Research article

The big picture

The most significant economic and financial factors currently shaping world city real estate markets.

The real estate markets in our 
12 world cities are directly shaped by larger economic, political and business factors. The continued rebalancing of the financial system, the global concentration of wealth and the ongoing activities of central banks have all played a significant role in the performance of real estate in the world cities.

Here, we set out the three key themes that are creating challenges – as well as opportunities – for property investors.

Growth factor

The redrawing of the global economic map is having a significant impact on real estate markets. ‘New world’ economies, notably China and India, continue to see weakened growth, while older industrialised economies, including the US, UK and Japan, are recovering more strongly than many commentators anticipated. As a result, the runaway real estate growth of ‘new world’ cities has abated and in some cases, such as Mumbai and prime Hong Kong, has now reversed.

Meanwhile, the emergence of new economies, as personified by Dubai’s revival as a high-growth real estate centre, is indicative of a market that is recovering following very full corrections after 2008.

The picture is made more complex by the economic performance of world cities, which make a substantial contribution to a country’s GDP (see fig. 11). In some cases, city growth has been much greater than country GDP growth, with London and New York being good examples in recent years.

So perhaps it is not surprising that many of our world cities have seen much higher growth in their real estate values than their surrounding nations and, in a significant number of cases, there are active concerns that real estate markets have become overheated.

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Figure 11
Thinking big

It is notable that the biggest real estate deals of the past year were concentrated in just a handful of cities. Seven of our 
12 world cities were in the top 20 most active investment markets (see fig. 12).

Figure 12

What’s more, it would appear that the higher up the world rankings a city is, and the higher the level of international investment in a city, the more likely this is to be the case (see fig. 14). This is particularly true where large quantities of private wealth are focused on property – and inflating markets in particular.

Figure 14

When it comes to the biggest buyers and sellers, the US tops the sellers’ league, while Chinese developers and property companies dominate the buyers’ league (see fig. 13). Generally speaking, West is selling to East, and private wealth and sovereign wealth funds are buying from banks and institutions.

Figure 13
Bank on it

Quantitative easing has had a big impact on asset prices worldwide, and real estate has been no exception. Its influence has been felt in three ways.

First, liquidity has been injected into the investing sector of the economy. By creating an active demand for bond investments, money has been put in the hands of investors. These investors have then searched for further asset classes in which to put their money. Real estate has been a recipient of this.

Second, by removing a significant supply of bonds from the investment markets (by buying and keeping them) central banks have decreased the supply of lower-risk investment vehicles available for purchase and thereby encouraged investors to seek alternative asset classes. Real estate has often been seen as a viable alternative. Activity tends to have been concentrated in well-known, prominent world cities.

Third, by increasing the scarcity of bonds, yields have been driven down (an intended consequence to keep interest rates low) and this has had a knock-on effect on asset prices as lower yields mean inflated asset prices. This applies to a wide variety of assets, including real estate.

However, the capital value growth of real estate has been confined to particular places and types of property. The most well known and internationally welcoming cities have been the main recipients of this inward investment, especially if they have transparent markets, good legal title and represent safe havens for those seeking to preserve wealth.

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