Global trading conditions have been subdued in recent years and are forecast to remain that way. China appears to be emerging from its recent downturn, while developed economies in the Americas and Europe face a host of geopolitical and economic uncertainties.
The real-estate market recovery peaked in 2015, driven by strong demand in major cities in the Asia Pacific region, western Europe and the United States. In 2016, activity slowed and global trading (excluding China land deals and joint ventures) was down 12% overall.
Many global gateway cities now look fully valued and the increasing uncertainty in Europe around Brexit, Italian banking and Greek debt default appears to have subdued interest in parts of that region.
European real-estate trading was down 21% overall, despite the strong performance of some European cities, and was down 38% in the UK.
The improvement in the Chinese economy bodes well for the future of Asian investment and one sign that activity is beginning to pick up again is the substantial rise in big Chinese land deals, up 32% on 2015. However, this is a domestic finance play rather than indicative of future cross-border trading which has been curtailed recently by increasing curbs on capital movements out of China.
Historically low global interest rates have inflated world asset prices, including real estate, since the central banks started quantitative easing after 2008. Now this is coming to an end in most jurisdictions (though it may yet have a way to run in Europe), the expectation, certainly in the US, is that interest rates will start to rise. This spells an end to the downward yield shift in real-estate markets which was driving capital values upward.
We expect that future capital value growth will be driven by rental growth, coupled with stable, low property yields which will trade at a lower margin over bonds as interest rates rise.
This means that the bull market in prime real estate in gateway cities is probably over, but there is no reason to expect price falls if rental growth remains steady.
In these times of geopolitical and economic uncertainty, real estate appears to have taken on a new role as a different and stable, real-world asset with income-producing characteristics. Private wealth and institutions are seeking real-estate investments and are increasingly looking at sectors previously considered ‘fringe’ or ‘alternative’, but recognising their ‘safe haven’, income-producing attributes.