Asian capital flow into Europe isbooming, slowly shifting towards Eastern Europe

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According to Savills’ first estimations, Asian investment in Europe since the beginning of the year reached €13.5bn in Q3. This is a 57% increase compared to the same period last year and the trend is set to further accelerate.

That isexplained by the fact that such an apex is notably due to the large pan-European Logicor logistics portfolio sold by Blackstone to China Investment Corp (CIC) for €12.12bn, which will mark the largest investment transaction in European real estate history.

The UK and Germany absorbing 65% of all Asian investment

Most Asian investors focus on UK and Germany, which accounted 53% and 12% respectively of the total Asian money recorded in Europe over the past 12 months.

Asian investors’ target is also slowly moving towards Eastern Europe. The volume is particularly high in the Czech Republic, thanks to two large deals signed at the end of last year; the acquisition by Singapore’s sovereign wealth fund GIC of P3 Logistic Parks for €375m and the acquisition by CEFC China Energy co of the Florentinium office building in Prague for €281m. Growing interest was also recorded in Poland, Romania and Slovakia.

Asian Investments in Romania target mainly residential projects

In Romania, the value of the purchased assets by CIC in Bucharest, Ploiesti and Timisoara from Blackstone in Europe’s largest deal in history, was €48 million.

The Romanian Ministry of Economy has announced in June 2016, during an economic cooperation reunion, that Chinese companies have agreed to invest over 118 million euros in five new projects in Romania, including a car parts factory in Brasov, a real estate complex in Bucharest of 23 million euros and a solar park. So far Chinese investors are already involved in energy projects at the Rovinari plant, Cernavoda as well as a real estate project in Craiova. „The Romanian government is supporting Chinese companies willing to develop railway infrastructure projects, energy projects or tourism in Romania. What we want from the Romanian state is better coordination on these projects” stated the Chinese minister at that time.

In terms of real estate investments in Romania, “the interest of Chinese investors for the local market is focused mainly on the residential segment, expressed by securing land that allows the development of “city-in-city” type of projects. The size ofa project is the essential criterion for making a positive decision to invest in the real estate market in Romania. The bigger the project, the higher the interest. I have not yet noticed any interest for purchasing office buildings or other equivalent products” said Codrin Matei, Managing Partner and Head of Office, Capital Markets and Business Development at Crosspoint Real Estate.

Office and logistics take the lead, interest for retail has vanished

While the strong appetite for offices remained relatively unchanged – accounting for 52% of all Asian investment in Europe over the past 12 months, interest for retail assets nearly vanished (2% over the past 12 months against 41% in 2007). At the same time, their logistics investment in European increase substantially and accounted for 18% over the past 12 months, compared to 3% in 2007. This new allocation from retail to logistics is reflecting the growth of e-commerce and the consequent need for distribution centres.

The hunt for high yields is leading to diversification notably toward income-stream asset type, fuelled by demographic global trends. Asian investors place their capital increasingly in the multifamily segment and senior housing, mainly in the UK, according to Savills’ researchers.

They are increasingly seeking trophy assets, such as prime office buildings in central locations of European capital or key cities or large logistics portfolios. LKK Health Products Group acquired the “Walkie Talkie”, a landmark office building at 20 Fenchurch street in London for €1.45bn (£1.28bn).

Most active investors

“Sovereign wealth funds have dominated investment outflow from Singapore in the past and continue to do so” says Oliver Watt, director in Savills’ cross-border investment team. Today, most of the Asian capital flow coming onto the European property market is still coming from SWF (Sovereign Wealth Fund) but increasingly from property companies and also from private investors notably in China. Asian money is now more evenly broken down between Singapore, Hong Kong, Korea and China. Honk Kong investors are mainly targeting its previous sovereign country, the UK, while Korean and Singapore investors are mainly concentrating on mainland Europe. So far there is no evidence of activity slowing down from Chinese investors following the tightening rules on their cross-border investment

Why is the European property market becoming a magnet for Asian investors?

First and the main reason is to catch the property cycle. Business sentiment is rising and unemployment is falling across Europe. Business expansion continues to drive office demand while office vacancies are falling in all European capital city markets.

Secondly, yields in Europe is also comparatively attractive for Asian investors. Additionally, portfolio diversification is a strategy to balance risk and optimise return. Finally, Trump’s election to the US presidency also played a positive role in making Europe a preferred arena for Asian’s outbound investment.

“We expect Asian investors’ appetite for European property market to continue growing in 2018, driven by strong property fundamentals, the hunt for higher yields and the need for diversification” said Lydia Brissy, Savills European Research Director.

According to Savills, despite the new tight financial regulation, Chinese investment activity in Europe will not lose its momentum. It will become however more strategic and in line with the government’s key policy initiates such as the One Belt One Road. As Hong Kong maintains strict judicial independence from the mainland, it will increasingly play a role as China’s global financial intermediary.

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