Real estate on the rebound

Global real estate has bounced back steadily after 2009’s sudden crash, and efforts are being made to prevent another bubble. World Finance has selected those companies leading the surge in our Real Estate Awards 2014


With renewed economic growth slowly creeping across much of the developed world, alongside it has been a surge in the value of real estate. While the financial crisis, subsequent recessions, and decline in credit severely hampered much of the world’s property markets, real estate has bounced back during the last 12 months.

Investment in real estate across the world has continued to increase considerably over the last year, with volumes rising to as much as $788bn in the 12 months to June as a rate of 17.2 percent, according to a study by real estate consultants Cushman and Wakefield (C&W) released in October.

This year, the IMF launched its Global Housing Watch study that will continually look at real estate markets around the world. Launching the report, the IMF’s Deputing Managing Director Min Zhu said that providing the world with detailed analysis of real estate prices would ensure that some of financial crises that were exacerbated by property prices could be understood better. “Understanding the drivers of house price cycles, and how to moderate these cycles, is important for economic stability. It is only by maintaining an open dialogue on these issues that we will gain a solid understanding of how policies can contain housing booms.”

Contrasting fortunes
Some of the initial findings in the IMF’s study showed that the most expensive parts of the world to buy a house were Belgium, Canada and Australia. Calculating the index by comparing the ratio of house prices to average income in each country, the results show that it is proving particularly difficult for people to acquire property in these regions. By contrast, affordability in Germany, Korea and Japan is particularly low.

Another result of the study was the stark impact of the global financial crisis on the world’s house prices, with a fall of 20 percent on the average price of property in 2009. While prices have yet to return to their 2008 high, some countries are seeing bigger increases than others. These include the Philippines, where average prices rose by 10.5 percent in 2013, and Hong Kong, which saw a 10.3 percent rise. India saw a dramatic fall in prices last year of nearly 9.1 percent, while the troubled economies of Greece and Italy caused prices to fall seven percent and 6.5 percent respectively.

Investment in retail property has also been strong, although has experienced smaller increases in the worlds top 25 cities compared to the wider market, according to C&W. At the same time, office space has grown, but there has been more focus on modernisation and upgrades than a surge in new space. Reduced occupancy has become a global trend, with many businesses looking to scale down their real estate costs.

In the US, foreign investors pushed up real estate activity by nearly 50 percent over the last year, dominated in large part by Canadian, Chinese and Australian buyers, according to C&W. As the US economy strengthens, foreign investors are increasingly looking at the country’s real estate. Pension funds and Asian investors are particularly keen on US real estate, and it is thought this trend will continue into 2015.

The areas that have been of most interest have been near to energy and technology markets, with New York, San Francisco, Boston and Houston all seeing strong investment. At the same time, retail markets have strengthened as a result of the improving economy and falling unemployment.

Asia’s property market has remained strong, with a healthy level of demand and liquidity due to insurance companies and pension funds being eager to invest. However, uncertainty over the regions economy has meant that activity isn’t as high as had been expected, with tougher lending conditions also hampering real estate markets, says C&W.

“Core markets are generally outperforming but the mixed economic picture together with rising new supply has weighed on overall performance. However, while there are occasional scares over the outlook, sentiment is generally firming, with expectations of a modest improvement next year as China’s commitment to rebalancing starts to pay off and as reforms in Japan and India add to confidence.”

Runaway market
London’s runaway property market has shown little sign of slowing down; with house prices in the UK capital surging passed the expected level for 2014. Homeownership has become an increasingly politicised issue within London, as the city’s soaring population struggles to fit into the houses on offer.

Studies suggest that London’s population is growing by roughly 100,000 people each year, and by 2030 will hit 10 million citizens. In order to cater for this there needs to be a rapid increase in house building. Current Mayor of London Boris Johnson has set a target of 42,000 new homes to be built each year, although some commentators believe that figure should be nearer 52,000.

One contentious issue surrounding London property is the number of foreign buyers that are seemingly hoovering up many of the new buildings as soon as they hit the market. Politicians from all sides of the political spectrum have said they intend to do something about this issue, although whether they will be able to genuinely resist this influx of foreign capital remains to be seen. Overseas investors have looked to capitalise on London’s robust property market, pouring money into real estate across the capital over the last year at a rate that far outweighs any other city.

Coinciding with this, the C&W study reports that the level of investment into London has jumped by a staggering 40.5 percent to $47.2bn in the 12 months up to June. London was second only to New York in this respect, which saw $55.4bn invested during the same period, an increase of 10.9 percent.

Another issue is talk of a potential tax on high value property that has been proposed by two of the three main political parties. The so-called Mansion Tax would hit all homes valued over £2m ($3.23). However, there has been much debate over how fair such a tax would be on people in London, and how practical it would be to actually implement such a scheme.

Finally, with interest rates set to be increased – albeit modestly – in the coming year, it is though that the booming property market in the UK could well stabilise.
While few people believe there will be any large collapse in property values, there have been signs of a slowdown recently. Next year will likely see this continue, although there will likely not deter the enthusiasm for UK property seen from people overseas.

Mass urbanisation
Across developing nations, mass urbanisation has led to slums sprawling out of major cities. As jobs become centralised and people flock to the big cities, governments are struggling to build the necessary homes that will cater for their demanding citizens. In places like Brazil, China and India, a lack of affordable homes is hampering growth. According to a study by the Royal Institution of Chartered Surveyors titled Global Affordable Housing: BRICs PLUS Mortar, governments should ensure that a clear strategy is laid out for addressing these problems.

Professor Duncan Maclennan, the reports author, says, “International bodies and lobby groups talk of the looming challenges of population ageing, the environment, worklessness, immigrations and the like. They also need to recognise that there is an emerging global crisis in relation to the provision of decent homes and neighbourhoods.”

C&W say that the global market during the coming year is likely to be stronger still, but also vulnerable to differing strategies towards monetary policy. “Looking forward to 2015, the global economy is anticipated to be firmer but still vulnerable, with trends divergent country by country. One of the most notable drivers for this will be the polarisation in monetary policy, which will be tightening in some areas but remaining loose elsewhere. This points to conflicting trends for real estate globally.”

The report goes on to state that while interest rates are likely to rise during the coming year, the impact on real estate prices is not likely to be too severe as some fear. “Whatever the nature and timing of policy changes, however, fears over higher interest rates are somewhat over done: withdrawal may be painful but investors should be more frightened of stagnation and deflation. Higher rates and reduced quantitative easing will in fact be a welcome sign of ‘normality’ returning and investment strategies should be ready to respond – focusing on the fundamentals which actually look promising in a number of property markets.”

The likelihood for next year is that the increasing competition to acquire property will continue to force prices up around the world. Unless there is a gearshift in house building across the most desirable locations, these prices are unlikely to see any falls in the future. Our Real Estate awards feature those companies best equipped to handle, what can at times, be an unpredictable market.