Most cities above 1m population and many resort destinations are now well integrated into the network of global capital flows directed at property. While financial centres struggle with the credit crunch, property investment and development in emerging markets continue largely unabated. With entry of so many new countries into the global system of free markets, generating capital pools through production shifts, rising commodity prices and global trade, they are no longer so dependent on the developed world to source capital for investment. And a healthy share of this capital is being invested in property in OECD countries, particularly as entry yields rebound.
Equally, established investment groups from mature markets are placing serious bets on the more attractive emerging markets, the BRIC countries in particular. Sovereign wealth funds, regional financial institutions, private groups, and the like, while remaining focused on home countries and regions, have recognised the advantages of developed markets. These include not just prudent investment diversification but also the intangible benefits of being visible participants in global investment markets. After a first round of largely passive investments into managed funds and joint ventures, these groups quickly acquire the knowledge and confidence to invest direct, co-invest or even sponsor their own funds. Property investment markets have certainly benefited from this increased velocity and multi-polarity of capital flows.
As important as the differing players themselves is the increasing ease by which capital moves in and out of this historically illiquid asset class due to the growing role of REITs, securitisation vehicles, opportunity funds and the like in sourcing and intermediating capital. Enhanced liquidity, combined with an increasingly volatile environment for shares and bonds, has also led to perhaps a sea change in the weighting of property in investment portfolios. Alternative investments, of which real estate is a significant component, continue to command a growing share of managed investment portfolios.
Within the property world, hotels and other leisure assets are now seen by most property pundits as a fifth “food group” for institutional investors, alongside office, retail, residential, and industrial. Their high operational leverage, longer return cycles, and higher sensitivity to economic trends, call for more intensive asset and investment management. But this is proving justified by returns and, in contrast to the situation a few years back, investors now have a range of capable third party hotel asset and investment management firms to assist them. For the most part, this new-found interest is focused on luxury properties in large, established city centres, and selected international resort destinations.
Major projects in the higher-profile emerging business cities, often part of mixed-use developments incorporating residential, retail and office elements alongside a hotel, are also popular. When the credit crunch first hit in mid-2007, luxury hotel properties stayed particularly resilient to the yield shifts in other asset classes. Higher debt costs were being offset by still-growing travel volumes, but as the crunch spread to impact the broader economy, fears have grown as to whether this could continue. Yet, while hotel REVPAR growth has decelerated, it remains at historically high levels. Hotel values continue to hold up well although trading volumes are down noticeably.
Given the state of the financing markets, only a handful of well capitalised buyers have the resources to pursue In portfolio and corporate acquisitions. Mid-market properties in emerging markets still benefit from growing middle classes. Here, the pace of sizeable, ambitious schemes breaking ground continues unabated.
The availability of emerging market capital has meant that, while the credit crunch continues, many larger schemes being funded these days are outside DECO countries. Plus ça change!
The above article originally appeared in the 23 June 2008 issue of Property Finance Europe.