16 March 2016, by Yolande Barnes
Here, we take some headings from current market conditions and suggest the direction of travel for different aspects of global real estate
HEADING NORTH – CITY RANKING AND POTENTIAL
Our city ranking analysis highlights two things: first, that rent levels and growth are dependent on cities achieving – and then maintaining or growing – their competitive edge against other global cities. Currently, New York and London dominate the ranking of our core 12 cities, Dubai and Singapore are rising, while Hong Kong and Moscow have moved down the rankings.
Second, small cities such as San Francisco, Berlin and Dublin are climbing the ranks and becoming more competitive, as well as costing less in rent than the larger global cities’ average. These compass points show the way for investors; countries that rank higher on accommodation costs than on city quality and competitiveness (Hong Kong, Dubai and Moscow) are likely to experience less rental growth in future than those that rank lower. Meanwhile, the highest rental growth is likely to be seen in the cheapest real estate rental markets that have the highest potential for growth and development as global cities. Both Berlin and Dublin stand out in this regard.
HEADING EAST – CHINESE DEBT
Real estate debt in China is a metric for which there are no reliable figures, although McKinsey Global Institute estimated that, as of Q214, Chinese debt exposure to real estate (less mortgage household debt) totalled $6-7.7 trillion. Not all Chinese developers are deeply indebted and their financial performance varies accordingly, but they are a group that has seen some significant refinancing of late.
Where these are state owned or part state owned, bailouts may have been facilitated by some of the $245 billion sell-off by the Chinese of US treasuries since March 2014, although most went toward reducing foreign reserves, maintaining the US currency peg and stemming capital outflow. While stock markets decline, real estate has still proved to be the best investment and is an important store of personal wealth in the People’s Republic. The government will not want to see real estate contagion, which is why continued support of the industry is likely.
HEADING SOUTH – OIL PRICES
The 71% fall in the price of Brent Crude since June 2014 has had a profound effect on some real estate markets. Moscow’s price falls are perhaps the most pronounced among our global cities, while Dubai, although not directly dependent on oil, has nevertheless seen a distinct cooling.
The effects of low oil prices are asymmetric, with some non oil-producing markets in Europe and the US potentially benefiting from improved consumer spending and a flight of (usually private) funds from oil-producing regions into real estate and other assets.
In the meantime, some sovereign wealth funds – and others that are dependent on oil revenues – are liquidating overseas assets to repatriate funds, or will need to do so if the oil price remains low. This may offer some core prime buying opportunities in a world where they would have been otherwise scarce.
WESTERN INSTITUTIONS – SHARE PRICES AND STOCK ALLOCATION
The fact that there is no direct link between the price of shares on the Shanghai Stock Exchange and the rent on an office building in downtown Denver gives real estate an important place in any diversified investment portfolio. But, as global share prices fall and the consequent value of equity portfolios decrease, so the proportion of funds now allocated to real estate must, de facto, rise. This presents a problem for funds, which limit their exposure to real estate by reference to the proportion of the value of all funds under management. Even without any new investment, real estate fund allocation will reach or exceed the upper bounds set by institutional fund managers in 2015.
If buy orders are withdrawn, there will be contagion from equity markets to real estate. If demand eases and yields soften, this could present buying opportunities for non-institutional investors unfettered by asset allocation limits.
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