Although the global economy is not experiencing the sort of turbulence it has done in recent years, there are still considerable economic headwinds that are making investors look towards the relative safety of real estate markets. Geopolitical events in the Middle East and Eastern Europe have meant money typically invested in commodities like oil is being diverted towards the apparent stability of real estate, in particular in markets like London and New York, where prices have steadily risen over the last few decades.
International real estate investment management company Jones Lang LaSalle (JLL) said that transactions within the global property market have jumped substantially over the year. Indeed, during the second quarter of 2015, transactions hit $177bn, which represented a nine percent increase on the same period last year. According to JLL, over the course of the year volumes have hit $333bn, which is also nine percent more than 2014, and they say that it is because of a rise in larger deals and property portfolios becoming ‘a regular feature of the investment market’.
JLL added that the strong dollar is masking an even stronger level of property transaction around the world. “This is particularly true for the eurozone, UK, Japan, Australia and South Korea where the dollar is between 10 and 20 percent stronger than a year ago. If fixed exchange rates were used, then volumes would be up 19 percent globally over the first half of 2015 compared to 2014.”
According to estate agents Knight Frank, the global real estate market has rebounded considerably over the last 12 months, and is expected to strengthen even further in the coming year. Much of the strength comes from cities, with Knight Frank’s Global Cities Index 2015 showing how the next 15 years could see populations in cities soar by another 1.1 billion. The cities to benefit most from this are those with existing world-class industries and high quality workers, which result in major corporations moving their offices there and business people wanting to do work there.
Bouncing back
Knight Frank believes that it’s within the interests of both governments and businesses to maintain this level of growth, citing a number of high-profile developments currently underway within major global cities. “It is little surprise that cities are expanding. The workers of the Global Cities are among the most productive in the world, typically outperforming their host countries. Asia’s cities have powered ahead, with Singapore’s GDP [PPP] per capita overtaking the US in 2005, while Hong Kong surpassed Switzerland in 2006.
“Firms want to capitalise on this success, and governments need the tax revenue. So cities will be encouraged to achieve their potential, resulting in a new wave of development. Micro-cities will be built within cities, ranging from Barangaroo in Sydney to Nine Elms in London”, concluded the report.
In many locations, property markets have defied the turbulence of the rest of the global economy. Demand in cities in particular has remained sky high, with an increasingly global workforce determined to live near to where the best jobs are. As such, many of these locations have to frantically build more properties to keep up with demand.
London’s property market is a case in point. Many young people cannot afford to even get on the property market in central London, despite working in traditionally secure and well-paid jobs.
This is largely because of years of subsequent governments refusing to build houses to meet the rising population of the city. While the current government is aiming to build enough properties to match demand over the next 10 years – said to be 200,000 each year – the reality is that very few new properties have hit the market in the last few years.
Similarly, New York has experienced soaring demand for property, with little in the way of new building. This has changed, however, with Mayor Bill de Blasio announcing his housing reform plans in July that he hopes would revolutionise the property market in the city. One of the requirements under de Blasio’s plans would be to have at least one in four of every new apartments built in a development to be affordable housing.
Following the trend
Affordability has become a key factor in the housing market, with few key workers able to afford to buy in popular cities like New York and London. According to global accountancy firm PwC, real estate markets are being affected by the changing attitudes to homeownership of young people. So-called ‘millennials’ tend to delay buying and renting longer, largely because of the high price of property and sluggish wages in most economies. However, this is likely to have a knock-on effect in the coming decade, with buyers emerging in the market looking for larger properties and a smaller generation of property consumers emerging that could have a negative effect on prices of smaller properties.
PwC recently unveiled its list of Emerging Trends in Real Estate for 2015, outlining the 10 key themes that are driving investment within the international market. According to PwC, the increased urbanisation of cities is leading to them shifting from mere nine-to-five environments towards 18-hour places that have thriving night-time economies.
This is in turn changing the locations that investors are targeting, and spurring investment in many new urban locations. “Downtown transformations have combined the key ingredients of housing, retail, dining, and walk-to-work offices to generate urban cores, spurring investment and development and raising the quality of life for a roster of cities. Buyers have more markets to consider now that the 18-hour centres are putting the elements in place to ratchet up their investment capital flows”, said the report.
There has been a considerable shift towards cross-border investing in real estate over the last few years, according to Knight Frank, and choosing to put their money in the apparently safe property markets of places like London, Hong Kong, and New York, where demand remains as high as their skyscrapers. “A feature of the new real estate landscape is the internationalisation of the investment market. Foreign buyers have accounted for the majority of investment volume in London for seven of the last 10 years. Most of the other Global Cities have seen a notable rise in foreign investment, buoyed by new money from emerging markets. For new comers, buying in core locations is tempting, but that is not necessarily where the best opportunities are.”
Many of these investors come from emerging markets where their domestic economies are not as stable as more developed nations. Indeed, Asian investors have been the primary source of income for many new developments across London in recent years. “Emerging markets investors have proved quick to acknowledge this, as shown by Chinese money targeting up-and-coming Brooklyn, and a Malaysian consortium backing the regeneration of the Battersea Power Station site in London.
“We believe the next few years will see more joint venture development between international investors and local property companies. Or in some cases we may see large sovereign wealth or pension funds recruit in local talent and establish themselves on the ground in leading Global Cities.”
Changes in technology
Perhaps one of the biggest things to affect the real estate market in recent years is the advent of technology. Online property search has given buyers and renters far easier access to a range of properties than in the days where they were reliant solely on an estate agent. However, it is the way in which property owners are now able to cut out agents altogether and sell or rent directly to buyers through online marketplaces that is causing a big shift in the market.
The rental market in particular has seen a big change in recent years, thanks to online services like AirBnB, which allow easy short-term rentals to be offered in a much more informal basis than before. However, it is likely to face some sort of government oversight in the coming years, and legal reforms that capture this new market into the tax system are likely round the corner.
While consistently high prices in many places have led to people predicting an imminent downturn, it seems that is unlikely in the coming years while demand remains so high. Although the real estate cycle continues to turn, according to Knight Frank, any potential pitfalls in the coming years are likely to be minor compared to what has come in the last decade: “Cycle expectations have encouraged investors to buy real estate. This reflects the view that even if there are further road bumps ahead, the worst of the downturn has been ridden out, and property today could look a canny investment when reviewed in five years’ time.”
With the real estate market forming such a key component of the global economy – even more so in times of high volatility in other forms of investment – the companies operating within this space will have world’s attention on them in the coming years. World Finance celebrates those real estate and construction companies leading the charge in this vital market.
