CBRE's Jonathan Hull

GlobeSt.com: An odd year, in all, given credit and dollar problems. How do you see capital flowing out of the US into foreign markets?

Hull: We've seen a strong flow of capital through a number of vehicles, including pension funds, into the global markets. Over the past few years, Europe has been a key target, but Asia and Japan have also been growing in their relative attractiveness over the past year and we've seen a lot of attention in those markets.

Europe continues to see US capital flowing in, both through core funds and more opportunistic players. But of course the relative strength of sterling and the euro do make that more difficult. So perhaps you'll see more capital flowing the other way in 2008, with equity-based core funds finding the US CBD markets in particular more attractive than they did in 2007.

GlobeSt.com: And what of the capital flowing outside the US markets? And talk a bit about Asia as well.

Hull: If you asked that question pre-July we would have had a very different answer than now at the end of the year. Both New York and London have seen similar reactions--in time and depth--to the changes in the debt markets. That's probably because those two markets are mature in their relative cycles. London certainly leads the way in Europe and tends to run up to six months ahead of other markets, with Paris close behind. London is the dominant capital market in Europe and now perhaps the world.

GlobeSt.com: So the post-July situation has changed that dramatically?

Hull: The answer, and you will love this, is yes and no. The yes bit is in those mature markets that were reaching the peak of their cycle, where debt was very aggressive and supply was beginning to cause some concern. In those cities, the response was to limit the supply of stock in maybe two to three years, which actually provides a good cap on the market and may have already prevented overheating.

The no bit comes in that while we've seen deal flows dry up, London figures so largely in Europe and represents a very large percentage of the office trades that any change in those markets has a disproportionate effect on London itself. But there are still markets in Europe that are not affected by the credit crunch as much as London. There are markets both in Central and Eastern Europe and other non-core locations that have not attracted the most leverage in the past and were more equity driven by their core fundamentals as investment locations. But all markets will be affected to some degree. Everyone feels the thinning of the market through the lack of debt.

GlobeSt.com: Are you essentially an optimist? We've heard that by midyear life will once again be wonderful if a bit more cautionary.

Hull:

The dominant equity players will be in the market during the course of 2008. You'll find the German open-ended funds, which are seeing strong inflows, spread across Europe and in the states. And their timing will be excellent, since they restructured only over the past couple of years. You'll see more Middle East money coming into the European market in particular, and perhaps indirectly into the US. And obviously we have a huge amount of Australian capital looking to place itself, particularly in Europe and Asia.

That's all positive, but it's not going to replace the scale of debt that's supported the market over the past couple of years. We will probably see good transactional demand during 2008 but the turnover will be below 2007.

GlobeSt.com: It's said that we should expect Chinese funds to flow into the US. Same dynamic taking place in UK?

Hull: That's very fair. I mentioned a second ago the equity-based funds and the biggest are the sovereign funds--from Singapore, the Middle East and China, which is perhaps the biggest untapped sovereign fund globally. We've already seen them take stakes in key IPOs. If the direct real estate market got even a small percentage of the dollars that could be allocated from the Chinese sovereign fund, that could have a very positive effect.

GlobeSt.com: From where you sit, what would be your list--in descending order--to place capital?

Hull: Most clients pay for this. Rather than give you a list, let me give you a number of markets that are interesting, that are attractive to our clients. Definitely Japan and the wider Asian markets, which includes Hong Kong, Singapore and increasingly the mainland Chinese markets, although that's very hard to access at the moment. We haven't seen a lot of foreign investment in mainland China although that's not to say there isn't a lot of capital looking to get in.

GlobeSt.com: From what I understand the Chinese government is fueling interest in second-tier cities.

Hull: And they will be key places to invest. Once those markets begin to open up with more transparency and efficiency, a lot of interest will arise in those markets.

GlobeSt.com: Even into 2009?

Hull: As we get closer to the Olympics there will be a lot of pull factors for capital going into China and a lot of those second-tier cities could actually be key destinations for capital--if the tax-efficient structures to get capital out of the country can be managed. That has really been the key problem.

GlobeSt.com: And continuing with your short list?

Hull: I was going to say that the effect of the credit crunch is that prices in the UK dropped back. The London market certainly dropped back 10% to 15% in the past quarter. That will make it relatively attractive. The UK, as you may know, tends to offer longer and guaranteed upward-only leases when compared to other countries. So I think the UK will probably see quite a lot of capital in 2008.

GlobeSt.com: And the US?

Hull: That will be interesting. There's a lot of change taking place in the US. The core equity funds will look for opportunities but a lot of those opportunities will be satisfied in the European market. As I said, the larger sovereign and the open-ended funds from Germany will be the key US buyers in 2008.