Analysis identifies which countries could see more real estate investment

Canada and Germany have been identified as the world’s most underweight real estate investment markets and are set to attract billions of dollars per year.

A new analysis, part of Knight Frank’s Active Capital report, has been conducted using a bespoke ‘gravity’ model, based on the models used to forecast international trade and says these two nations could see $4.5 billion and £3.1 billion of property capital per year respectively.

Canada had £2.6 billion of foreign real estate investment in 2017 and can expect to see a further £4.5 billion. Germany could see £3.1 billion of investment per year, Switzerland and Sweden, both $1.8 billion, France £1.6 billion and Belgium £1.1 billion.

The study also suggest that both Malaysia and Indonesia could see annual real estate investment of $1 billion, Austria some $0.9 billion, down from $3.8 billion in 2017 and Mexico some $0.8 billion, up from $0.1 billion last year.

For the first time, Knight Frank has created a model encompassing over 40 variables which impact on inbound real estate investment, including GDP per capita, relative strength of currency and location of the destination country.

Crucially, the model also considers a range of social and cultural factors that impact upon the flow of capital from one country to another, such as shared language, existing trade agreements, and shared common religious worship.

The analysis shows that six countries in Europe are attracting less inbound real estate investment than expected. Germany, which Knight Frank calculates could support an additional $3.1 billion per year, is the most underweight European market, followed by Switzerland, Sweden, France and Belgium.

Annual investment into Austria is also significantly below the level forecast by Knight Frank’s gravity model while outside Europe, Knight Frank identifies current inbound real estate capital into emerging markets Indonesia and Malaysia as $1 billion per annum below the potential level.

“For the first time we have applied the type of spatial interaction model used to forecast global trade to estimate the level of real estate investment that global markets could support,” said William Matthews, head of commercial research at Knight Frank.

“By looking at the market and economic fundamentals, and by unpicking the socio-economic factors which impact on the flow of capital between individual countries, we have found that Canada and some of Europe’s most advanced real estate markets, including Germany and France, could support more inbound investment,” he explained.

“While competition provided by domestic investors in each market is one factor that can crowd out inbound investment, our feeling is that this sort of barrier will become less important over time, as appetite for cross border transactions increases,”he added.

According to Ole Sauer, head of capital markets for Berlin at Knight Frank, the potential inbound capital will have a hugely positive effect on domestic German investors and the overall positive sentiment surrounding the nation’s healthy real estate market.

‘This confidence is already leading to a surge in new Grade A office developments, an area where Germany is definitely behind international competing markets who have a far greater number of state of the art office complexes,’ he added