In the past week over 21,000 real estate professionals from across the world will gather at the Palais des Festivals in Cannes, on France’s Cote d’Azur. At MIPIM, the world’s largest real estate event, the message echoing through the exhibition halls will be positive: real estate is back.
After the global financial crisis of 2008 prompted a fall in the value of commercial real estate (CRE), and the levels of rent it could command, levels of investment are beginning to return to former heights. Research from CBRE, the world’s largest commercial property advisory firm, shows that in 2014, four countries in Europe reported record levels of investment in CRE: Spain, Ireland, Sweden and the UK. The level of CRE investment in the fourth quarter of 2014 was the highest CBRE has ever recorded. The view from MIPIM looks good, and that’s not just the proximity of the Mediterranean Sea.
Compared with other sectors, property has shown strong growth since the global financial crisis. As an investment it offers a higher yield than bonds. Low interest rates have also helped, and there has been a huge investment demand in property fuelled by private and institutional capital, which requires the income that bonds just don’t provide now.
London and Hong Kong have experienced impressive growth due to their positions as major financial centres, aided by quantitative easing. But just because we are witnessing an upturn in property value, this does not mean a return to business as usual. New trends at the occupier level are transforming real estate.
Where, how and why companies are occupying space in cities is changing. These shifts mean that property investors and developers must now be more mindful and seek to understand the requirements and even personality of a likely tenant.
Property Stays Strong
There is an interesting story that illustrates the strength of commercial property as an investment and how it does not necessarily follow major economic trends. In London’s Canary Wharf, a skyscraper at 25 Bank Street was under development in 2001, earmarked for occupation by American energy giant Enron. This plan was abandoned prior to the company’s well reported collapse in December of that year. Nevertheless, Canary Wharf Group was able to secure an agreement with Lehman Brothers to rent the building on completion on a 30 year lease, and 25 Bank Street served as the European Headquarters of the financial services firm from 2004 until their own insolvency in 2008.
When this happened, around half the building was already let to sub-tenants who continued to occupy and paid rent; the former Lehman Brothers space was occupied by the administrators who also paid rent. The building was sold in 2010 to JP Morgan Chase for £495 million. What other financial asset – bond or equity – would continue to hold such a high proportion of its value despite such a turbulent sequence of events?
With the global economic recovery set to continue, the outlook is good for property. The US recovery is on track with growth of 2.5% in 2014 and 3.1% in 2015 likely. Growth for the same quarter in the eurozone is slower at 0.3%. However, falling oil prices, an end to fiscal contraction and QE seem likely to boost growth in 2015 and 2016.
‘Abenomics’ has been positive for growth in Japan. Reforms in the Chinese economy are set to introduce a flow of savings estimated to be £1.3 trillion into the economy over the next five years. The performance of these major economies has an impact on the finances of their citizens in the form of real estate prices.
Home owners in London experienced a 16% rise in house prices in 2014, which saw their city overtake Hong Kong as the most expensive for residential property per square foot in the world. Companies operating in Beijing, the third most expensive city for commercial real estate after Hong Kong and London, can expect prices to rise as there has been very little prime office supply added since 2009.
The real estate industry, backed in many cases by international capital, directly contributes to these property trends. As well as creating offices that allow businesses to thrive, real estate provides the modern logistics facilities that allow the city’s shops, cafes and restaurants to be supplied quickly and efficiently. The industry builds homes too, providing the supply that drives prices and allows the movement of people. And you don’t need to be a homeowner to be affected by real estate; if you have a pension, it is likely that around 7% of the assets your pension fund manages will be in property.
International investment is a driving force in the real estate sector, particularly in major cities. Few have been more affected than London, where more than 50% of commercial real estate is now foreign owned. It is the rental income that flows from real estate assets that is prized by investors, for its stability and its ability to keep up with inflation long term. Another major factor behind the sector’s current attraction is its combination of investment characteristics, which include both the defensive features of a bond with the upside growth potential of equities.
In terms of growth, there’s the ability for income to rise as rents increase, but investors are also protected from inflation. Defensively, real estate investment represents a long-term bond-like income stream and the demand for commercial office space won’t disappear. Perhaps most important of all, property offers a very high level of defensive capital protection, similar to gold. Even if your tenant goes bankrupt, the building can be re-let.
courtesy of Newsweek