Cross-Border Capital Doubles Over Two Years

LONDON-Retail and institutional investors are driving strong cross-border capital flows into property, according to a leading banker at the Euromoney PropInvest Europe conference.

"The growth of cross-border flows is coming not only from the wave of money, but also the increasing globalization of the industry," Robert Meyer, head of European investment banking for Macquarie Capital Partners said.

Meyer identified the three major sources of capital driving these cross-border flows globally as US, Germany and Australian retail investors. In the US, REIT mutual funds had net investment inflows of $6.9 billion in 2004, 1.5 times the figure for 2003 and twice the figure in 2002. Real estate equity placed on the US stock market was $6.8 billion last year, $7 billion in 2003 and $4 billion in 2002, he said.

Significant proportions of this capital has gone into international property investment. Equity capital flows from the US to Europe more than doubled to $9.7 billion in 2004 from $4.6 billion the previous year. Most of this was concentrated in big deals like the purchase by Morgan Stanley real estate fund of Britain's Canary Wharf, GE Capital's acquisition of Sophia in France and American opportunity funds buying up huge trancheses of German public housing from state governments.

But the traffic has not been one way. Capital has also been flowing back across the Atlantic to the US, particularly from Germany, where open-ended real estate funds attracted record levels of retail investment in 2002 and 2003, before declining returns last year from domestic investments and a series of corruption scandals saw a dramatic slowdown. But the momentum of the capital that had moved into the funds was sufficient to keep Germany as the top source of foreign real estate investment in the US at $2.4 billion, up from $1.8 billion the previous year.

Meyer predicted the situation would change significantly in 2005, with Australia becoming a major power in global property investment. "The Aussies are coming. They'll overtake Germany in the US in 2005 and will become the major foreign capital source in the UK and then Europe," he said.

The driver behind these flows is Australia's compulsory superannuation schemes which had assets of about AU$649 billion in 2004 in 298,000 funds. Around 12% of the assets are allocated to real estate, but with a high proportion of investment grade domestic property already securitized and listed property stocks making up 9% of Australia's stock market, this capital increasingly needs to find a home abroad, Meyer said. Westfield, the world's largest retail REIT, has already led a consortium in the purchase of British developer Chelsfield and is rumored to be seeking another large UK acquisition.