Reversing capital flows

May 4, 2015 / By  

A shift in capital flows appears to be underway in Asia Pacific real estate markets.

JLL has been working with the World Economic Forum on asset pricing dynamics in real estate – or in common parlance how to spot a real estate bubble. The report by Dr David Rees, identified a set of indicators that might be useful in devising an early warning system for spotting instability in the real estate markets.

The report sets out three broad sets of measures related to real estate that it is useful to track in a market.

  1. Physical market metrics for example, yields, vacancy rates, transaction volumes, and lease expires (see the report for a longer list);
  2. Specific residential market metrics for example price to rent ratios, cost comparison eg home ownership vs renting and measures of financial stress like mortgage default rates; and
  3. Capital market metrics like credit growth cost, sources of debt and cross border capital flows.

As researchers our contribution to the real estate industry is to establish and maintain data collection of many of the metrics listed in the report. Much of real estate statistics remains manual to collect by comparison to equity and bond markets and this data is becoming increasingly valuable. This week a team from the IMF came to chat with the JLL research team on real estate markets. The IMF is committed to understanding how real estate data can help the G20 and close gaps identified following the GFC. (see link here)

One of the measures that might indicate an over-heating market is a run up in the rate of foreign investment coming into a market. The chart below shows quarterly transaction volumes in Asia Pacific. The red bars show the net position of foreign inflows and outflows of global capital from the Americas and Europe/Middle East into Asia Pacific.

In 2007 the red bars show inflows; with the following years showing a gentle net outflow in foreign capital post GFC. Over the same time period, transaction volumes have sustained a steady upwards trajectory (the grey line) supported by abundant local Asia Pacific capital, available to back fill exiting foreign capital and outbid new sources.  The exception to this pattern was CPPIB and Blackstone who both made significant investments into Asia Pacific last year.

The chart shows that at present, taken as a whole markets in Asia Pacific are operating at a very sustainable level of net capital flows, with no sign of instability from this indicator. Whilst this is only one indicator, compared to the long list in the JLL/WEF report – it is a key measure.

Looking to the remainder of 2015 – the flow of net foreign capital outflows appears to be reversing. Partially as Asia Pacific capital, in particular Chinese capital, expands to take up opportunities outside the region; and partially with renewed interest by North American  or global funds in Asia Pacific looking at deals in non-core locations.


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