                                                                          US$143.5bn US$299.4bn US$391.4bn
                                                                                                                The volume of intra-continental investment
                        Tom Grimbert   Source: Knight Frank/RCA            Asia- Pacific Europe North America   that took place in Europe during 2017.

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                                                                           While much cross-border activity takes place at the intra-
Cross-border flows from regions into countries                             continental level (such as wider Asian investment into China or         Cross-border flows from different types of investors
Where the country of origin is not the same as the country of investment   Australia, or Canadian investment into the US), it is also clear that   Excluding developments
                                                                           a number of markets have broad appeal to investors across the
                                                                           world. As we discuss on pages 12 to 15, our view is that this mix
Source: Knight Frank/RCA                                                   of countries will become more diverse over time.

                                                                                                                                                   There is significant variation in the foreign    A similar mix of markets is also targeted     their respective lists in 2017 largely           Source: Knight Frank/RCA
ORIGIN                                                                                                          DESTINATIONS                       real estate acquired by different types          by private equity and sovereign wealth        due to a few multi-billion dollar platform
                                                                                                                                                   of investors. The approach taken by              funds, but the difference is that rapid       transactions. Such activity will certainly
CONTINENT                                                                                                       TOP FIVE PER REGION                developers and institutional investors has       growth in the scale of purchases made         remain a feature of the global market
                                                                                                                                                   tended to see them invest consistently           by these investors makes the ranking          over the coming years, and will be
                                                                                                                Australia            US$6.3bn      in a relatively broad range of established,      of destinations increasingly volatile         exacerbated by the high volume of capital
                                                                                                                                                   liquid markets.                                  from year to year. Spanish apartments         inflows that such funds are seeing.
                                                                                                                                                                                                    and UK industrial real estate topped
                                                                                                                Bulgaria             US$0.8bn

                                                                                                                China                US$8.8bn
                                                                                                                France                US$5.1bn
US$90.0bn                                                                                                       Germany              US$6.8bn
                                                                                                                                     US$0.9bn                                                      TOP FIVE                                                                             TOP FIVE
                                                                                                                                                                                                   DESTINATIONS                                                                         DESTINATIONS

                                                                                                                                                                                                   $6.3bn United States,                                                               $5.3bn	
                                                                                                                Hong Kong            US$0.3bn                                                              office                                                                              apartment
                                                                                                                Hungary              US$0.3bn
                                                                                                                                                                                                          United States,                                                                $5.2bn	
                                                                                                                Netherlands          US$5.3bn                                                             apartment                                                                            office

                                                                                                                Panama               US$0.3bn
                                                                                                                                                                                                          United Kingdom,                                                               $3.5bn Finland,
                                                                                                                                                                                                          office                                                                                office
                                                                                                                Poland                US$1.3bn

Europe                                                                                                          Romania              US$0.3bn
                                                                                                                                                                                                          United Kingdom,                                                               $2.2bn	
US$83.3bn                                                                                                       Spain                US$0.3bn
                                                                                                                                                                                                          hotel                                                                                office
                                                                                                                                                                                                   $1.3bn Germany,                                                                     $1.7bn	
                                                                                                                United Kingdom       US$0.4bn
                                                                                                                                    US$19.6bn                                                              retail                                                                              office
                                                                                                                                     US$6.8bn      Developers                                                                                   Private equity

                                                                                                                United States       US$19.8bn
                                                                                                                                    US$13.0bn                                                      TOP FIVE                                                                             TOP FIVE
                                                                                                                                    US$14.0bn                                                      DESTINATIONS                                                                         DESTINATIONS
Middle East                                                                                                                          US$0.4bn
                                                                                                                                                                                                   $10.6bn	United States,                                                              $5.1bn	
                                                                                                                                                                                                                                                                                               United Kingdom,
North America                                                                                                                                                                                               office                                                                             industrial
US$80.9bn                                                                                                                                                                                          $9.1bn	
                                                                                                                                                                                                          Germany,                                                                      $2.5bn	
                                                                                                                                                                                                          office                                                                               industrial
                                                                                                                Other                US$0.9bn
                                                                                                                                                                                                   $7.2bn United Kingdom,                                                              $2.2bn	
                                                                                                                                                                                                                                                                                               United States,
                                                                                                                                    US$29.0bn                                                              office                                                                              office

                                                                                                                                                                                                          Australia,                                                                    $2.1bn France,
                                                                                                                                                                                                          hotel                                                                                 industrial

                                                                                                                                                   Institutional                                   $3.9bn	
                                                                                                                                                                                                          United States,                        Sovereign                               $1.6bn	
                                                                                                                                                   investors                                              retail                                wealth funds                                   industrial
South America

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                                                                                                                                                       THE GRAVITY MODEL
                                                                                                                                                                                                                    North America
                                                                                                                                                       The opportunity for additional inbound investment

                                                                                                                                                                                                                    Potential additional annual
                                                                                                                                                                                                                    cross-border inflows:

                                     The rules of                                                                                                                                                                   South and Central America
From the
Knight Frank
                                                                                                                                                                                                                    Chile, Colombia, Mexico, Peru

data lab:
                                                                                                                                                                                                                    Combined potential additional
                                                                                                                                                                                                                    annual cross-border inflows:
Why do some countries receive more inbound real estate investment than
others? What drives these cross-border flows – and should some markets
be getting more inward investment than they currently do? Our gravity model
sets out to find the answers.

The world of real estate is globalising.                                                      Gravity models are common in the field of
The volume of cross-border transactions has                                                   international trade, helping to predict the flows
grown by 80% over the past five years, but that                                               between locations based on mainly economic
increase has been heavily concentrated within           Interestingly, the                    factors, yet there has been little application of the
a limited number of locations. In fact, the top         income tax rate                       technique to real estate investment.1                    Western Europe (large)
five countries by capital inflows have typically        and the number
accounted for well over 60% of total cross-border       of days it takes                      By testing the model with a large number of              Countries:
                                                                                                                                                       Germany, France, Spain
investment over the decade. The UK has been the         to complete a                         different inputs, we were able to refine it to the
top destination for cross-border capital for six of     property deal                         point where it explains 80% of the variation in
the past ten years.                                     were positively                       annual investment flows between countries. As a          Combined potential additional annual cross-border inflows:
                                                                                              sense check, investment volumes for the US and           US$5.6bn
So why do relatively small, medium growth               correlated with
                                                                                              UK - arguably the most developed cross-border
countries such as the UK attract more inbound           deal flow.
                                                                                              markets – were predicted to within a few per cent
capital than larger or faster growing rivals? The                                                                                                      Western Europe (small/medium)
                                                                                              of actual levels.
answers are well rehearsed: they benefit from a
significant market size, with large and high quality                                          We explored around 40 variables for this model,          Countries:
assets, good levels of transparency, consistency in                                           carefully analysing the importance of each while         Austria, Belgium, Denmark, Ireland, Netherlands,
                                                                                                                                                       Switzerland, Sweden
the rule of law, to name just a few. Of course there                                          bearing in mind factors such as the likely high
are also softer factors too, such as familiarity, and                                         level of correlation between the variables.
these often play an equally valid role in the choice                                                                                                   Combined potential additional annual cross-border inflows:
of investment location, particularly for many first-                                          For this version of the model we focused on              US$7.2bn
time overseas investors.                                                                      identifying the key factors that explained the most
                                                                                              variation in direct real estate investment flows.
But is there a danger that accepted notions of                                                Many of the factors that we initially identified         Middle East
attractive investment markets overshadow more                                                 were discarded due to high correlation with other
quantifiable data on factors such as demographic                                              key factors such as GDP. Variables that were             Countries:
trends or income growth prospects? If we were to                                                                                                       Israel, Saudi Arabia, United Arab Emirates
                                                                                              theoretically promising such as the country’s GINI
account for these factors, would we expect some                                               coefficient (which shows wealth distribution), or
markets to receive more inbound investment than                                               using volume of flight routes between countries          Combined potential additional annual cross-border inflows:
they do at present?                                                                           as opposed to a pure physical distance separation,       US$1.7bn

                                                                                              were excluded as they were found to add no
                                                                                              improvement to the existing model.
In order to put the question to the test, we have                                                                                                      Emerging Asia
developed our own version of a gravity model                                                  Interestingly, the income tax rate and the number
                                                                                              of days it takes to complete a property deal             Countries:
to analyse cross-border real estate investment                                                                                                         Indonesia, Malaysia, Philippines, Thailand
inflows. The aim was to identify markets that                                                 were positively correlated with deal flow. These                                                                           of the variation in annual
currently receive less inbound capital than                                                   variables are likely to be acting as proxies for other                                                                     investment flows between
                                                                                              factors such as a country’s economic health or           Combined potential additional annual cross-border inflows:        countries is explained by
their demographic, economic and business                1T
                                                          he main exception to this is the
                                                         work carried out by McAllister and
                                                                                              level of development in the eyes of an investor.         US$3.1bn
environment rankings might suggest.                      Nanda of Henley Business School.                                                                                                                                our model

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                                                        THE MODEL IN DETAIL                                   WE FOUND THAT THE BEST PREDICTORS                   The general equation2 for a
                                                        Past studies have tended to focus on analysing
                                                        the total amount of direct real estate flows into
                                                                                                              OF CROSS-BORDER INVESTMENT INTO                     production constrained gravity
                                                                                                                                                                  model is:
                                                        countries, rather than on the flow of direct real     A COUNTRY INCLUDED:
                                                        estate investment between an/the origin country
                                                        and destination country. We have used a spatial
                                                        interaction model, also called a gravity model, to
                                                        analyse these flows.                                      volume and growth of the destination
There are a number of regions                                                                                     country’s GDP per capita
                                                        Such models have long been used to predict levels
that could see higher levels of                         of cross-border investment and trade. They start                                                          Where:
cross-border inflows.                                   from the premise that there are certain factors           whether the destination country was in
                                                                                                                                                                         is the direct real estate flow between
                                                        that can generate investment in one country, and          the European Union                                     origin country/and destination
                                                        certain factors that can draw that investment                                                                    country
FUTURE HOTSPOTS                                         towards a specific destination. In addition, there
                                                                                                                  percentage of MSCI’s Real Estate Index                 is a vector of attributes relating to
Comparing the volume of inflows predicted by            is a cost, usually physical distance or a monetary
the model with the actual volume of transactions        cost, which grows with the measurable separation          coverage                                               the attractiveness or otherwise of all
                                                                                                                                                                         destination countries
seen in 2017 gives an idea of the theoretical           between origin and destination country.
potential for additional investment. The results                                                                  whether the destination country had been               is the physical distance between the
                                                        For this particular research, which is part of a
showed that there are a number of countries and                                                                   a colony of the origin country
                                                                                                                                                                         two countries, based upon weighted
                                                        wider study, we have focused on the destination                                                                  population country centres
regions that might reasonably be expected to see
                                                        aspect of direct real estate investment flows by
significantly higher levels of cross-border inflows                                                                                                                      is a matrix of coefficients to be
                                                        using an origin-constrained spatial interaction           whether the countries were contiguous
each year, based on the factors that typically                                                                                                                           estimated by the model.
                                                        model. We were interested in identifying which
drive inbound investment. In the graphic on the
                                                        factors best predict the flow of direct real estate
previous page, we have grouped these countries by                                                                 percentage of shared common religious
                                                        investment as well as using the resulting model
region and indicated their combined potential for                                                                 worship amongst the population
                                                        to analyse countries that were over- or under-
additional annual investment.
                                                        invested in according to the model. We can then
Of course, some markets have well-understood            look at these countries to see if there are obvious       whether the countries shared an
reasons for seeing a lower-than-expected volume         reasons that explain the findings.
                                                                                                                  ethnographic language.
of inbound investment.
                                                        Data used in the model was sourced from the
In Canada, for example, the high number of              World Bank, The Heritage Foundation, MSCI
sophisticated, locally based global investors can       and the CEPII research project.
effectively “crowd out” demand from foreign
                                                        The model produced a highly satisfactory
investors. Other countries operate constraints
                                                        outcome in that it explained over 80% of the                                                              Where:
such as ownership restrictions, which preclude
                                                        variation in investment flows. The final model
investment from non-domestic sources.                                                                         ELEMENTS THAT WERE LINKED                                  is a balancing factor to ensure that
                                                        found that shared ethnographic elements such as
                                                                                                                                                                         the flow estimates from each origin
Fundamentally, however, the model accords               common official language, religion and a colonial
with our outlook for global capital flows. We do        history increased the amount of direct real estate
                                                                                                              TO A REDUCED FLOW OF DIRECT REAL ESTATE                    sum to the known origin country
not envisage the demand for real estate in the          investment between countries. Not surprisingly, a     INVESTMENT INTO A COUNTRY INCLUDED:                        As we are using Poisson regression
established European market slowing in the short        country’s economic productivity and wealth were
                                                                                                                                                                         to estimate our model we can
term, but we recognise that the hunt for returns is     found to be linked to the volume of investment
                                                                                                                                                                         transform the general equation by
causing investors to give greater consideration to      that was likely to be received by that country.           whether the currency of the destination                taking natural logarithms of each
emerging markets. Our model demonstrates that                                                                                                                            side to form the equation.
                                                        We found that the greater the dispersion                  country had fallen against that of the origin
there is a quantifiable logic to these trends.
                                                        between the origin and destination countries’             country in the last three years
Few of the hurdles to inbound investment are            scores in the Index of Economic Freedom, the
insurmountable in the longer term. We predict           lower the investment between those countries.             whether the Index of Economic Freedom
that the fixed or binary factors currently identified   Currency fluctuations also played an important
                                                                                                                  score in the destination country is higher
as drivers of investment, such as location,             role in predicting the flows between countries.
                                                                                                                  than that of the origin country
language and colonial ties, will become less            Countries that share a border with each other
important over time. Instead, variable factors such     were more likely to see greater investment levels,                                                        Where:
as transparency, economic growth and market             which ties in with the finding that as the physical       the distance between population weighted
liquidity will play a stronger role in determining      distance grew between two countries the flow of           centres within the country, with greater               is the poisson distributed mean of
the volumes of capital inflows to real estate.          real estate investment fell.                              distance being linked to lower flow                    direct real estate flows between
                                                                                                                                                                         countries i and j
                                                                                                                  whether the destination country had                    is a constant
                                                                                                                  been a coloniser of the origin country                 is a fixed effect variable to ensure
                                                                                                                                                                         the flow estimates from each origin
                                                        We predict that the fixed or binary                       whether the origin and destination                     sum to the known origin country
                                                        factors currently identified as drivers of                country had both been former colonies                  totals
                                                        investment, such as location, language                    of the same country.
                                                        and colonial ties, will become less
                                                                                                                                                                    or further details see https://rpubs.
                                                        important over time.                                                                                       com/adam_dennett/259068

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                         Titans at the gate:
                         The rise of the real
                         estate megafunds
                         The biggest private real estate funds are getting bigger, leaving
                         a long tail of smaller rivals. What is fuelling this consolidation,
                         and what does the pursuit of scale hold for the future?

                         Left:                   AN INDUSTRY OF GIANTS
                         Burj Khalifa, Dubai
                                                                                                        equity investment managers can offer, as well as
                         Image:                  The private equity industry has thrived in recent      the potential for less bureaucracy and faster deal-
                         Clay Banks              years: since 2012 there has been over                  making as well as diversification.
                                                 US$3.6 trillion of private capital raised.
                                                                                                        The type of funds that have been successful
                                                 Traditional private equity, in the form of buyout
                                                                                                        in raising capital has evolved as the real estate
                                                 funds, still represents the largest share of the
                                                                                                        cycle has matured. Today, with yields on directly
                                                 market, but real estate is firmly in second place.
                                                                                                        held real estate at or near record lows in many
                                                 Real estate-focused private equity has seen its        developed markets, there is a recognition that the
                                                 own rapid expansion during the global real estate      years of truly exceptional returns from property
                                                 recovery of the past eight years. Data from            are over for now, at least in certain locations.
                                                 Preqin shows that at US$565 billion in mid-            Against this backdrop, some investors have sought
                                                 2017, assets under management have more than           to maintain expected performance by investing
                                                 doubled since 2009, and while capital raising          in vehicles that are further up the risk curve. In
                                                 slowed in 2016 and 2017, this did not prevent the      Q1 2018 only US$0.6 billion was raised for funds
                                                 volume of dry powder (funds allocated to real          targeting core property, while over US$20 billion
                                                 estate but as yet unspent) from reaching a record      was raised for opportunistic funds.
                                                 US$266 billion at the end of March 2018. Today,
                                                 numerous funds have upwards of US$10 billion           Increasing risk has not been the only approach,
                                                 under management.                                      however. Some investors have turned to real estate
                                                                                                        debt funds as a defensive play, reasoning that
                                                 WHY REAL ESTATE?                                       lenders are less exposed to the impact of asset
                                                                                                        value fluctuations than asset owners. Real estate
                                                 Real estate funds have attracted capital for
                                                                                                        debt funds raised over US$28 billion in 2017,
                                                 a variety of reasons, including the promise
                                                                                                        the highest volume on record.
                                                 of diversification benefits, as a means to put
                                                 relatively inexpensive debt to work, and most
                                                                                                        CONSOLIDATE TO DOMINATE
                                                 obviously, the lure of healthy performance. In the
                                                 three years to June 2017, private real estate funds    As well as changes driven by the timing of
                                                 saw annualised returns of 10.7%, outperforming         the real estate market cycle, there is a deeper
                                                 all other types of private capital bar traditional     structural shift at work: the consolidation of
                                                 private equity.                                        capital into larger and larger funds. The biggest
                                                                                                        funds are continuing to grow rapidly, creating a
                                                 However, there are clear nuances among investor        consolidation at the top, followed by a long tail
Unspent capital                                  types. Institutions, such as pension funds,            of smaller funds.
targeting real estate                            have sought to close a funding gap created or
                                                 exacerbated in the years after the financial crisis.   In recent years, the number of real estate funds

                         US$690m                 They have allocated capital to private real estate
                                                 funds hoping for both strong returns and a
                                                                                                        closed each quarter has declined, but the average
                                                                                                        volume of capital raised in these funds has risen:
                         the average size        greater degree of income stability than is offered     in 2016 the average was US$370 million, but by
                         of fund close in        by many competing asset classes. Others, such          Q1 2018 it had risen to US$690 million. What’s
                         Q1 2018                 as family offices, value the privacy that private      more, this growth has not been evenly distributed.

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                                                                                                                                                                                                                                    The largest funds have continued to expand                                                                                                                                         relatively more heavily on smaller funds with
Equity fund purchases                                                                                                                                                                                                               rapidly in size, creating a consolidation effect at                                                                                                                                fewer staff. Perhaps most importantly, scale has
                                                                                                                                                                                                                                    one end of the scale, and a long tail of smaller                                                                                                                                   not imposed a performance penalty.
                                                                                                                                                                                                                                    funds at the other.
                                                                                                                                                                                                                                                                                                                                                                                                                       THE FUTURE: CHALLENGES OF SCALE
                                        Cross-border                                                                                                                                                                                According to Preqin, firms that have raised funds
                                                                                                                                                                                                                                    of US$1 billion or more in size since 2013 have                                                                                                                                    The trend towards larger funds has further to run
                                        Domestic                                                                                                                                                                                    secured approximately half the total capital raised                                                                                                                                and, as if to prove the point, 2018 has begun with
                                                                                                                                                                                                                                    in the period, despite representing less than 10%                                                                                                                                  a number of record-breaking fund raises. Is the
                                                                                                                                                                                                                                    of the number of funds closed. As a result, the                                                                                                                                    race for scale unique to real estate private equity?
                                                                                                                                                                                                                                    market share left over for smaller funds has seen                                                                                                                                  No. In fact, the shift is even more pronounced in
                                                                                                                                                                                                                                    fierce competition for capital.                                                                                                                                                    traditional buy-out private equity. But real estate
                                                                                                                                                                                                                                                                                                                                                                                                                       funds that have raised very large amounts of
                                                                44%                    The majority of real estate investment still takes place in
                                                                                       the country in which the fund is domiciled. However, at                                                                                      WHAT HAS DRIVEN THE SHIFT                                                                                                                                                          money nevertheless face a number of challenges.
                                                                                       44% the share of cross-border investment in 2017 was                                                                                         TO LARGER FUNDS?                                                                                                                                                                   First and foremost is the need to deploy capital
                                                                                       the highest since 2009.
                                                                                                                                                          The largest funds
                                                                                                                                                          have continued                                                            One reason is that since the financial crisis,                                                                                                                                     and make a return in relatively short order (funds
                                                                                       We expect this share to remain elevated, as North                  to expand rapidly                                                         institutional investors in private equity funds have                                                                                                                               typically have a five-to seven-year life from close).
                                                                                       American funds are attracted to healthy returns on                 in size, creating                                                         been more selective, placing a greater emphasis on                                                                                                                                 This means that acquiring many small assets
                                                                56%                    European assets and increasingly raising capital to
                                                                                       deploy in Asian markets.
                                                                                                                                                          a consolidation                                                           track record. This has favoured established names
                                                                                                                                                                                                                                    over smaller new entrants.
                                                                                                                                                                                                                                                                                                                                                                                                                       is unlikely to be practical for the biggest funds.
                                                                                                                                                                                                                                                                                                                                                                                                                       Purchases need to be of large individual assets,
                                                                                                                                                          effect at one end
                                                                                                                                                                                                                                                                                                                                                                                                                       portfolios or even entire real estate businesses –
                                                                                                                                                          of the scale, and a                                                       Another reason is that scale brings efficiencies.                                                                                                                                  a trend that has been growing over the past year.
                                                                                                                                                          long tail of smaller                                                      Raising capital can be a long and sometimes
                                                                                                                                                          funds at the other.                                                       labour-intensive process, and a burden that falls                                                                                                                                  In the longer term, we expect the largest funds
                                                                                                                                                                                                                                                                                                                                                                                                                       to continue to invest along thematic lines, in
Destination of cross-border capital      Sources of cross-border capital
                                                                                                                                                                                                                                                                                                                                                                                                                       the same way that some have targeted logistics
from equity funds                        from equity funds
2017                                                                                                                                                                                                                                                                                                                                                                                                                   and residential property to date. These themes
                                                                                                                                                                                                                                                                                                                                                                                                                       will increasingly border on light infrastructure,
                                                                                                                                                US$80bn                                                                                                                                                                                                                                                                especially for those seeking a way to enter
Although the bulk of cross-border
                                                                                                                                                          Capital raising and fund closures
                                                                                                                                                                                                                                                                                                                                                                                                                       emerging markets, although the nature of
capital emanates from the US, in 2017                                                                                                                                                                                                                                                                                                                                                                                  investible stock means that fund purchases will
                                              Asia                                                                                                        for private equity real estate
three-quarters of it was invested in                                                                                                                                                                                                                                                                                                                                                                                   ultimately remain focused on more traditional
European assets.
                                              Australia & NZ
                                                                                                                                                                                                                                                                                                                                                                                                                       real estate assets in the medium term.
                                                                                                                                                                Average fund size (rolling four quarter average) (LHS)
                                                                                                                                                                                                                                                                                                                                                                                                                       Indeed, suitable deals have to be sourced first,
                                                                                                                                                                Number of funds closed (rolling four quarter average) (RHS)                                                                                                                                                                                            which is not always straightforward.
                                                                                                                                                                                                                                                                                                                                                                                                                       For example, many specialist property sectors
                                              Middle East
                                                                                                                                                                                                                                                                                                                                                                                                                       are appealing to private equity funds on paper,

                                                                                                                                                          US$600m                                                                                                                                                                                                                                                120   but in reality are rendered unviable due to the
                                              North America
                                                                                                                                                                                                                                                                                                                                                                                                                       level of fragmentation in these markets. This is
                                                                                                                                                                                                                                                                                                                                                                                                                       where smaller funds still have a place as product
                     Europe                   South Americas
                                                                                                                                                                                                                                                                                                                                                                                                                       aggregators, especially in niche markets where
                                                                                                                                                US$50bn   US$500m                                                                                                                                                                                                                                                100   a particular asset-level expertise is required.
                                                                                                                                                                                                                                                                                                                                                                                                                       Then there is the risk of sub-optimal deals.
                                                                                                                                                                                                                                                                                                                                                                                                                       An opportunity to deploy capital in significant
                                                                                                                                                                                                                                                                                                                                                                                                                       volumes could be hard to resist, even at the

                                                                                                                                                US$40bn   US$400m                                                                                                                                                                                                                                                80
                                                                                                                                                                                                                                                                                                                                                                                                                       expense of performance. Particularly pertinent
                                                                                                                                                                                                                                                                                                                                                                                                                       in the current market is the danger of overpaying
                                                                                                                                                                                                                                                                                                                                                                                                                       simply to put funds to work, a hazard that private
                     Asia                                                                                                                                                                                                                                                                                                                                                                                              equity investors across all asset classes are alive
                                                                                                                                                          US$300m                                                                                                                                                                                                                                                60
                                                                                                                                                US$30bn                                                                                                                                                                                                                                                                to at present.
                                                                                                                                                                                                                                                                                                                                                                                                                       Looking further ahead, the assembly of world-
                                                                                                                                                                                                                                                                                                                                                                                                                       class real estate platforms has clearly been an
                                                                                                                                                          US$200m                                                                                                                                                                                                                                                40    attractive way to drive returns, but assets must
                                                                                                                                                                                                                                                                                                                                                                                                                       eventually be sold to realise capital. 2017 and 2018

                                                                                                                                                                                                                                                                                                                                                                                                                       to date have seen numerous examples of billion-
                                                                                                                                                                                                                                                                                                                                                                                                                       dollar platform sales, but it is clear that the larger
                     North America
                                                                                                                                                          US$100m                                                                                                                                                                                                                                                20    the entity, the smaller the pool of potential buyers.
                                         investment from                                                                                        US$10bn                                                                                                                                                                                                                                                                Nevertheless, we remain sanguine about demand
                                         equity funds has                                                                                                                                                                                                                                                                                                                                                              for these businesses. Many of today’s most prolific
                                         risen by over 80%                                                                                                                                                                                                                                                                                                                                                             investors – sovereign wealth funds, or Asian
                                         during the past                                                                                                  US$0m                                                                                                                                                                                                                                                  0     capital exporters – were in their infancy just ten
                                         five years. North                                                                                                                                                                                                                                                                                                                                                             years ago. The next decade will see these funds
                                         America remains

                                                                                                                                                                          Mar 2013
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                                                                                                                                                US$0bn                                                                                                                                                                                                                                                                 grow in scale, and more importantly, be joined by
                                         by far the largest











                                                                                                                                                                                                                                                                                                                                                                                                                       wealth created from the current global economic
                                         source, but Asian
                                         capital is growing                                                                                                                                                                                                                                                                                                                                                            expansion and the rising savings of a growing
                     Pacific             at the fastest pace.   Source: Knight Frank/RCA                                                                  Source: Preqin/Knight Frank                                                                                                                                                                                                                                  global middle class.

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                         Wealth of nations:
                         The impact of the changing order
                         The Wealth Report, published annually by Knight Frank, is the market-leading
                         publication for understanding global wealth trends. These trends drive
                         capital to commercial real estate either through direct asset acquisitions or
                         indirectly through increasing allocations to asset managers. What does the
                         latest report tell us about the quantum, routes and sources of demand for
                         commercial real estate?

                         Wealth continues to grow at pace. The number of       growth overall. However, this may prove to be         Growth in number
                         ultra-wealthy individuals with net assets of over     conservative if the recent changes to corporation     of UHNWIs
                         US$50 million rose by 10% last year according to      tax encourage more investment across the US.          by 2022
                         Wealth-X data prepared exclusively for our latest     And while Europe has been overtaken by the
                         Wealth Report. This marks a noticeably stronger       continued momentum of Asia, the next few years
                                                                                                                                     Source: Wealth-X

                         rate of expansion than in the previous five years,    will see a much-improved rate of growth than

                         which recorded a cumulative 18% increase.             the previous five years as the economic position
                                                                               improves. Therefore, expect Europe to be a more
                         WHERE WILL THE MONEY COME FROM NEXT?                  important part of the capital flows landscape than
                         The next five years is expected to see a              in the recent past.
                         continuation of this recent return to growth, with

                         the global population of ultra-wealthy forecast to    WHERE IS THIS PRIVATE CAPITAL HEADING?
                         rise by 40% over the period. This expansion in        A key focus of The Wealth Report is to identify
                         the population of UHNWIs will continue to be          sources and destinations of private capital.
                         driven by North America, which will remain the        This year, for the first time, the report included    Indonesia
                         world’s largest wealth region; here, growth over      analysis of newly released data from the Bank
                         the next five years is expected to be 38%, taking
                                                                               of International Settlements (BIS) on the level
                         the population to just under 60,000.                  of foreign deposits by “non-banks” in their
                         However, Asia is catching up rapidly and the          financial institutions.
                         55% increase expected over the next five years        This provides a unique perspective on the
                         will continue to narrow the gap with the US.          movement of money around the globe and helps
                         Indeed, despite a much-improved rate of growth
                         in Europe last year, the region narrowly lost its
                                                                               us to understand shifting capital flows that are
                                                                               likely to have an influence on real estate markets.   +51%
                         second-place position to Asia in 2017. And with       In particular, it paints a picture of a very active
                         China expected to double its population of ultra-     flow of capital around the world, with foreign        Japan
                         wealthy individuals by 2022 and strong growth         non-bank deposits rising by US$97 billion in the
                         in Japan (+51%), India (+71%), Indonesia (+66%)       year to June 2017 in the 29 locations that provide
                         and Malaysia (+65%), it will now start to pull away   detailed reporting.
                         from Europe.
                                                                               As has been widely noted in the direct real estate
                         At a country level, the US continues to dominate      markets, the movement of Chinese capital has
                         across all wealth bands, with a particularly          been increasing rapidly. This is reflected in         The next five years
                         significant dominance in the demi-billionaire         the BIS data, with Chinese funds deposited in         will see the ultra-
                         space (US$500 million+), with 1,830 individuals       reporting locations (i.e. outside China) rising by    wealthy population
                         versus the nearest closest region, China Mainland,    US$172 billion over the three years to June 2017.     grow by 40%.
                         at 490. This dominance will continue as far ahead     Interestingly, the impact of Chinese government
                         as 2022, with the US forecast to remain the key       policy can also be seen in the data, with Macau       Image:
                         driver of global wealth accumulation at 36%           recently seeing a decline in deposits (down 10%)      Stephen Di Donato

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                                                                                                                   The ultra-wealthy by country
                                                                                                                   Number of individuals worth U$500m+ in 2017
The continued appetite for moving money and increasing
investment cross-border shows no signs of abating.                                                                 Poland                                                                                                                                Czech Republic
At the same time, governments are increasingly looking                                                             10                                                                                                                                    10
to monitor, if not influence, these flows.                                                                                                                                                         Spain
                                                                                                                   Austria                                                                          90
                                                                                                                   20                                                                                                                                    10
                                                                                                                                                               Canada               Switzerland                                Italy
                                                                                                                                                                 270                    250                                     160                      Sweden

                                                                                                                                                                                                           UK                  Germany                   Ireland
                                                                                                                                                                                                           220                   430                     30
                                                                                                                                                                                   50                                                                    Monaco
                                                                                                                                                                                             Taiwan                                                      10
over the 12 months to June 2017, while Hong Kong                                                                                                                                               100
has become increasingly popular with Chinese           Regional change                                                                                                             Indo-                                                                 Cyprus
                                                       in US$50m+ populations                                                                                                      nesia                                                                 10
investors, up by US$19.5 billion in the same period.                                                                                                                               70
                                                                                                                                                                                                                                           France        Belgium
Indeed, the impact of legislation is becoming          Source: Wealth-X                                                                                                                                                                      230         30
an increasingly important factor in the global                                                                                                          United States                            China Mainland            India
                                                                                                                                                             1830                                     490                   200
movement of money. The introduction of the                                         44,000
OECD-inspired Common Reporting Standard                33,520
(CRS), launched in September 2017, for example,                                                                                                                                    Saudi
looks set to be a key influence on global capital      North America                                                                                                               120
flows over the next few years. The BIS data                                                                                                                                                                                              390             20
appears to show that countries not signed up to                                                           47,110   Tanzania 10                                                     UAE                                                                   Philippines
                                                                                                                                                                                                             Hong Kong
this regulation are attracting significant inflows.                                                                                                                                80
                                                                                                                                                                                             South              320
In particular the US, a well-recognised global safe    32,090                      35,180                                                                                                    Korea
                                                                                                                   Botswana 10                                                                100
haven which has not adopted the CRS, saw non-                                                                                                                                                                                                            Argentina
                                                                                                                                                                                    Turkey                                                               20
bank deposits increase by US$122 billion over the                                                                  Kenya 10                                                           50            Singapore
                                                       Europe                                                                                               Egypt                                      100                                               Chile
three years ahead of its implementation, with a                                                                                                              20                                                                Brazil                    40
rise of US$90 billion in the 12 months to the end                                                        57,740    Nigeria 20                                                                                                   130
of June 2017 alone.                                                                                                                                                                      Russia & CIS
                                                                                                                                                                                                                 Mexico                                  Caribbean
                                                                                   35,880                          Uganda 10                                                                 220
                                                                                                                                                                                                                   50                                    10
At the same time, commentators point to                26,250                                                      South Africa 30
other traditional low-tax jurisdictions whose
attractiveness is being eroded by the CRS and                                                                      Zambia 10                              New Zealand        Australia      Israel               Peru     Columbia                     Source: Knight Frank
other transparency measures. Bahamian non-             Asia                                                                                                             20   50             30                   20       10                           Visual:

bank deposits fell by 25% in the last year for
example, while deposits held in the Channel                                                               6,040
Islands also declined, with a 31% fall in Guernsey.    4,880
                                                                                   4,740                           FUTURE TRENDS IN CAPITAL MOVEMENTS                                the domestic tax regime that could also lead
                                                                                                                   This strong rate of wealth creation and                           to a rise in foreign direct investment and, as
GROWING COMPLEXITY                                     Middle East                                                 accumulation will drive increasing demand for                     the incentives for profit shifting are changed,
The continued appetite for moving money and                                                                        real estate investments through both direct asset                 more capital and intellectual property being
increasing investment cross-border shows no                                                                        purchases and also indirectly via deposits in pension             repatriated that was previously being held
signs of abating. At the same time, governments
                                                       5,380                       4,220                  5,470    funds, insurance vehicles and savings products.                   offshore.
are increasingly looking to monitor, if not                                                                        Indeed, as we discuss in our article on so-called              —— European renaissance
influence, these flows. As well as the requirement     Latin America & Caribbean
                                                                                                                   megafunds (see page 18), the strong growth in                     Expect the continued resurgence of strong
for investment diversification, as investors                                                                       wealth accumulation plus the increasing ability of                buying activity from private European buyers
become fully exposed to their local markets, there                                                                 the asset management industry to capture a share                  as wealth growth momentum returns. Over
is an increasing number of regulatory reasons for                                  2,870                           of this growth is driving significant increases in                the last year we have noted a new wave of
this capital to move.                                                                                              assets under management and a rising requirement                  European capital looking to invest outside
                                                       Russia & CIS                                                for real estate as part of these funds.                           their traditional markets, including many that
These include: the impact of capital controls on
                                                                                                                   Over the next year we expect to see:                              are looking overseas for the first time, and
money movements out of countries such as China
                                                                                                                                                                                     expect this trend to gather momentum.
and India; the taxes on foreign buyers increasingly                                                       2,230
                                                       1,900                       1,650                           —— Increasing attractiveness of the US
being implemented in a number of jurisdictions;                                                                       Strong local wealth accumulation will support               —— Asian expansion
the drive for more transparency by governments;        Australasia                                                    domestic demand for real estate and more of                    Asian buyers continue to make waves on
and the attractiveness to some nationalities of                                                                       this capital may stay on-shore over the next                   the world stage as wealth is amassed at pace.
swapping foreign direct investment in return for                                                                      few years. In addition, the BIS data shows just                Capital controls may temper direct real estate
citizenship. Add in a push for more global tax         1,300                        1,190                 1,560       how attractive the US is currently to global                   buying by Chinese capital, as we have seen                      There’s a new
revenue to be “on-shored” rather than held outside                                                                    depositors. We expect further increases in                     in the US in 2017, but the long-term trend                      wave of European
domestic tax regimes, plus the possibility of trade    Africa                                                         inflows from overseas depositors into the US,                  remains one of global expansion, and other                      capital looking to
wars, and we expect capital to continue to move                                                                       with positive economic growth and rising                       parts of Asia, such as Japan, Singapore and                     invest outside their
around the world at speed.                             2012                        2017     PROJECTION    2022        interest rates being supported by changes to                   Malaysia are in expansion mode.                                 traditional markets.

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                         Take five:
                         Asia-Pacific’s industrial
                         and logistics markets
                         Growth in the sector has captivated investors across the world.
                         Demand is particularly high in Asia-Pacific markets, driven by a
                         rapidly evolving mix of factors: here, we take a look at some of
                         the most important.

                         Image:                             Global investment into industrial and logistics
                         Tanjong Pager Terminal,            property has doubled over the past five years,
                                                            reaching US$126 billion, according to data from
                                                            RCA in 2017. A sector traditionally prized for its
                                                            stable income has come to see dynamic capital
                                                            growth, and in some markets logistics facilities
                                                            now attract lower yields than retail property –
                                                            almost unthinkable just a few years ago.
                                                            This evolution has been driven by exceptionally
                                                            broad investor appetite for the sector, with
                                                            demand ranging from private equity vehicles
                                                            and institutional funds to private individuals and
                                                            families. Platform and portfolio transactions have
                                                            become increasingly common among the largest
                                                            investors, such is the desire to gain exposure to
                                                            the sector. Indeed, some of the largest real estate
                                                            transactions of recent years have come via the sale
                                                            of logistics platforms, with CIC’s circa US$14.5
                                                            billion purchase of Blackstone’s Logicor business
                                                            the stand out example.
                                                            What is behind this insatiable demand for the
                                                            sector? In Western markets, a stylised answer
                                                            would highlight a structural rebalancing taking
                                                            place, as changing consumer expectations
                                                            increase retailer demand for modern distribution
                                                            facilities. The relative scarcity of this stock is one
                                                            reason why rental growth forecasts are healthy
                                                            across much of Europe.
                                                            Asia-Pacific markets share many of these
                                                            characteristics too: witness the lightning pace of
                                                            e-commerce growth forecast until 2025 overleaf.
                                                            But, as we explore in our five key trends, these
                         Some of the largest real           locations face an arguably more complex mix of
                         estate transactions of             investment drivers, encompassing global trade,
                         recent years have involved         manufacturing growth and new infrastructure
                         logistics platforms.               opportunities to name just a few.

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                                                                                and Africa, while new transport corridors will
                         01                                                     provide significant opportunities in the logistics      South-East Asia e-commerce market volume 2015-2025, by country
                         China moving up the value chain                        sector as supply chains are upgraded.                   (US$bn)

                         China’s growth over the last 30 years has been         Varying levels of institutional effectiveness
                         largely based on being the workshop of the             and market risks coupled with the sheer scale               2015      2025                                                                                                          Source: Temasek Holdings
                         world, relying on low-cost labour and often heavy      of the vision mean that progress will likely be
                         manufacturing. However, as crystallised in the         patchy and opportunities staggered, although            Total
                         “Made in China 2025” industrial strategy launched      South-East Asian markets, in particular Thailand,
                                                                                                                                        Indonesia       1.7
                         in 2015, policy makers are making a concerted          Malaysia and Cambodia, are already seeing an                                                                                    46.0
                         effort to accelerate the country’s move up the value   uptick in interest across these sectors amongst
                                                                                                                                        Singapore      1.0
                         chain. Known as the Chinese version of Germany’s       Chinese and international manufacturers and                                   5.4
                         “Industrie 4.0”, the aim is for China to compete       real estate developers.                                                1.0
                         globally in manufacturing innovative technologies.                                                                                         8.2
                         In terms of the impact on the built environment,
                         there will be more investment in high-tech
                                                                                04                                                      Thailand
                                                                                Indian tax changes helping
                         business parks, a continued drive to upgrade           modernise the logistics sector                                         0.5
                         existing industrial sites and more investment in                                                                                                 9.7
                         modern logistics facilities, while some of the older   The Goods and Services Tax (GST), regarded                             0.4
                                                                                                                                        Vietnam                     7.5
                         brownfield manufacturing areas, especially in the      as the biggest tax reform in the history of
                         country’s rust belt, could begin to be targeted in a   independent India, was rolled out in 2017. The

                         nascent regeneration strategy. Externally, “Made in    long-awaited move has led to the replacement of
                         China 2025”, along with the rising cost of labour is   numerous federal and state taxes and has brought                                                               Forecast size of e-commerce
                                                                                                                                                                                               market in the ASEAN region
                         already pushing a number of major international        about significant uniformity and certainty in the
                                                                                                                                                                                               2015 to 2025 (US$bn)
                         manufacturers into lower-cost locations, especially    Indian market. Prior to the GST regime, the same
                         in South-East Asia.                                    products were sold at different prices across state
                                                                                borders owing to this lack of uniformity in the tax     Forecast size of e-commerce
                         02                                                     structure. GST has helped eliminate these price
                                                                                                                                        market in the ASEAN region in 2025






                         E-commerce in South-East Asia                          differentials and thus created a level playing field.
                                                                                In the logistics and supply chain industry, this
                         With a challenging fragmented market, a lack
                                                                                is already having a noticeable impact. First, the
                         of easy online payment methods, and a strong
                                                                                removal of check-points has led to the faster
                         shopping mall culture, e-commerce in South-
                         East Asia has not had the same penetration as
                                                                                movement of goods, which is leading to reduced                                Amazon
                                                                                inventory holding levels. Reduced inventory
                         some other regions. However, while the story of
                         e-commerce in China, home to the world’s largest
                                                                                levels directly impact the requirement for                                    logistics                        80
                                                                                warehousing space and facilitate the growth of
                         online retail market, is well documented, the
                         potential in a region of 650 million consumers
                                                                                fewer, larger warehouses that allow companies                                 in Australia
                                                                                to leverage enhanced economies of scale.
                         and a rapidly growing middle class must not
                                                                                Subsequently, in a very fragmented market,
                         be overlooked. The significant investments of
                                                                                developers and logistics players have started to
                         the major Chinese e-commerce giants, Alibaba                                                                   Recently, the next phase of Amazon’s APAC
                                                                                look at warehouse consolidation. All of these
                         and Tencent, into South-East Asia over recent                                                                  strategy commenced with its Australian
                                                                                changes are attracting increasing interest from
                         months have brought the region into sharper                                                                    launch, highly anticipated in a market where           60
                                                                                investors keen to tap into growth in the second
                         focus, and with cross-border payment solutions                                                                 a vast geography and limited national
                                                                                most populous market in the world.
                         being introduced, the scope for growth is
                                                                                                                                        infrastructure network makes achieving
                         significant. As with other markets, as more
                         retail moves online, the growth in demand for          05                                                      rapid delivery times a challenge.
                         modern logistics warehousing around major              Trade tensions
                                                                                                                                        Historically, Australian vendors were
                         urban centres and transport axes will be a strong
                                                                                2018 has been marked by fluctuating trade               able to sell through Amazon but had
                         trend going forward.
                                                                                tensions, especially between the US and                 to send products offshore for shipping                 40

                         03                                                     China. The threat of escalation is forcing
                                                                                some businesses to review their strategies and
                                                                                                                                        and packaging. Now, a new distribution
                                                                                                                                        warehouse just outside Melbourne allows
                         Belt and Road to shift manufacturing                   risk assessment. Major manufacturers who
                         and spur logistics markets                                                                                     this to be a much more streamlined process.
                                                                                could potentially face increased tariffs if the
                                                                                situation deteriorates could look at adjusting
                         Launched in 2013, China’s flagship Belt and Road                                                               These are still early days, and the
                                                                                their supply chains, with many already looking
                         Initiative is already having an impact on markets                                                              commerce giant is yet to launch its Prime
                                                                                at contingencies in case the situation worsens.
                         across the Eurasian continent. Spanning more                                                                   offering – which accounts for 63% of
                                                                                This could have an impact in a number of                                                                       20
                         than 70 countries in Asia, Africa, the Middle                                                                  Amazon members in the US – to Australian
                                                                                ways, with possible reshoring or outsourcing
There is increasing      East and Europe, the BRI has directed significant
                                                                                to markets where any potential tariffs could be         consumers. Amazon’s expansion into other
interest in India        investment into ports, railways, highways, power
                                                                                circumnavigated or assembling components                large markets has typically been followed
from investors           plants and economic zones to the benefit of
                                                                                in different markets to reduce risk. While a            by significant acquisition of logistics space
keen to tap into         destination markets and Chinese contractors.
                                                                                deteriorating situation could have a knock-on           near urban locations, and we expect a
growth in the            While the initial investment is focused                effect on a number of Asia-Pacific economies,
                                                                                                                                        similar pattern to be followed in Australia
second most              on infrastructure, the initiative is likely to         political manoeuvring could resolve the situation
populous market                                                                                                                         over the next few years.                               0
                         help encourage the movement of low-cost                or potentially see increasing engagement on
in the world.            manufacturing towards parts of South-East Asia         other multilateral trade deals.                                                                                           Source: Business Insider/BI Intelligence

26 |   KNIGHTFRANK.COM                                                                                                                                                                                                                                        KNIGHTFRANK.COM            | 27

                                                                              THE GLOBAL PICTURE
                                                                              Cross-border investment is nothing if not volatile.
                                                                              To understand this trend in more detail we have
                                                                              analysed cross-border acquisitions of residential
                                                                              development sites in a selection of key global
                                                                              cities, from each region, over the past four years.
                                                                              Globally, the level of cross-border acquisitions hit

                                                                              its highest level in 2017, having risen by 90% since
                                                                              2014. Despite this new global high, and perhaps
                                                                              reflecting their position at the forefront of this

the world
                                                                              trend, cross-border activity in London, New
                                                                              York, Singapore and Sydney has seen volatility
                                                                              in recent years.
                                                                              This volatility can partially be attributed to slower
                                                                              markets in 2016 and 2017, and also the expansion
                                                                              of cross border development activity into other
Growing demand from investors for international properties has                global cities, such as Los Angeles.
                                                                              At the same time, tighter capital controls in
been one of the defining features of the world’s leading urban                mainland China have led to more scrutiny of
housing markets over recent years. And, where investors lead,                 potential high-profile investments.
developers follow.
                                                                              In New York, cross-border acquisitions have
                                                                              declined over the past two years. However, in
                                                                              the wake of tax reforms at the end of 2017, the
                                                                              attractiveness of New York to international
                        As real estate investment becomes progressively       developers has risen and we expect activity to
One Barangaroo, Crown
Residences, Sydney      more global, so does the activity of developers.      start to pick up again.
                        The strength of this trend is confirmed by the        Activity in London has swung between two
                        fact that the level of cross-border acquisitions of   extremes. In 2015 it was the only market to see a
                        residential development sites across the world        year-on-year decline in cross-border acquisitions,
                        has increased each year since 2014, rising by 26%     with a fall of 26%. However, in 2017 cross-border
                        in 2017 alone.                                        acquisitions increased 82% to a new peak. We
                        International developers are playing an               expect this trend to continue with a significant
                        increasingly influential role in the world’s prime    volume of activity seen in the first quarter of 2018.
                        residential markets. In itself, this process is       In Sydney, it appears that the recently imposed
                        not new – for example, many Hong Kong and             restrictions on foreign buyers, which limit the
                        Singapore based developers have been operating        ability of overseas developers to effectively market
                        outside of their domestic markets for decades.        projects in their home countries, have started to
                        However, the volume of activity has changed           take hold, with acquisitions falling 83% between
                        up a gear with the advent of a new push from          2016 and 2017.
                        developers to target the world’s “gateway markets”,
                        in particular London, New York, Singapore             Singapore has recently seen a surge in activity as
                        and Sydney.                                           year-on-year cross-border acquisitions increased
                                                                              by 204% in 2017. This could be attributed to the
                        In recent years – a leading Indian based developer    housing market’s recent resurgence following the
                        has focused on London; a Shanghai developer           cooling measures that were introduced by the
                        has targeted Los Angeles, New York, London and        government four years ago. This trend is set to
                        Sydney; while Malaysian developers have been          continue: in the first quarter of 2018, cross-border
                        building in Melbourne, London and Singapore.          activity in Singapore equated to almost two-thirds
                        While some international developers are buying        of the 2017 total.
                        sites to develop themselves, others are embarking
                        on joint ventures with domestic developers. For       TOP PLAYERS
                        example, in London there are active developments      Not only are overseas developers active in these
                        by a consortia of UK, Singapore and Malaysian         markets; they have become some of the cities’
                        developers.                                           biggest players.
Globally, the level     International businesses are not only active in       Despite the declines in activity noted above,
of cross-border         the development space as sole developers or           overseas developers have maintained a tight
acquisitions hit        through joint ventures, but also through the          grip in Sydney. Of the top 20 players in the
its highest level       funding of developments. Investment can come          city’s residential development sector, over half
in 2017, having         from financial institutions (including pension        were international, with YMCI (China) leading
risen by 90%            funds, insurance companies and banks), sovereign      the charge. There were a further nine Chinese
since 2014.             wealth funds or wealthy individuals.                  entities – four of them in the top ten – and one

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