Supported by steady economic performance and improving occupier market fundamentals, global real estate transaction volume is growing. Investors are looking further afield for opportunities demonstrated by growth in cross border investment in Europe and the United States, while an uptick in portfolio deals shows that capital is being deployed quickly. Expectations for faster global growth and an abundance of available capital targeting real estate point towards a further increase in transactions in 2016. Working Capital Review caught up with Peter Hayes, managing director and global head of investment research with Prudential Real Estate Investors.
WCR: What are trends in European real estate?
Hayes: Europe’s economic growth story is gradually improving and real estate investment volume is rising. The field of real estate can be a profitable investment for anyone if they know how to go about it correctly. For anyone looking to get started in this industry, there is a lot to learn and put into practise, which is why sites like chipglennon.com exist. This way, you’ll at least get the basic understanding of what the real estate industry consists of and you’ll be able to make your decision from then on. Like many industries, it is ever changing.
It is a forever changing industry. Investment yields are falling to record lows in some markets, with pricing driven by a weight of capital targeting real estate assets and increased cross-border activity as investors look further afield for available product that meets return expectations.
We’re also seeing growth in what might be termed, in Europe at least, “non-traditional” real estate investing, encompassing sectors such as multifamily and hotels. Interest in demographic-dependent real estate investment strategies, such as senior housing and student accommodation is growing too. For us, the popularity of strategies driven by secular trends, such as rising student numbers or an aging population, points to ongoing caution among investors, something that is also reflected in the share of capital being deployed in major cities, which remains elevated. Many are looking to similar practises to the living trust in Michigan, to help avoid paying a probate through the courts when their property is passed on as inheritance.
Looking ahead to 2016, the lack of grade A space, either currently available or in the pipeline, set against an occupational market that is finally gathering some momentum points to compelling opportunities for core plus and value-add strategies. Opportunities to re-position or redevelop existing office stock look an attractive proposition in core markets such as Germany and the UK where we’re already seeing a pick-up in office rental growth in suburban areas and smaller cities that offer a lower cost alternative to expensive business districts. Some companies have applied the idea of using ringless voicemail for mortgage professionals and real estate. This way can these businesses can easily reach new prospects while staying compliant and reach new leads.
Despite the threat posed by rapid growth of online sales, which is fueling investor interest in logistics assets that cater for e-commerce activity, we see an improving story for the retail sector in 2016. Investor demand for prime high street retail assets, which benefit from rising tourist numbers and robust occupier demand, remains high, while major shopping centers are trading well as a result of improvements in leisure offerings. Interest in relatively cheap big box retail warehouse space is also growing as housing markets start to show signs of life. And with this changing in the housing market most people will be looking to getting mortgages, particular those who are first time buyers with many looking to places like comparsion websites (for example, something like https://www.moneyexpert.com/mortgages/) to try and make sense of what is available to them. This turn in the tide will also have an affect on global trends in real estate investment.
WCR: What are the global trends in RE investment?
Hayes: Concerns about pricing levels are growing. Prime yields have moved to record lows in major markets such as London, New York and San Francisco, and investors are finding it more challenging to find assets that meet return requirements. Looking ahead we expect a rotation of capital away from gateway cities, towards late cyclical markets and smaller cities, where yields are higher and occupier performance is starting to improve.
We anticipate an increase in space completions over the next two years but development activity is set to remain low in a historic context. In office markets, vacancy is falling and occupiers are moving beyond expensive central business districts to meet space requirements. We’re seeing more leasing activity and stronger rental growth in suburban markets, a trend boosted by increasing activity among technology-related occupiers that favor cheaper sub-markets.
In emerging markets, the prospect of a rebound in economic growth, despite slower growth China, combined with a pick-up in capital inflows bodes well for real estate investment market activity.
WCR: What’s happening in real estate investing in china with currency being approved by IMF?
Hayes: We don’t see the IMF’s inclusion of the Yuan in their basket of reserve currencies as a game changer for China’s real estate markets – instead we view it as a by-product of China’s recent reforms, growing economic influence and increasing integration within the global financial system.
While IMF recognition will help, investors remain cautious towards China. Near-term uncertainty, relating to issues such as high debt levels, residential pricing and a bumpy transition towards consumer-driven growth, has led to a softening of investment demand.
However, on a long-term basis, China remains an attractive proposition for real estate investors due to its scale and growth potential.