Real-estate risk is changing, and attitudes to that risk are changing, too. These are the findings of an important new Savills real-estate report – Worldwide Trends 2018 – prepared by the Savills World Research team.
Those changing risks, and the attitudes to them, are particularly apparent in China, where a huge weight of money has been pressing on the sector and investors are working hard to find investment assets in their sectors of choice. In some cases, they are resorting to debt finance as a means of gaining exposure and, in others, buying into operational platforms and asset-management companies. These options put greater emphasis on net real-estate income flows rather than investment trading of directly owned assets.
This theme is not confined to China and we expect it to be particularly prevalent in regions where freehold is unavailable. Leasehold land ownership, of limited duration, is the norm in many emerging and recently emerged markets, and this should put an emphasis on the size, reliability and duration of income over a fixed term rather than long-term capital-value appreciation through future trading.
Here are seven ways real-estate risk will change in the coming months.
1. Real estate as an alternative to government bonds
In countries where there is political instability or fiscal uncertainty, real estate has taken on a role as a stable provider of fixed income in investment portfolios.
Particularly in locations with Anglo-Saxon law traditions where there is familiar and secure legal title (often former British colonies), real-estate investors enjoy a degree of sovereignty over their possessions so they might be considered higher grade than local government bonds at risk of default. History shows that cities and buildings can often endure longer than political regimes or even sovereign nations. Little wonder that real estate is lower yielding than bonds in these circumstances.
2. (Over)crowded markets
There are only limited opportunities to invest in conventional asset classes in many world cities as the supply of investable assets has not kept pace with demand. This is especially true where development debt finance has been scarce following the global financial crisis.
However, for those investors willing to consider something new, more opportunities are opening up. The growing number of middle-class populations in Asia, for example, offer big opportunities, but will only present a well-matched risk for investors in locations where real-estate title is robust and markets are transparent.
Some world property markets have very different legal traditions and rights than those to which many global investors have become accustomed. Without change, there is a limit to how much land the real-estate investment universe can cover. Real-estate investment growth is more likely to be in new property types, sectors and neighbourhoods that have yet to be widely invested in.
3. Learning lessons from Japan
As the western world learns to live with low inflation and low interest rates, lessons can be learned from Japan, which has already experienced three decades of this phenomenon. Core residential investments in Tokyo, for example, are illustrative of a potential global trend: there is little likelihood of capital value growth without rental growth – or the prospect of it.
4. Some alternatives are becoming core
Most of our global tipsters point to potential in, and growing demand for, alternative asset classes. This does not necessarily mean that investors are exploring outside their comfort zone on the risk curve. In a supply-constrained world, our researchers report that investors are still focused on quality and looking for prime investments, but would rather find them in new asset classes than move into secondary and tertiary properties in conventional asset classes. The extent of investable global real-estate asset classes is therefore expanding.
5. Which alternative assets will make the grade?
The successful emergence of some new core asset classes, such as student housing or logistics, cannot be applied to all demographic or social trends. The aging of the US population, for example, hasn’t translated directly into demand for new types of housing for the aging or elderly. Instead, other, non-real estate solutions such as robotic assistance may be found. So, new social and demographic trends, although real, do not always have consequences in the real-estate world – or they may have unexpected consequences.
6. Disruption continues
Technological changes will continue to disrupt real estate. The effects of e-commerce, driverless cars, new transport technologies, robotics and AI have only just sent the first rumbles of what may be a major industry earthquake. Technology will continue to alter the nature of real-estate risk, which means future Impacts articles will have very different asset classes featured as ‘core’.
7. Cyclical turning point?
Keith DeCoster, Director, US Real Estate Analytics, Savills Studley, describes how not every site or district can be the next tech/millennial/creative hub. The US experience may be indicating where the limits of the new, alternative real-estate lies and where wishful thinking of the next cycle begins. With construction starts in the US spiking for the first time since 2008, 2018 looks as if it could be the fulcrum between the rational real-estate investing of the last 10 years and the next 10-year bout of over-exuberance, leading to correction.
Over the next few years, investors need to distinguish between rational moves to the new successful asset classes in a time of change and disruption versus traditional late-cycle, over-exuberance and over-extension.
Read the full version of Worldwide Trends 2018 now, which has detailed regional and sector-specific data and comment.