Real estate capital takes financial centre stage
Private capital will play a critical role in funding the growing and changing need for real estate and its supporting infrastructure. Just as asset managers, real estate funds and Sovereign Wealth Funds find the assets under their control swell, so governments will have increasing needs for capital to finance urbanization. Private real estate capital will become an important partner of governments.
PwC estimates that the broad AM sector will see assets under management (AuM) swell to US$101.7 trillion by 2020, up from US$63.9 trillion today. The global growth in AuM will come from three different sources: the shift towards individual retirement plans, the surge in high-net-worth individuals (HNWI) in emerging markets and growth in SWF assets. PwC anticipates that, across the entire AM sector, retirement assets will grow from US$33.9 trillion in 2012 to US$56.5 trillion in 2020; the HNWI sector will expand from US$52.4 trillion to US$76.9 trillion; the SWF sector from US$5.2 trillion to US$8.9 trillion. This compares with our calculation that the stock of institutional investment grade real estate will expand by more than 55% from US$29.0 trillion in 2012, to US$45.3 trillion in 2020, according to our calculations. It may then grow further to US$69.0 trillion in 2030.
Private capital will step in to fill the gap left by banks and insurers as a result of regulations that require reduction in their exposure to real assets. The international Basel III bank capital guidelines and US Dodd-Frank regulations have increased the size the capital buffer lenders have to hold as protection against possible future losses and require that banks better match the duration of their own funding to their loans. So while banks’ willingness to fund prime real estate may be strong,their appetite could diminish if lending becomes higher risk or longer term.
Meanwhile, the EU Solvency II Directive has reduced the ability of European insurers to invest, although Asian insurers are likely to remain highly active. Studies show that institutional investors are raising allocations to real assets. In a survey of institutional investors managing US$1.9 trillion, 72% said they would be more likely to invest in real estate than any other asset class in 2013.24 For example, Norway’s US$810 billion oil fund, the world’s largest SWF, has targeted raising its property allocation already significantly by 2015, compared to 2013.
As the balance of wealth shifts south and east to the developing nations, so the sources of assets are changing, influencing where real estate asset managers distribute and market their funds. The emergence of growing new institutional investors such as Asian SWFs and pension funds will change worldwide capital flows. Many invest mainly in their home countries, but over the next six years they’re likely to look increasingly to international markets.
Already, real estate asset managers are beginning to take a more central place in the financial ecosystem. Since the financial crisis, real estate asset managers stepped into the funding gap left by banks in some countries. By 2020, they’re also likely to have developed new investment fund structures that address the shortcomings that the financial crisis exposed in both closed-end and open-end funds, related to transparency and liquidity. But there will be challenges. A consistent campaign of anti-tax avoidance measures, driven by the OECD since the Base Erosion and Profit Shifting (BEPS) report in 2013 will see asset managers operating in a world where country-by-country reporting of profits, tax paid and employee numbers is the norm. Fiscal pressure may mount due to bankrupt local and state governments’ cross-border capital flow restrictions and tax reforms.
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