SINGAPORE — Commercial real estate has long had a place in the portfolios of wealthy investors, who see it as a useful diversification away from more volatile assets like stocks or bonds.
But lately the trend has accelerated, in particular among Asian investors, who are taking advantage of the strength of their currencies and the environment of low interest rates to increase their investment in these physical assets.
They are not the only ones. According to the Sovereign Investment Lab at Bocconi University in Milan, sovereign wealth funds made 38 commercial property investment deals across the world last year for a total value of almost $10 billion, as they continued to seek alternatives to volatile equity markets and low-yielding bonds.
Hedge funds have also been reported as increasing their stakes in commercial, mortgage-backed securities.
A lot of wealthy individuals “are already well invested with residential properties in different countries, and they have shown some interest in diversifying further in commercial properties,” said Joseph Poon, head of ultra high net worth, South Asia, at UBS Wealth Management in Singapore.
He said that he was seeing interest from Asian clients in commercial properties in London and Australia, as well as in distressed commercial properties in Europe and the United States. Su Shan Tan, the group head of wealth management at DBS, agreed.
“Traditionally, ultrahigh-net-worth individuals” — defined as those with $50 million in investable assets — “have always invested in commercial properties to some extent, be it office, retail or hospitality, often depending on which business sector they have an operating business” in, she said.
“But the recent trend has been primarily driven by loose monetary policies globally, as you have very cheap money available everywhere, and by central bankers, all trying to talk down their own currencies.”
Ms. Tan noted that there had been particular interest from Asian buyers in the British commercial property market, based on the significant depreciation of the pound against many Asian currencies in recent years: The pound has fallen about 6 percent against the Singapore dollar in the past two years and 20 percent against the renminbi.
Other factors, she said, are that British common law is familiar, especially to clients in Singapore and Hong Kong, both former colonies, and many Asian clients already own residential properties in Britain and thus understand the property market there.
She said there had also been some investment flows into the property market in the United States, but mainly through mortgage-backed securities, rather than through the purchase of the physical assets, though the bank has had clients who have invested directly in New York, San Francisco and Boston.
Other wealth managers confirmed that they too were seeing an upward trend in investment in commercial property.
According to Megan Walters, the head of research for Asian Pacific markets at Jones Lang LaSalle, global direct commercial investment rose 24 percent year-on-year in 2012 to total about $440 billion, and the company is forecasting that it could reach $450 billion to $500 billion this year.
“The relatively robust end to the year demonstrates that real estate markets are well through the recovery phase of the cycle,” Ms. Walters said. “We anticipate that 2013 will record a similar performance.”
Wealthy individuals “like buying in cities they know well, which means either home locations, or cities with family links, often where family members have been to school or university,” she said.
“They particularly like London, as a global city with ease of entry for foreign capital.” London topped the list of commercial real estate by transaction volumes last year, with $56.1 billion, Ms. Walters said, citing figures compiled by her company.
“About 63 percent of the buyers were from overseas,” she said. She said major markets would continue to do well as investors remained attracted to real estate for its yields, currently higher than can be achieved in many other asset classes.
“We see some upside potential in the secondary markets, which have remained subdued since the global financial crisis but are starting to witness greater investor interest, given their more attractive yields,” she said.
“Countries to watch are Indonesia, Vietnam and India in Asia, and Mexico and Canada in the Americas.”
She said she did not expect much change in Europe because “the challenging debt market conditions continue to constrain the market.”
Wilson Aw, the head of private banking at United Overseas Bank in Singapore, noted that by casting their nets wide for commercial properties around the world, wealthy investors were “able to negate the downsides of differing property cycles in various markets and enjoy the benefits of diversification in their property portfolios.”
He added, however, that investors considering commercial properties were not always aware of all the associated risks.
“The cost of financing has dropped tremendously in the last three to four years, so clients see it as an opportunity to take advantage of the yield gap between the cost of funding and what they receive as a rental or income flow,” Mr. Poon of UBS said.
“However, we’re in a very unusual low-interest environment. Investors are projecting the current low environment to infinity, while expecting a 7 to 8 percent asset yield on their property. That pairing is not going to hold, and people need to know that.”
“We’re advising clients to be extremely careful and use our powerful analytical tools to see what the real world could become in a three- to five-year time frame,” he added.
Currency risk, too, can be a significant factor, especially if a foreign buyer intends to sell the property quickly to capture a gain in a local currency.
Mr. Poon took the case of a dollar-based investor who was planning such a “flip” in Japan; with the U.S. currency having appreciated 15 percent against the yen in the past two to three months, “that could mean a big loss on your investment without the assets having done anything yet in terms of price appreciation.”
Mr. Aw of United Overseas also warned that clients should remember the economic risk associated with commercial properties, which is different from that with residential properties.
“Even in a severe economic environment, shelter remains an essential need and people will still need a roof over their heads,” he said. “Investors renting out residential units will need to adjust rentals downwards until they find the point of demand.”
But unless a commercial property is in a top location, he said, “there may not be takers for shop units or offices for an extended period of time in an economic downturn.”
“This will severely impact an investor’s ability to sell the property for a reasonable price,” he said.
nytimes.com
But lately the trend has accelerated, in particular among Asian investors, who are taking advantage of the strength of their currencies and the environment of low interest rates to increase their investment in these physical assets.
They are not the only ones. According to the Sovereign Investment Lab at Bocconi University in Milan, sovereign wealth funds made 38 commercial property investment deals across the world last year for a total value of almost $10 billion, as they continued to seek alternatives to volatile equity markets and low-yielding bonds.
Hedge funds have also been reported as increasing their stakes in commercial, mortgage-backed securities.
A lot of wealthy individuals “are already well invested with residential properties in different countries, and they have shown some interest in diversifying further in commercial properties,” said Joseph Poon, head of ultra high net worth, South Asia, at UBS Wealth Management in Singapore.
He said that he was seeing interest from Asian clients in commercial properties in London and Australia, as well as in distressed commercial properties in Europe and the United States. Su Shan Tan, the group head of wealth management at DBS, agreed.
“Traditionally, ultrahigh-net-worth individuals” — defined as those with $50 million in investable assets — “have always invested in commercial properties to some extent, be it office, retail or hospitality, often depending on which business sector they have an operating business” in, she said.
“But the recent trend has been primarily driven by loose monetary policies globally, as you have very cheap money available everywhere, and by central bankers, all trying to talk down their own currencies.”
Ms. Tan noted that there had been particular interest from Asian buyers in the British commercial property market, based on the significant depreciation of the pound against many Asian currencies in recent years: The pound has fallen about 6 percent against the Singapore dollar in the past two years and 20 percent against the renminbi.
Other factors, she said, are that British common law is familiar, especially to clients in Singapore and Hong Kong, both former colonies, and many Asian clients already own residential properties in Britain and thus understand the property market there.
She said there had also been some investment flows into the property market in the United States, but mainly through mortgage-backed securities, rather than through the purchase of the physical assets, though the bank has had clients who have invested directly in New York, San Francisco and Boston.
Other wealth managers confirmed that they too were seeing an upward trend in investment in commercial property.
According to Megan Walters, the head of research for Asian Pacific markets at Jones Lang LaSalle, global direct commercial investment rose 24 percent year-on-year in 2012 to total about $440 billion, and the company is forecasting that it could reach $450 billion to $500 billion this year.
“The relatively robust end to the year demonstrates that real estate markets are well through the recovery phase of the cycle,” Ms. Walters said. “We anticipate that 2013 will record a similar performance.”
Wealthy individuals “like buying in cities they know well, which means either home locations, or cities with family links, often where family members have been to school or university,” she said.
“They particularly like London, as a global city with ease of entry for foreign capital.” London topped the list of commercial real estate by transaction volumes last year, with $56.1 billion, Ms. Walters said, citing figures compiled by her company.
“About 63 percent of the buyers were from overseas,” she said. She said major markets would continue to do well as investors remained attracted to real estate for its yields, currently higher than can be achieved in many other asset classes.
“We see some upside potential in the secondary markets, which have remained subdued since the global financial crisis but are starting to witness greater investor interest, given their more attractive yields,” she said.
“Countries to watch are Indonesia, Vietnam and India in Asia, and Mexico and Canada in the Americas.”
She said she did not expect much change in Europe because “the challenging debt market conditions continue to constrain the market.”
Wilson Aw, the head of private banking at United Overseas Bank in Singapore, noted that by casting their nets wide for commercial properties around the world, wealthy investors were “able to negate the downsides of differing property cycles in various markets and enjoy the benefits of diversification in their property portfolios.”
He added, however, that investors considering commercial properties were not always aware of all the associated risks.
“The cost of financing has dropped tremendously in the last three to four years, so clients see it as an opportunity to take advantage of the yield gap between the cost of funding and what they receive as a rental or income flow,” Mr. Poon of UBS said.
“However, we’re in a very unusual low-interest environment. Investors are projecting the current low environment to infinity, while expecting a 7 to 8 percent asset yield on their property. That pairing is not going to hold, and people need to know that.”
“We’re advising clients to be extremely careful and use our powerful analytical tools to see what the real world could become in a three- to five-year time frame,” he added.
Currency risk, too, can be a significant factor, especially if a foreign buyer intends to sell the property quickly to capture a gain in a local currency.
Mr. Poon took the case of a dollar-based investor who was planning such a “flip” in Japan; with the U.S. currency having appreciated 15 percent against the yen in the past two to three months, “that could mean a big loss on your investment without the assets having done anything yet in terms of price appreciation.”
Mr. Aw of United Overseas also warned that clients should remember the economic risk associated with commercial properties, which is different from that with residential properties.
“Even in a severe economic environment, shelter remains an essential need and people will still need a roof over their heads,” he said. “Investors renting out residential units will need to adjust rentals downwards until they find the point of demand.”
But unless a commercial property is in a top location, he said, “there may not be takers for shop units or offices for an extended period of time in an economic downturn.”
“This will severely impact an investor’s ability to sell the property for a reasonable price,” he said.
nytimes.com
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