Forward thinking

What are the prospects for future growth in world real estate markets?

18 September 2013, Words by Yolande Barnes

 

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The various so-called ‘cooling measures’ that have been imposed to subdue markets that were perceived as being overheated, in places like Hong Kong and Singapore, do seem to have had an effect on transaction levels and may have contributed to some of the slowing in residential price growth seen in these cities during the first part of 2013.

However, studies of previous cooling measures suggest that the one-off imposition of these various taxes and limitations tends to have a short-term effect rather than a lasting one. The signs are that while the market adjusts to the measures, values are re-aligned with cost, there is a fall-off in market activity and values soften but, having adjusted, markets then resume their former trajectories.

The future for real estate values in many of our ‘new world’ cities will therefore depend not so much on cooling measures but on the fortunes of the country’s economy. This not only governs how much wealth is created and thereby gives rise to investor demand but also how much is produced and how much demand is created for both new living space and work places.

We therefore foresee that the more subdued growth currently seen in many of the emerging and recently emerged world economies are going to have a more profound impact on real estate values than legislation and taxation.

The impact is more likely to be felt in the low-yield cities of our 10 than the higher yielding ones. Capital value growth (both residential and commercial) will continue to be more volatile where prices are not underpinned by income.

This means that the trends we have started to see in 2013 are portentous. The stability and underlying strength in the fundamentals of real estate, namely rental growth, in many of our ‘old world’ cities will continue to be an attractive feature for investors.

We have said over the past two years that New York looked good value. Sure enough, global investors – as well as locals – do now seem to have picked up on this so that the first half of 2013 saw substantial capital growth in many real estate asset classes. Our analysis suggests that there is still room for further growth, driven by domestic occupier demand as well as further downward yield shifts as investors respond to brightening US economic prospects.

Perhaps more unexpectedly, Tokyo has also appeared on our radar as a prospective ‘buy’. The combination of moderately rising rents, more positive capital growth and high yields, in relation to bonds, are likely to encourage more domestic investors into the real estate markets. For overseas investors, Tokyo remains challenging but the cheaper Yen, recovering economy and stable real estate markets may start to encourage those looking for ‘old-world’ exposure and stable, long-term income streams.

There will still be opportunities for out-performance in some of the ‘new world’ cities. The underlying strength of secondary office rents suggests, for example, that there may be value-add opportunities if overpriced ‘trophy assets’ are avoided.

 

 
 

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Key Contacts

Yolande Barnes

Yolande Barnes

Director
World Research

Savills Margaret Street

+44 (0) 20 7409 8899

 

Paul Tostevin

Paul Tostevin

Associate Director
World Research

Savills Margaret Street

+44 (0) 20 7016 3883