Research article

The Sector Seesaw

The demand for offices is markedly lower since the downturn, but this drop is mirrored by an increased appetite for residential property.

Shanghai's River Hunagpu and Pudong district

▲ Shanghai’s River Hunagpu and Pudong district

The impact of world capital flows and new types of money in global real estate since 2008 has shown up in changing investment volumes in different asset classes. Offices are still the largest traded asset class but have fallen out of favour in relative terms. Since 2008, offices observed the biggest drop in trading of 6%, although it is still the most dominant asset class with more than a third of total trading volumes at 36%. Some of this fall is due to lower availability resulting from less frequent trading and grade A stock being locked up in long-term portfolios.

The drop is partly the result of falling institutional appetite as well as changes in working practices, which have altered occupier behaviour and threatened the performance of some locations and building types.

Meanwhile, an appetite for residential property has burgeoned among both private investors and REITs – a trend that is likely to continue as it is supported by growing occupier demand from both Generation Y in developed economies and a growing middle class in emerging ones. Residential investment market share has nearly doubled since the downturn, and is currently hovering at 18%. Growing investment in this sector outside as well as inside the US by institutions is also likely to fuel greater future transactional activity in apartments. Office and residential exhibit a weak inverse correlation trend, suggesting that money has transferred from one sector to the other fairly efficiently.

In addition, demand for retail property is underpinned by similar demand characteristics as a result of new housing development creating the need for new neighbourhood services.

Consumer spending also increases in line with urbanisation, wealth creation and growth in the number of middle class consumers, fuelling retail demand and the prospects for growth in the sector globally. The retail sector has also shown some resilience, growing its market share by nearly 4% over the past seven years. We expect to see increasing transaction numbers in the coming years as well.

The steadiness of the industrial sector belies a big difference between logistics warehousing, closely allied to the retail sector and dated manufacturing units. The global growth in e-tailing means there is more investor interest in logistics in many parts of the globe and this has offset what might have otherwise been declining appetite for out of town manufacturing and workplaces.

Figure 1

FIGURE 1Investment market share – 2008 v 2015

Source: RCA/Savills Research

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