With global interest rates historically low and loose monetary policy enacted by central banks around the world, the search for yield has intensified. One area of the market that has benefitted from this hunt is real estate. Two particular areas to highlight are Asia Pacific and Europe.
First, the numbers. Asia Pacific remains one of the best-performing economic regions in the world. Growth continues to outpace the West, with 2014 GDP at 4.7% vs 1.8%*. This should continue into this year, with GDP set to top 4.9%.
The real estate market has also been buoyant. Demand for quality property remains high, thanks to rapid urbanisation, expanding household wealth and a burgeoning middle class.
In the commercial space, institutional investors continue to enter the market, with cross-border activity on the rise as they seek better returns away from core markets. Newly formed property funds have further bolstered activity. Investment in commercial real estate is set to increase to US$140 billion this year, according to Jones Lang LaSalle (a 7% year-on-year increase on 2014).
In Europe, the picture is of one of recovery, rather than stellar growth. The economy, after all, remains in the doldrums, while politicians continue to lurch from one existential crisis to the next. The latest brinkmanship over the Greek bailout is a case in point.
Nonetheless, the European Central Bank has showing its willingness to act, belatedly launching its own €1 trillion quantitative easing programme in an attempt to stave off deflation and kick-start activity. This should keep a lid on government bond yields – already at historically low levels – for the medium term. As a result, European real estate remains attractively priced and investor appetite is consequently strong.
Indeed, total investment in the European real estate sector topped €78 billion in the fourth quarter of 2014, the highest level since the peak of the cycle in 2007.
Behind the positive figures, however, there are regional differences both in Asia Pacific and Europe. Transaction volumes in China, for example, declined by 23% last year to just over $19 billion, while Indian investment soared by 74% to $2.3 billion.** The former's real estate market has cooled thanks to government intervention and over-supply; the latter's new pro-business government has seen positive sentiment swell (both domestically and internationally) and demand for commercial property grow.
In Europe, values have been rising steadily given the weight of capital targeting the sector. While core markets, such as the Paris central business district and top-tier German regional cities, were the initial beneficiaries of this trend, the search for yield has impelled investors into peripheral markets. This is driving strong returns in the likes of Dublin and Madrid, with robust income returns supported by the prospect for capital growth.
Further ahead, we expect rental growth to take over from yield compression as the key driver of value growth. We are already seeing encouraging signs of this in Dublin, Stockholm and Munich.
A bright outlook
So, what for the remainder of 2015? While the US Federal Reserve may be about to tighten policy, conditions elsewhere are accommodative. Interest rates are low, with the likes of India, China, Australia and South Korea all recently cutting the headline number. Against this backdrop of 'lower for longer' rates, real estate should continue to be an attractive asset class for investors seeking yield and diversification in a volatile world.
*IMF (Jan 2015)
** Jones Lang LaSalle (Jan 2015)