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Global Capital flows: how investment has been affected by Covid-19

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As Stephanie McMahon, Head of Research at BNP Paribas Real Estate UK explains, “In 2020 we saw significant declines in activity, with investment volumes dropping by 23%. Although €222 billion was transacted across Europe, this is significantly down from 2019.”

Indeed, across all countries markets witnessed significant declines in 2020. With the UK down 20%, France down 35% and Germany, as the strongest market at negative 19%. Whilst volumes have considerably dropped, Stephanie McMahon points out that, “Cross border investment accounted for 50% of total volumes which is outstanding when we consider that borders have been closed. Germany received the most activity from cross-border investors, followed by France and the UK.”

Cross border investment as a whole was down 23% and experienced a significant drop specifically from Asian investors, down by 44%, European investment was down 20%, the Americas negative 32% and the Middle East down by 8%. 

Looking into these numbers in greater detail, Stephanie McMahon explains that, “Whilst American investment fell by 32%, the nature of investment is changing as this year core funds are looking to come back into Europe. Whilst in the Middle East investment on the face of it only fell by 8%, this in actual fact an ongoing trend, as it has been in decline since 2013/14.” 
 

Investors are focusing on secure assets

In a ULI/PwC survey entitled, Emerging Trends Europe, which questioned a number of European investors, 47% agree that prime assets are overpriced, with 18% strongly agreeing with the statement. As Stephanie McMahon details, “Prime assets are expensive. How then to best access real estate? We have 68% of respondents who state that redevelopment is the most attractive way to acquire prime assets.”

The attitude of investors therefore seems to be one that is focused on safety, but with a growing attitude towards taking greater risks, which is leading to a bifurcation type recovery.  Unsurprisingly, investors are looking keenly at logistics, nursing homes and healthcare but there is still sustained interest for flexible and serviced offices. As Stephanie McMahon points out, “The question remains, is there enough stock to meet demand?”

With each asset class behaving differently, investors are focused on a long-term vision and the assets which are able to secure this. Stephanie McMahon believes that we must change how we asses real estate, saying that; “How we measure real estate is changing. We have to pick up the right risks and opportunities.” 

There is after all a lot of analysis that shows how much short-term thinking costs, with the CFA estimating it costs S&P countries $79 bn a year in foregone earnings. 
 

Stephanie McMahon

There’s a role in real estate to help corporates measure and manage the real estate that they are going to have in the future

Stephanie McMahon
Head of Research at BNP Paribas Real Estate UK
United Kingdom

Supporting corporates through real estate

“There’s a role in real estate to help corporates measure and manage the real estate that they are going to have in the future,” states Stephanie McMahon. 

Corporates will now have to adapt to a new office layout, taking into account a new relationship to space and headcount and having to balance the relationship between remote working and being in the office.  As Stephanie McMahon clarifies, “Now instead of worrying about people being productive when working from home, companies will be challenged by ensuring productivity in the office, as employees are now coming there to socialise.”
 

Focus UK

The UK has been one of the worst affected countries by Covid-19 over the last year but thanks to a swift and efficient vaccine programme, the tide seems to be turning. 

Etienne Prongué, CEO of BNP Paribas Real Estate UK points out that, “The UK has had significant lockdown restrictions since November but the government has now laid out a clear plan out of the pandemic. The vaccine rollout is putting us on a strong path, with 34% now having had their first jabs. This is a big improvement from three months ago and the difference in the market place is already noticeable.” 

Brexit is now finalised but there are still parts that remain outstanding.  For example, the question around “equivalence” in financial services is looking unlikely, so how much London will be affected is still uncertain. Etienne Prongué states that, “There have been 7,000 city job relocations since the referendum in 2016. However, this isn’t a cause for too much concern as the London office take-up has significantly changed since the global financial crisis. Indeed, since 2015/6 the media and tech sector accounts for 20% of take-up, whilst the financial sector stands around 14%. London is therefore much more diversified in terms of its occupier base. What’s more, the UK has always attracted the lion’s share of international capital into Europe, as it is often the first European port of call.” 
European investors have also played a significant part in the central London investment market in 2020 and Etienne Prongué believes this is only set to continue, with more money still to come from French and German investors. 

As Etienne Prongué concludes, “2021 looks to have “good” but “not perfect” market conditions, with investors looking to deploy more capital into the sector.” 
 

Focus on Asia

Han Khim Siew, Co-Head, BNP Paribas Real Estate Asia Pacific explains that in recent months, “Capital has returned to Europe. Hong Kong and Singapore investors for example have over the last few months respectively invested over £1 billion into London. Asian investors have also invested €500 million into Germany during the same period.”

Over the last three months, activity has picked up in terms of Asian investment and is set to continue to do so, especially when investors can travel. This is being held up by travel restrictions and quarantine rules at the moment.

 Han Khim Siew shared that, “We are seeing existing investors who have holdings in the UK and Europe rebalancing their portfolio – adding logistics and data centres. They will start building up to even out volatility in their investment portfolio. Investors from Hong Kong, Singapore and Korea are specifically looking at office and logistics.”

The relative value of the London real estate market in comparison to Europe is certainly drawing interest. With Brexit now in the rear view mirror, investors are seeing the opportunity of investing in the British capital and taking a longer-term view. As Han Khim Siew clarifies, “Investors are willing to see past the short term noise for the eventual pay offs.” 
 

Focus on the Middle East

In the Middle East, investment hasn’t dropped as much as from other regions, hovering around 8 billion. Investment levels have held up despite lockdown, economic uncertainty, the significant decline of oil prices early in the pandemic, and the inability to travel to inspect properties in Europe. However, Fadi Alkhatib, Head of Investment at BNP Paribas Real Estate Middle East points out that, “The Middle East has been a historical investor to Europe since the 60s.  Asset managers and private families have invested since the 80s especially in London and Paris, and more recently in Germany, Benelux and Southern Europe.”

One answer to the reasonable decline in investment volumes is that many financial institutions and sovereign funds have been able to bridge the gap caused by lockdown through their local offices in London and Paris, or well-established relationships with asset managers. As Fadi Alkhatib explains, “Some of our clients are also BNP Paribas Real Estate Investment Management clients and can rely on asset managers that are already present in European countries.”

Additionally, whilst real estate remains largely a physical business, tech has helped meet some of the shortcomings, with virtual viewings and video conferencing applications. 

As Fadi Alkhatib points out, “The Middle East has always been an interesting but volatile region. Oil prices are the main driver of wealth and the key source of government revenues and liquidity. This then trickles down to the private sector and wealth is thus built for the next generations; therefore, well-located properties in key European cities remain sought after so to preserve that wealth. Now with oil prices going back up, we expect Qatar and UAE to have a fiscal surplus to boost spending and government investment.”

See the full webinar here.