Domestic investors boost global real estate markets

by • September 8, 2020 • InvestmentComments (0)128

As widespread lockdowns and travel restrictions stalled investors’ short-term capital deployment plans, domestic investors boosted demand for real estate

Despite the devastating impact of the pandemic on economies around the globe, the real estate markets of Japan, Germany and South Korea showed resilience in the first half of this year as they leant on deep domestic pools of capital.

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As widespread lockdowns and travel restrictions stalled investors’ short-term capital deployment plans, commercial real estate investment fell 29 percent globally to US$321 billion in the first six months of 2020 compared to the year-earlier period, according to data from JLL.

Yet, despite the widespread drop in investment, Japan, Germany and South Korea all outperformed the broader market in the first half of the year. In Japan, deal volume climbed seven percent to reach US$24 billion. Germany dropped a mere 1 percent, and, despite sliding 15 percent, South Korea outperformed its long-term, first-half average.

“Countries that acted quickly and effectively to contain the spread thus far have generally been more resilient both in terms of domestic commerce and commercial real estate investment,” says Sean Coghlan, Head of Global Capital Markets Research, JLL. “Aside from rigorous efforts to contain the spread of the virus, these countries also benefitted from relatively high levels of market transparency, deep pools of domestic capital and strong government stimulus.”

In May, Prime Minister Shinzo Abe doubled Japan’s stimulus measures to US$1.1 trillion. In Germany, its stimulus package to mitigate the economic hit from Covid-19 amounted to more than 1.3 trillion euros (US$1.47 trillion). Both packages were among the biggest in the world. Although South Korea’s stimulus totalled just US$277 billion, its GDP growth showed a relatively smaller contraction of 3.3 percent in the first half of this year compared to other developed countries.

“Japan is home to a few of the largest investors in the world, some of which are significantly under-allocated to the sector,” says Coghlan. Japan’s Government Pension Investment Fund, the world’s largest pension fund, has signalled plans to allocate more to alternatives assets, including real estate.

In Germany, domestic investors have deployed more than US$11 billion into the country’s commercial real estate market year-to-date. Funds continue to see an appetite for real estate, and this has driven the Germans to be amongst the most active investors in the world this year, Coghlan says.

“These funds are discretionary vehicles which invest on behalf of private capital. In the low interest rate environment, this structure remains attractive as a means of generating yield.”

Real estate transparency is also an important driver of confidence for domestic investors, especially in light of the inability to travel to process deals and conduct due diligence. In this restrictive environment, a lack of transparency creates risk when underwriting opportunities, says Coghlan.

“In the current environment, transparency has become a mitigating factor for investment decisions. Strong governance is mitigating uncertainty in some cities and supporting investment activity,” he says.

Second-half recovery will vary for domestic investors

With some regions experiencing a resurgence of Covid-19 cases, the path to recovery in the second half of the year remains uncertain.

Having dealt with the pandemic for longest, Asia is widely expected to lead the global recovery with lockdowns gradually being lifted and business sentiment improving in regions like China.

As economies rebuild, domestic capital will continue to play an important role in the real estate market recovery, says Coghlan.

“We have already started to see domestic sources in Europe and the U.S. drive a higher share of investment activity—albeit volumes are still down. This is likely to become more evident through the second half of the year given the drop-off in inter-regional and intra-regional investment, and the importance of domestic capital in stabilising liquidity,” he says.

As the world navigates the pandemic, investors are taking different routes to overcome challenges of deployment. Some domestic investors have sought in-market sponsors and managers to deploy capital, triggering an increased focus on funds, joint ventures and platform investments.

“We’re seeing more evidence of joint-venture deals in Asia, and we expect the appetite to grow in the U.S. and Europe as activity gradually improves,” says Coghlan.

Property investors remain confident that a recovery is only months away

As economic uncertainty hampers deal-making in global real estate markets, investors remain confident that a recovery in deal volumes in Asia Pacific is only months away.

Widespread lockdowns and travel restrictions stalled investors’ plans so far this year, with commercial real estate investment falling 29 percent globally to US$321 billion in the first six months of 2020 compared to the year-earlier period, according to data from JLL. Throughout the same period, volumes in Asia Pacific contracted 32 percent, as the impact of COVID-19 was felt on investment markets.

But 84 percent of property investors remain confident that transaction volumes in Asia Pacific will rebound meaningfully by early 2021, according to a JLL poll of 38 global investors representing close to US$2 trillion in assets under management.

Optimism is being further buoyed by signs of a sustained recovery in China. Select investors remain more bullish, with 32 percent confident that the market hit its trough in the first half of 2020. Such confidence isn’t unique to real estate. Stock markets have raced higher in recent months despite the pandemic, with analysts citing a confidence that the worst of the pandemic may be over, and hefty central bank stimulus.

The survey identified Japan, South Korea, China, and Australia as the markets most likely to see an increase in transactional activity into 2021 as investors turn to core geographies as a defensive strategy to mitigate ongoing risk.

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