Concrete Analysis

Capital continues to flow into real estate, with fresh strength in commercial sector

Hong Kong is rated among the top four global cities over the next 10 years, as Shanghai and Beijing grow in prominence

PUBLISHED : Tuesday, 15 April, 2014, 2:16pm
UPDATED : Wednesday, 16 April, 2014, 4:48am

We are still only in the early part of 2014, but the global real estate market is already in overdrive. The constantly changing and diverse global economic environment is what makes the prospects particularly exciting.

The United States is recovering, Britain and much of Europe are gradually coming out of recession, and credit markets are opening up.

Yet there are increasing fears about the Asian economies, where the rate of growth has slowed considerably, and then we have got Australia, which was virtually immune from the global financial crisis, but is now feeling the effects of slowing commodity trading.

What is clear is that the funds behind most sovereign wealth institutions are accumulating hand in hand with high-net-worth individuals, increasing their wealth and their number.

The established residential markets will still rise in value, but the pace in growth will slow

Our recently published Wealth Report 2014 reflects the attitudes of more than 23,000 ultra-high-net-worth individuals worth on average US$68 million and with a combined wealth of US$1.5 trillion.

The individuals in this group have expressed a desire to move their homes more often, invest more in second homes and increase their exposure to the commercial real estate market.

Then there is the corporate occupier. Given that for much of the past five or six years a great deal of the world has been in recession, occupier activity in the office, industrial and retail sectors has been constrained in many established markets.

Yet this dynamic is changing. There appears to be another technological revolution: retail trends are moving at an extremely rapid pace and distribution of product in the e-fulfilment arena has never been a greater priority.

There have been some extremely active residential and commercial markets. The leader in last year's Prime International Residential Index was Jakarta, which saw a year-on-year increase approaching 38 per cent - a very impressive increase.

That said, our assessment of global cities over the next 10 years keeps London, New York, Singapore and Hong Kong as the top four locations, but with the likes of Shanghai and Beijing taking increasing prominence.

Considering a range of factors, we interpret that Sao Paulo, Istanbul, Abu Dhabi, Mumbai and Sydney may be the emerging hot spots for the coming years.

What about investment strategy? Well, generally investment - whether residential or commercial - begins in the home market. There then comes a point, if resources and wealth are accumulated, that diversification is considered.

Generally this diversification is focused upon safe, well-established, transparent markets. For example, London has been particularly important in this regard. Other similar markets have included the key US cities, particularly New York, the bigger European capitals and Australasia.

More speculative prospects are available in those markets that saw a dramatic correction following the global financial crisis, but which are now showing significant signs of growth. Such cities are typified by Dubai and Dublin.

Meanwhile, Taiwan is featuring increasingly on the international radar - both in terms of inbound and outbound capital.

The city has an advanced economy that some forecasts suggest may become one of the top 20 largest in the world over the next decade.

In the commercial world, even though the dynamics have changed, the general story is of constrained supply and, therefore, an increasing expectation of rental growth.

Particularly, this applies to the likes of New York and London, and, therefore, we expect inflows to such markets to continue throughout this year.

To summarise, the momentum of capital moving around the world will continue its scale and pace during 2014.

We expect the established residential markets to continue to rise in value, but the pace in growth is likely to slow slightly.

Commercial property is generally expected to see rentals improve, particularly throughout Europe and North America, with strength returning to demand for prime offices, retail and distribution units.

There is no sign of the capital flows decreasing in volume, and the general story must be that yields will continue to harden.

So there appears to be a busy year in prospect!

Alistair Elliott is senior partner and group chairman of Knight Frank