2015 was a year of speculation and fluctuation, from oil prices to interest rates. But the global economic recovery, by and large, maintained an upward trajectory and this has sustained demand among competitive property investors for assets in the world’s real estate capital market.
With many markets reporting record-high investment opportunity levels, industry experts are questioning whether this momentum can be maintained in 2016. While pockets of volatility are challenging some economies – the oil price dip in Dubai, for example; the over-supply in Singapore, which is dragging down rents; and political instability in Russia, which is deterring some investors – there are plenty of ways to profit from property over the next 12 months.
However, the rules have changed since the last market high, says global capital markets research director, David Green Morgan, and savvy investors should take the following advice.
1. Seek out ‘trophy tenants’
As many markets reach the peak in this cycle, capital values are under increasing pressure and investors are urged to focus on assets with good income producing potential. This means looking closely at who occupies a building. Strong demand across almost all of the world’s major cities for space in offices, malls, warehouses and residential properties is pushing rental growth up but it’s also creating more competition – the buildings with better management will attract the highest paying tenants.
“No longer will reducing rents be enough to attract tenants,” warns Green Morgan. “The wider market lift we have witnessed in the last few years is evaporating and there must be a greater focus on asset management; manage your building better than the one down the road and you will attract more profitable tenants, and invest for income rather than capital values at this point in the cycle.”
2. Recognise an opportunity when you see it
Much has been said about many major markets reaching the peak of this investment cycle – transaction volumes in London and New York, for example, have surpassed 2007 levels causing concern in some quarters that the bottom is about to fall out of the international real estate market. But this is not the case, according to Green Morgan, who says that there is still room for manoeuvre in some of the most hotly contested cities.
“Look for opportunities in markets that are already seemingly at their peak in terms of pricing and saturation. For example, while headline rates in London seem very expensive, rental growth predictions are very good. If you’re investing for the next seven to eight years then these primary markets offer good opportunities to outperform…if you can find the right property to invest in.”
3. Explore development
Finding property to invest in is possibly the primary difficulty facing investors who are looking at the world’s major cities. But development is one way to secure investment grade stock in highly competitive areas; providing the risk fits the reward.
Green Morgan says: “Commodity prices are low – steel is down, oil is down and, as a result, material prices are dropping. This means that construction becomes more cost effective in some markets.”
But this is tempered with caution: “However, in cities such as London where you have major projects such as Crossrail, the cost of labour has risen so it’s about balancing the risk profile of the investor with the right location and the available opportunities. Also, look for markets where property is trading above replacement cost, where development makes economic sense.”
Regardless of the market or sector, the message is clear: there are still options open to investors in this capital market. Whether it’s refinancing at a lower LTV to reduce the total cost of debt, reviewing asset management or recycling a portfolio to reposition assets and protect against future turbulence, opportunities will continue to present themselves but they will perhaps be more difficult to spot.
David Green Morgan