Global Real Estate Concerns – The House Always Wins?

Benjamin Foster

Global real estate markets are facing increased concerns as the fundamentals of previously booming markets begin to scare regulators and institutional investors. The main target of this disquiet is China, with Beijing and Shanghai both well known for ballooning house prices and witnessing double-digit gains last year. Whilst this has prompted a degree of regulatory tightening in the main cities, Bloomberg’s recent investigation into the economic data of ten key Chinese cities highlights a large degree of fluctuation in the fundamentals behind property bubbles. These fundamentals (including population growth, income gains and the ratio between house prices and pay) and their fluctuation across the Chinese market are raising interesting concerns for those navigating the region’s real estate market.

A deep examination of the ten cities, selected out of the 70 that the government closely monitors, reveals a mixed picture. Shanghai and Beijing — facing lower population growth, moderate increases in wages and elevated home prices — appear increasingly vulnerable, especially when one factors in plans to cap their population and curb urban sprawl, traffic congestion and air pollution. Smaller cities also should be regarded as somewhat risky investments, with Haikou offering weak wage gains and lower population growth, raising concerns over the increased investment in the region. In contrast, Guangzhou and Shenzhen in the south may face less pressure, with far more favourable rates of population and income growth, as well as far more opportunities for development across the board.

A similarly troubled market is also clearly present across the Pacific, with the Australian housing market finally winding down. With almost half a decade of surging prices, the market value of the nation’s homes has exploded over $5 trillion, four times the country’s gross domestic product. Not even the U.S. and U.K. markets achieved such heady peaks a decade ago. Like the U.S. and the U.K. however, Australia’s obsession with home ownership is firmly entrenched in the nation’s economic focus. Record-low interest rates, tax breaks and increasing breadth, and depth of mortgage lending have pumped incredible amounts of debt into Australian homes.

The increasing treatment of housing as a financial commodity has seen a spike of borrowers tying themselves into a maze of mortgage-related products. Whilst this has been incredibly profitable in the short term for banks operating in the region, Daniel Blake, economist at Morgan Stanley, highlights that banks may find it harder to value their collateral if — or more likely when — the market falls dramatically as investors look to consolidate their portfolios of multiple homes. Indeed, the signs from some institutional investors are not particularly positive, with UBS economists declaring that “Australia’s world-record housing boom is officially over… The cooling may be happening a bit more quickly than even we expected.”

The world’s biggest sovereign wealth fund, however, says it has no intention of pulling back from real estate. Whilst Norway’s $1 trillion fund does note that gaps are opening between the noted valued of real estate and their value on the physical market, a potential sign that a correction could be looming, the fund is steadily growing its real estate empire (valued at $32 billion).

“It’s clearly a red flag in pricing if anything is too far off in any direction,” Karsten Kallevig, chief executive officer of Norges Bank Real Estate Management, said in an interview at his Oslo office on Wednesday. Yet perhaps the fund’s holistic approach to the sector, in its eyes, helps to mitigate these risks. Investing in a wide range of key global cities with prime office space, rather than domestic real estate being the backbone of their portfolio, the fund also holds an increasing amount of retail and logistics properties. With Amazon as one of its biggest tenants, the real estate unit is a close observer of the shift to online shopping.

“Retail is going through an evolution for sure, and it is something we are very focused on,” said Romain Veber, the London-based head of European markets. The fund is placing its bets on “high street retail,” which will “survive in the long term,” he said.

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