The FT recently reported some research by CBRE on the growing presence of foreign developers in London’s land markets. For me it raises a number of questions
- Is this part of an acceleration of the international integration of the real estate development sector?
- Alternatively, is London an outlier?
- Is it a one-way flow?
- Is this trend part of a “dumb money effect”?
- Are foreigners investors in land or developers of land?
- Are they really foreigners?
I doubt we can be sure of anything here but some thoughts, (if you thought the questions were bad…)
- As (I assume) global economic integration increases, then cross-border real estate development activity as a proportion of all real estate development activity should increase. However, as noted in a previous blog post, barriers to entry tend to be higher in cross-border real estate development compared to simply buying assets in foreign real estate markets.
- As one of the leading global cities, London is almost by definition exceptional. It is open, English speaking, growing and probably the largest global hub of real estate consultants, financiers and investors. When my colleague Anupam Nanda and I did an analysis of cross-border real estate investment flows using DTZ’s Investment Transactions Database last year, we were sceptical when we found that, over a 12 year period for 29 major European cities, London alone accounted for over half of all transactions by value. It had foreign transaction volumes that are nearly five times greater than the next largest destination of real estate investment – Paris. In an academic paper, drawing upon a CWHB database, Lieser and Groh (2013) estimate commercial real estate transaction volumes of c$12.5 billion for France and c$45 billion for the UK in the period 2000-2009. Also, a number of private sector researchers assured us that the number was plausible. We felt a bit more comfortable.
- I hear very little about major UK-based developers going overseas. It’s not one-way, but I’m pretty sure that it is extremely asymmetric. That’s not a criticism of UK-based developers. There’s another debate to be had about the costs and benefits of sector and geographical focus. From a UK perspective, Grosvenor seem to be exceptional with its international development pipeline reported at $5.5bn at the end of 2014. I don’t think that British Land or Land Securities have any notable international exposure – nevermind international real estate development exposure. Many (but by no means all) pension funds and insurance cos seem wary of even domestic real estate development exposure. Albeit some are very active. As an aside, IPD produced some research on the financial performance of real estate developments (as opposed to standing investments). I found the results surprising and their interpretation more surprising… but that’s for another blog post.
- Foreign money flows may be part of a picture of an overheated market. People queuing to buy flats off-plan, yields under 3%, crane numbers, affordability ratios, staff shortages in real estate brokers etc. all point to a fairly high risk of a sharp market correction. If this is a bubble, how many greater fools are left? I’ve only heard a few but some of the rationales offered in conversation for investing overseas in real estate development can seem a bit undercooked – even whimsical – albeit if asset prices rise, they could still make a lot of money. That’s development – you can execute poorly and still make money if the market rises and you can execute superbly but if the market falls…
- Land purchase is not the same as development. Whilst it can be a bumpy ride, some of the capital flow may be a simple play on rising land values – a more passive activity than executing a development project. However, (construction) contractor-developers are more common outside of the UK. Companies like Skanska are certainly going to be interested in building out any sites that they acquire.
- It is becoming more and more difficult to classify investors or developers as foreign or local. In many foreign markets, real estate investing and development organisations set up local operating platforms by employing experienced local professionals in local offices who are effectively enculturated insiders, are likely to have access to similar informational sets about local markets as local investors and developers. For instance, I suspect that the vast majority of the people who work in London for TIAA-CREF or Tishman Speyer (I was surprised to learn recently that Tishman Speyer had over 50 staff in their London office) went to Cass, Brookes and Reading etc. and have worked often for many years for leading UK real estate investment and advisory companies. They’re not exactly new to the London market. However, Lodha’s purchase of the Canadian Embassy for redevelopment into luxury flats was, I believe, their first major scheme outside India. They didn’t have an established local operating platform. Maybe they know something…?