These are exciting times for the global real estate market. While cities like New York and London still dominate much of the landscape, new ones are coming under investors’ radars due to factors such as increased transparency, booming economies, and a burgeoning global middle class.
The face of overseas real estate investors is also changing as Middle Eastern sovereign wealth funds (SWFs) and Chinese insurance companies overhaul their investment strategies to include more real estate assets.
All these present plenty of opportunities for investors to diversify their portfolio and invest in an asset class that is known for its relative stability and consistent returns. For those actively seeking those opportunities, here is a broad picture of the current global real estate market.
Real estate investments from the Middle East and China on the rise
As volatility in the equity markets remains, global investors are allocating more of their capital to real estate, including Sovereign Wealth Funds (SWFs) and global institutional investors such as pension funds and insurance funds.
Middle Eastern SWFs are leading the charge, changing their investment strategy accordingly. Fadi Moussalli, Head of JLL’s International Capital Group in the Middle East and North Africa (MENA), says the behaviour of a number of SWFs in the region has shifted from holding assets for the long term towards “value creation, followed by exits.” He added that some of these SWFs, “no longer hesitate to monetise profits if return thresholds are achieved.”
Middle Eastern SWFs are also enjoying gains from their investments during the Global Financial Crisis (GFC) as, unlike the majority of investor worldwide, they continued acquiring assets during this period.
While profits from oil production primarily fuel the investments of many Middle Eastern SWFs, this is forecast to change in the coming years. For example, the Abu Dhabi Investment Authority (ADIA) now generates most of their income from their core holdings so that they no longer solely rely on capital injections from oil profits. Saudi Arabia is also making moves to invest in a wide range of assets that are not closely tied with price fluctuations in oil.
In the Pacific, Chinese insurance companies are also looking to diversify their revenue streams with the country’s biggest insurers, Anbang Insurance Group and Ping An Insurance Group, leading the charge. In 2015, the domestic insurance sector saw a record year in terms of real estate acquisitions, while at the same time purchasing banks and stakes in other insurance companies at home and abroad for a total of US$12.2 billion.
Anbang in particular has been aggressive in its acquisitions. In 2014, it bought Waldorf Astoria from Blackstone for nearly US$2 billion, then a majority stake in South Korea’s Tongyang Life worth US$1 billion, as well as office buildings in Toronto and Vancouver worth about US$100 million each.
The main reason for Chinese insurance companies’ increased focus on global real estate is to address growing strain on their pension funds as the country’s elderly population grows. Traditionally, China’s pension funds have only had a mandate to invest domestically, something that recently changed with a policy shift from Beijing. By investing in overseas real estate, the funds are able to acquire assets that are relatively low risk, provide a steady income, and help further diversify their portfolios. JLL projects that these insurance groups could allocate as much as US$240 billion to direct real estate overseas over a long-term period.
Not just investing directly in real estate, these companies are also increasingly forming joint ventures and investing in funds, strategies that give them access to much-needed local knowledge when entering overseas markets.
Exciting times ahead for Asia Pacific
Asia Pacific currently has some of the most vibrant real estate markets globally. The rapid expansion of many economies in the region, its growing middle class, and an increase in urbanisation are the main drivers behind this frenetic pace of change.
Periods of transition such as this are exciting times for investors, providing plenty of opportunities to enter the market at the right time. However, these opportunities naturally involve a certain amount of risk and uncertainty, which underscores the need for markets that are highly transparent and can provide investors with reliable and up-to-date data and local intelligence. Professional advice from experts also plays a crucial role in helping investors make investments that offer the best returns.
As a region, Asia Pacific is full of opportunities, with data from the International Monetary Fund’s World Economic Outlook showing that, as of April 2016, countries in the region saw an average growth of six percent in real GDP over the 12 months prior. Even China, which is currently struggling to sustain the exponential growth in its economy, grew its real GDP by six percent during the same period. Meanwhile, many developed countries in North America and Western Europe have seen a growth rate of less than three percent in the same time frame as they continue to recover from the effects of the GFC.
One of the main drivers of Asia Pacific’s growth is its rising middle class. The Asian Development Bank estimates that by 2030, the Asian middle class will account for 43 percent of worldwide consumption equivalent to US$32 trillion. Meanwhile, Ernst & Young projects that during the same period, two-thirds of the world’s middle class will come from Asia Pacific, with one billion expected to come from China, and 475 million from India.
If the region can sustain current growth trends, it presents a goldmine of opportunities for investors, one of which lies in the real estate sector. For example, despite the downtrend in Australia’s mining industry, the country’s economy is being pulled up by its strong property market. This has largely been fuelled by record-low interest rates, which have allowed investors to better fund their property purchases.
China and Singapore are also seeing exciting times as they move their capital to neighbouring countries and across the Pacific. Chinese investors, in particular, are buying up in Japan, Australia, and the United States, while Singapore is moving much of its capital State-side.
Rapid urbanisation is key to the region’s growth. According to the United Nations, more than half of the population in Asia Pacific will live in urban areas by 2018. While this presents a huge challenge to governments, an increased demand for housing also presents an opportunity for those willing to invest in real estate.
Transparency Remains Important in Real Estate Markets
On a global scale, investors still prefer to acquire real estate assets in key, or ‘gateway’, cities in the United States, Europe, and Asia Pacific; particularly New York, London, Paris, Tokyo, and Shanghai. Transparency remains a key factor as to why investors choose these markets as it helps ensure that reliable data is available, solid transaction processes are in place, and that there are laws that support international real estate investments. This is also why, despite the improvement in transparency in many countries, 75 percent of commercial real estate investments still go to the top ten global markets with the highest transparency.
However, investors are also expanding their scope further as many countries show significant improvements in transparency in their respective property markets; including Germany, France, Poland, Taiwan, Japan, Slovenia, Serbia, Bulgaria, Slovakia, Romania, Botswana, and Zambia. According to JLL’s Global Real Estate Transparency Index (GRETI), transparency scores worldwide have increased by an average of 2.4 percent from 2014 to 2016. The development of the Real Estate Investment Trust (REIT) market in some countries such as Mexico and Japan has also helped raise their transparency levels since it, “necessitates the requirement for professional management, improved public disclosure, and improved governance,” says Jeremy Kelly, Director in JLL’s Global Research team.
Europe is the most transparent region with 20 to 30 of its markets considered either Highly Transparent or Transparent, according to the report. Meanwhile, seven of 13 countries in MENA showed improvements led by Dubai, although Egypt, Pakistan, and Saudi Arabia had the strongest improvements. In Sub-Saharan Africa, six of 12 countries reviewed in the 2014 Transparency Index made reasonable progress.
So-called New World Cities are also attracting investors’ attention, comprising a bulk of the top 20 cities for real estate investment. These include Boston, San Francisco, Toronto, Sydney, and Seoul. Aside from their highly transparent markets, other factors investors are looking into include improving market fundamentals, good infrastructure and livability profiles, and – in the case of some cities – their active tech sectors.
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