_How international developers are influencing the world's prime residential markets
As real estate investment becomes progressively more global, so does the activity of developers. The strength of this trend is confirmed by the fact that the level of cross-border acquisitions of residential development sites across the world has increased each year since 2014, rising by 26% in 2017 alone.
International developers are playing an increasingly influential role in the world’s prime residential markets. In itself, this process is not new – for example, many Hong Kong and Singapore based developers have been operating outside of their domestic markets for decades.
However, the volume of activity has changed up a gear with the advent of a new push from developers to target the world’s “gateway markets”, in particular London, New York, Singapore and Sydney.
In recent years – a leading Indian based developer has focused on London; a Shanghai developer has targeted Los Angeles, New York, London and Sydney; while Malaysian developers have been building in Melbourne, London and Singapore.
While some international developers are buying sites to develop themselves, others are embarking on joint ventures with domestic developers. For example, in London there are active developments by a consortia of UK, Singapore and Malaysian developers.
International businesses are not only active in the development space as sole developers or through joint ventures, but also through the funding of developments. Investment can come from financial institutions (including pension funds, insurance companies and banks), sovereign wealth funds or wealthy individuals.
The global picture
Cross-border investment is nothing if not volatile. To understand this trend in more detail we have analysed cross-border acquisitions of residential development sites in a selection of key global cities, from each region, over the past four years.
Globally, the level of cross-border acquisitions hit its highest level in 2017, having risen by 90% since 2014. Despite this new global high, and perhaps reflecting their position at the forefront of this trend, cross-border activity in London, New York, Singapore and Sydney has seen volatility in recent years.
This volatility can partially be attributed to slower markets in 2016 and 2017, and also the expansion of cross border development activity into other global cities, such as Los Angeles. At the same time, tighter capital controls in mainland China have led to more scrutiny of potential high-profile investments.
"Globally, the level of cross-border acquisitions hit its highest level in 2017, having risen by 90% since 2014."
In New York, cross-border acquisitions have declined over the past two years. However, in the wake of tax reforms at the end of 2017, the attractiveness of New York to international developers has risen and we expect activity to start to pick up again.
Activity in London has swung between two extremes. In 2015 it was the only market to see a year-on-year decline in cross-border acquisitions, with a fall of 26%. However, in 2017 cross-border acquisitions increased 82% to a new peak. We expect this trend to continue with a significant volume of activity seen in the first quarter of 2018.
In Sydney, it appears that the recently imposed restrictions on foreign buyers, which limit the ability of overseas developers to effectively market projects in their home countries, have started to take hold, with acquisitions falling 83% between 2016 and 2017.
Singapore has recently seen a surge in activity as year-on-year cross-border acquisitions increased by 204% in 2017. This could be attributed to the housing market’s recent resurgence following the cooling measures that were introduced by the government four years ago. This trend is set to continue: in the first quarter of 2018, cross-border activity in Singapore equated to almost two-thirds of the 2017 total.
Top players
Not only are overseas developers active in these markets; they have become some of the cities’ biggest players.
Despite the declines in activity noted above, overseas developers have maintained a tight grip in Sydney. Of the top 20 players in the city’s residential development sector, over half were international, with YMCI (China) leading the charge. There were a further nine Chinese entities – four of them in the top ten – and one Japanese.
Looking ahead, the prominence of overseas investors is likely to continue, with the recent purchase by Yuhu Group of two Australian projects from Wanda Group, another Chinese developer, for a reported A$1.13 billion.
The London market has the second highest presence of international developers and the most diverse mix, with Chinese, Hong Kong, Singaporean and US firms all represented in the top 20. Together, these international developers occupy seven of the top 20 slots, including the first and second positions.
The less global nature of the market in New York and Singapore is reflected in the data with, respectively, only 25% and 15% of the top 20 players in these cities being international.
Under construction
It is one thing to understand where developers are buying sites, but how many of these are being developed out and sold? We examined data from the beginning of 2017 and the beginning of 2018 to understand how many large-scale developments were being constructed or sold by international entities.
The data show us that London has the highest proportion of under-construction or unsold developments by international entities. At the end of 2017, 41% of large developments in central London were known to be being developed or funded by international means, compared with 31% in 2016, reflecting the growth of cross-border acquisitions of residential development sites.
Developments in central London also had the largest diversity of international developers and investors, with ten nationalities present, echoing the story with site investment. The top nationalities for construction activity were Hong Kong and United Arab Emirates, who were each involved with 15% of the international developments at the end of 2017, growing their shares from 13% a year earlier.
"At the end of 2017, 41% of large developments in central London were known to be being developed or funded by international means, compared with 31% in 2016".
Although cross-border investment in residential development sites in Sydney has decreased in the past year, the proportion of schemes by international developers has increased. Between the beginning of 2017 and the beginning of 2018 the proportion rose from 15% of developments to 20%.
New York tells a similar story. Here, the proportion of projects by international developers increased even though cross-border investment in residential development sites decreased. In the primary development area of Manhattan, international developers were involved with 8.5% of large developments in Q1 2017, yet by the beginning of 2018 this had risen to 11.5%.
The most prominent international developer nationality for both Sydney and New York is Chinese, followed by Singaporean. In New York, Chinese developers were involved, either solely or through joint ventures, in 56% of international developer projects at the beginning of 2018. For Sydney, the proportion is much higher at 83%.
Push and pull
Some of the main push factors driving this growth in global developments relate to domestic market conditions. In Singapore, for example, the market is relatively small so to generate increased growth and returns Singaporean developers and funds have had to look elsewhere. Meanwhile, many of the biggest players are responding to appetite from consumers in their home markets for international property.
For developers, overseas projects can also offer a level of diversification, in locations that may benefit from clearer ownership laws and rights than those available in some emerging markets.
If developers can break into and thrive in prestigious markets then this gives them not only the status of a truly global brand, but yields opportunities to further their reach in new markets and sectors. Developers can also use joint ventures in different markets to learn new processes and understand how big domestic developers operate.
This knowledge helps to increase the quality of their developments and to leverage capital markets rather than just bank loans. This is a particular driver for mainland Chinese developers who can now take these lessons into China where consumers are becoming more sophisticated in terms of their property requirements, prompting large-scale regeneration in certain locations.
Positive thinking
Cross-border acquisitions and developments are becoming more and more important in the global development space. Globally, activity is increasing but, as we have seen, there can be considerable volatility within individual markets. As overseas developers and institutions establish themselves in key gateway cities they are investing further afield into other markets.
This growing globalisation of developments has been an important factor in helping to support supply in many cities, keeping markets buoyant and injecting funds into domestic developers when needed.
This has been particularly evident in London, where mayor Sadiq Khan has said “international investment plays a vital role in providing developers with the certainty and finance they need to increase the supply of homes and infrastructure for Londoners”.
To date, this has not been the case in Australia; but it could be set to become a more significant factor in the future supply of housing as tighter funding constraints, which came into full force in 2015, have meant that many local developers struggle to obtain finance.
Finally, the increasing presence of international developers in key markets has not only meant that they can learn new practices to take to other markets, but also means there is opportunity for them to share new techniques, different ideas and expertise.
This confluence of ideas can help to broaden the variety of stock, as well as having the potential to improve productivity in the development sphere.