Global capital flows of Commercial Real Estate investments by Joshua Lee

Global capital flows of Commercial Real Estate investments:

In the first half of 2018, global Commercial Real Estate (CRE) transaction volume increased 13 percent year over year (YOY) to USD$341 billion. The Americas’ volume climbed 9 percent YOY to USD$132 billion with the United States making up the majority of the growth with a volume of USD$122 billion, up 11 percent from the same period in 2017. The outlook also found that respondents from the United States are planning to increase their capital commitment to CRE by 13% while those in Germany (13%) and Canada (12%) show similar levels of optimism and interest. In terms of inbound capital, the United States is the most preferred CRE market globally, followed by Hong Kong and China.

According to the latest edition of Deloitte’s Commercial Real Estate Outlook, global CRE investments will continue to rise on the back of a steady economic expansion and employment growth in key global markets. This is despite some concerns about a flattening yield curve, several tax reform initiatives, the threat of trade tariffs and the looming impact of Brexit in Europe.

Of the 500 C-suite CRE institutional investors Deloitte surveyed globally, 97% of the respondents plan on increasing their capital commitment to CRE over the next 18 months. The surveyed executive’s plan to diversify their portfolios through larger investments in newer and emerging business models and thematic investments such as flexible spaces which will provide an opportunity to yield higher occupancy and rents. Another area less surprisingly generating a buzz amongst investors are the ever-stable, non-traditional properties such as data centres and health care facilities. Regardless of having realised that their investments should be tied to the changing nature of work and tenant’s preferences, CRE investors are nonetheless expected to continue to value traditional properties and longer-term and high-creditworthy tenants.

Another reason why CRE investors are looking to increase their capital allocation is that real estate  provides a natural protection against the risk of escalating inflation, especially in today’s uncertain times. Interest rate hikes are generally correlated to increasing inflation, resulting in an increase of both rent and property valuation. Most leases are directly tied to an inflation index and rent increases are automatically enforced.

Surprisingly, there is a very strong disconnect between CRE investors who are overwhelmingly bullish and Real Estate Investment Trusts (REIT) investors who are conversely much more bearish. Taking into account that different types of property investors have different strategies and goals in mind, together with the assumption that operating macro preconditions remain identical, it is interesting to consider why CRE investors see the glass as ‘half-full’ whereas REIT investors see it as ‘half-empty’.

While it is worth noting that REIT investors are excessively focused on short-term news and on interest rates, CRE investors instead focus on the ‘bigger picture’ and consider a myriad of factors, which includes property price appreciation, Net Operating Income (NOI) growth and the real estate market cycle, in their investment strategies while remaining organic to existing market forces in order to diversify their investor base and attract higher capital investments.

Joshua Lee

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