Our capital gravity map predicts the major flows of foreign capital for 2021. The map shows that over the coming year, the focus of capital flows will principally be between liquid, global safe-havens, as investors continue to seek out true diversification. Nevertheless, core, income-producing assets in ‘near-neighbour’ locations will also attract demand at a time when some physical travel remains subject to restrictions. With the potential for more distress to be seen in 2021, investors from private equity funds, private capital and debt funds could also consider cross-border transactions further afield. The United States, Germany, United Kingdom and Singapore are likely to be major players in cross-border activity. But if oil prices remain depressed, we expect that the deployment of capital from oil-dependent countries will accelerate too.



The predicted top 10 flows for cross-border capital in 2021


Canada > $13.3bn > United States


United States > $10.1bn > United Kingdom


United States > $8.1bn > Germany


United States > $4.9bn > France


United States > $4.7bn > Japan


Germany > $4.2bn > United States


Singapore > $3.8bn > Australia


Singapore > $3.1bn > United Kingdom


South Korea > $3.1bn > United States


United States > $3.0bn > Netherlands


Global capital flows for H1 2020 were 23% lower than the same period in 2019 as the economic effects and physical restrictions imposed by the pandemic spread. Just over 26% of transactions were cross-border – a similar level to 2019. However, this is largely due to a combination of locations outside the initial epicentre of the pandemic seeing strong first-quarter inflows, and transactions commenced before Covid-19 disruption bolstered the figures. Even before Covid-19, global capital flows and demand for real estate were already facing a range of structural changes, from changing demographics, responses to climate change, and evolving technology, including the growth of e-commerce, to changes in employment patterns and a focus on supply chain resilience amid a heightened trade war rhetoric. This has opened up investment opportunities in a multitude of new and emerging sectors. Our prediction is that the onset of Covid-19 is likely to accelerate, rather than change the impact of these structural changes on real estate. Illustrative of this, in last year’s Active Capital, we used an augmented Black Litterman portfolio optimisation model to simulate future optimal commercial real estate allocations for global private equity investors. The model predicted a rotation over time towards non-traditional real estate sectors, such as student housing, data centres, various types of income-producing residential assets, and industrials, with somewhat reduced weightings over time towards retail and office.

The office sector will continue to play a prominent role in global allocations, however, particularly in global gateway markets. Looking back over previous cycles, investment flows into specific office geographies have demonstrated particular resilience. The most historically resilient office location is the UK, which has uniquely been in the top five destinations of global cross-border capital in every quarter but two since before the GFC. The US office sector dipped out of the top destinations during the early part of the GFC, but by Q3 2009, demand recovered. Similarly, office transactions in France and Germany led cross-border capital in the recovery from the Eurozone crisis.




By continuously enhancing our capital gravity model, first used in 2018, to analyse cross-border real estate investment inflows, we can predict the leading flows for cross-border capital and their estimated size. Gravity models are common in international trade, yet there has been little application of them to real estate investment. Using the Poisson pseudo-maximum-likelihood, a recommended method for estimating real estate capital flows4, we estimate the key flows for the coming year. We focused on identifying the main factors behind the largest variation in direct real estate investment flows. These are GDP, foreign direct investment as a percentage of GDP, exchange rate, world share price index, the distance between two countries, common languages, common borders and historic ties. We also included a ‘shock’ variable, as the period being forecast follows a significant disruption.

4 McAllister and Nanda (2016)

The predicted top 10 flows for cross-border capital in 2021:

The top 10 sources of capital in 2021:

  1. United States of America
  2. Canada
  3. Germany
  4. Singapore
  5. United Kingdom
  6. Switzerland
  7. France
  8. Hong Kong, China
  9. Sweden
  10. Israel

Top 10 destinations for capital in 2021:

  1. United States of America
  2. United Kingdom
  3. Germany
  4. Australia
  5. France
  6. Japan
  7. Netherlands
  8. Mainland China
  9. Canada
  10. Finland

In many destinations, the lack of stock available for sale has limited transactional volumes. While governments and central banks support economies – although many are now in recession – we have yet to see much fallout in real estate. However, as fiscal and monetary support unwinds, we can expect more distressed assets coming to the market next year.

The office sector was the most active in the first half of 2020, followed by residential and industrial.


Another potential source of supply comes from the rotation of real estate assets. Assuming a typical five-year hold or financing period, by looking at 2016 transactional activity, we can predict the types of assets for the coming year. For example, in the US, 2016 saw $145 billion of office transactions, spanning the country, including the strong innovation-led cities (ILC) of New York, Palo Alto, San Francisco and Atlanta. Additionally, $61 billion of industrial assets were purchased throughout the country. In short, we should expect to see a range of assets - from traditional office and retail through to the industrial, residential and alternatives sectors coming to the market for rotational reasons in 2021, even if some investors extend their business plans. These should offer a mix of cyclical and core opportunities. It is also useful for investors to monitor private equity activity, which is often the first mover into a market and therefore a leading indicator. Japan, for example, has seen a significant increase in cross-border transactional activity during Q2 2020 by private equity investors, ($3.4 billion in Q2 2020, vs $975million in Q1 and $161million Q2 2019) notably a portfolio of apartments purchased by Blackstone from Anbang Insurance. Private equity activity has risen across sectors in the UK, and a large large rise in Switzerland is centred around the purchase of a retail portfolio, with units in some innovation-led cities.


As models carry an inherent amount of uncertainty, the task of predicting the future when the market is faced with a major shock, such as Covid-19, is even more difficult. While our capital gravity model includes a ‘shock’ component to capture this impact, we also highlight three further influences on capital flows over the coming year.

In 2021, we predict that a key focus of capital flows will be to safe-haven countries as well as ‘near-neighbours’, where the potential operational barriers are lower, and risks are more understood.


Currency hedging has seen marked swings over the last few years. In May 2018, the currency hedging benefits for a US dollar investor targeting the UK on a five-year currency swap was as high as 2.3% p.a. (per annum) with an exchange rate of $1.33. By September 2020, the currency hedging benefits were closer to 0.25% p.a. at broadly the same exchange rate. Similarly, the currency hedging benefits for a US dollar investor targeting mainland Europe in September 2018 was almost 3.5% p.a. on a five-year basis, with an exchange rate of $1.16. In February, just before the onset of the pandemic, hedging benefits were still over 2%. By September 2020, these benefits were just over 1%, with an exchange rate of $1.18. This has the potential to impact the focus of capital flows. In core locations where prime yields can be lower than 3%, some cross-border investors have been able to find additional return through currency hedging. Without that, they may choose to direct their capital to other locations. Some investor groups are more sensitive to changing currency impacts than others. For example, South Korean investors shifted the focus of transactions from the US to the UK (activity for which peaked in 2015/16) from 2017 onwards as sterling weakened. Last year, they shifted again to mainland Europe with $6 billion of investment to take advantage of currency favourability. We have already seen that the US, UK and other key countries in mainland Europe are considered resilient safe-havens for capital in uncertain times. Depending on the path of the pandemic, a recovery of currency hedging benefits, along with a strengthening dollar, could further enhance investment into Europe or the UK. A weaker dollar may encourage more cross-border activity into the US.

2. OIL

As lockdown curtailed economic activity around the world, oil demand slumped. Despite there being only 254 active oil rigs in the US in August 2020 – 650 fewer than one year ago – and internationally, 743 rigs in July 2020 – down 419 on July 2019 – the oil price has dropped significantly. At the start of the year, it was upwards of $60 per barrel. Now, it is around $45 per barrel. This may encourage oil-dependent countries to accelerate diversification plans and look for the safe-haven, long-term, secure income that real estate can provide.


The last few years have seen a shifting of long-standing global ties, such as US trade agreements and the relationship between Europe and the UK. This uncertain environment has accelerated the move to more local supply chains in the service and manufacturing sectors and there could be further surprises ahead. We may see an increase in intracontinental investing over the coming year, for example, within Europe or between the US and Canada, where the potential operational barriers are lower, and risks are more readily understood. This includes well-located, income-producing real estate in safe-havens.