Real Estate: A Global Outlook

PWC and the Urban Land Institute have jointly issued a report on “emerging trends in real estate” around the globe, which stresses that real estate’s attraction as an investment, even as a cross-border investment, has held up notwithstanding unprecedented levels of concern about geopolitics.

The “global drift back to domestic agendas” as exemplified in the “America First” talk of the Donald Trump administration in the United States, and in Britain’s exit from the European Union, “risks upsetting finely balanced interdependencies between countries and regions,” the report says.

Yet this fact doesn’t lessen, it emphasizes, the need for a diversified portfolio. It means that the various national economies involved may move in different directions, which in turn means that institutional portfolios should be diversified by country as well as by category.

Another theme of the report is that “real estate” itself is getting trickier to define as an asset class, as its boundaries with infrastructure get blurrier. Infrastructure is sometimes defined by the clear value of certain investments to the economic health and productivity of a broad community. But everything about real estate, in a world of “rapid urbanization, resource constraints, rising inequality and a housing crisis” can be considered infrastructure in just that sense.
As logically irreproachable as that observation may be, as one interviewee told the people working on this report, “the two teams will still be run by specialists,” that is, different people within an investing institutions will keep looking at “real estate” on the one hand and at “infrastructure” on the other.

The United States

On interest rates, always a key issue when real estate is the subject, one interviewee said, with specific reference to the United States, “There’s a general consensus now that interest rates are only going one way – up – and probably a lot sooner than we thought.” Had Secretary Clinton become President, on the other hand, there might now be deflation and negative interest rates, or at least serious talk thereof.

Meanwhile, there is an increasing focus in the U.S. on the affordability of housing. One interviewee, raising this issue, said, “I don’t mean low-income or government subsidized. Just regular rents. No new buildings are providing that kind of product. Time will tell if that’s going to come back and haunt us.”

Asia-Pacific

In the Asia-Pacific region, real estate has become a matter in which the deals are higher priced, but there are fewer of them. In Japan especially there is a “decline in the overall number of transactions as buyers balk at rising prices and owners … opt to hold rather than sell.”

In China, too, good investment opportunities in real estate and/or infrastructure require more granularity than once might have been the case. One interviewee said, “Our holdings there are very significant, and if we are looking at new opportunities there, we are very selective.”

In Hong Kong, home sizes are shrinking, because only with sacrifice of volume are there still affordable homes for many families. One major developer now focuses on homes with footprints of just over 160 square feet, so-called “matchbox” homes.

Beyond homes or offices, one gets to the “non-core” real estate. Non-core asset classes within real estate include data centers, sub-logistics facilities, and senior living. These are all higher risk projects than the core, but some investors have moved up the risk curve and have diversified the real estate part of their portfolios in this direction.

In Australia, there’s some movement of investors toward the suburbs.

Meanwhile, India and Vietnam have both emerged as “promising long-term plays, although shortage of institutional grade stock ensures that most opportunities remain on the development side.”

Capital Flows

Commercial property debt funds have drawn in a good deal of new capital of late from fixed-income investors, simply because inflation-adjusted net yields on corporate bonds are these days uncomfortably close to zero.

In the U.S., one sees top institutions invested 10% in real estate for just this reason. And institutions not at the ‘top’ of the heap are following suit. One interviewee told these surveyers, “You can see bread and butter local pension funds continue to raise their target allocations commensurate with the leading investors.”

There is also a vast amount of capital from China and Japan looking for places to go – some of it in the hands of institutions that have historically had zero real estate allocation, a number that can only go up.