A positive and longer cycle
The fundamentals of the global property market may vary by city, but overall, they look good, with volumes near record levels, global capital flowing freely, pricing up and occupier markets firming. However, this is a time of great change: in monetary policy, in global politics, in demographics, technology and in the environment. Together, these forces are bringing significant volatility but also new areas of opportunity, as well as a new cycle that is likely to be longer but shallower thanks to low inflation, interest rates and limited development. What is more, we are yet to hit the peak of this cycle, with yields falling further and rents on the rise.
With the interest rate cycle bottoming, new decisions have to be faced – even though property has a significant buffer to work though, given that the risk premium over interest rates has remained elevated more due to a mispricing of interest rates than of real estate. Investors will nonetheless continue to wrestle with the question of what levels of risk and pricing are right for them. The degree to which rental growth accelerates to match build costs and tenant demand spreads to second-tier property as prime rents rise will help determine the right course of action.
Focus on super prime
While economic concerns are somewhat overstated, risks are clearly elevated. Thus, core will be the key theme for many, with super-prime assets in strong demand in all regions. However, demand will have to continue spreading to new markets and sectors to find opportunities at differing points on the risk curve. With markets no longer moving in the same direction, astute diversification will be rewarded.
Emerging Market comeback?
Low inflation and low commodity prices mean the developed world remains in the driving seat. Nevertheless, emerging markets will also see a steady economic improvement in time, and indeed, some could start to stabilize later this year. An increase in investment interest should also emerge both as they continue to develop but also as investors seek out
global growth opportunities. Domestic demand in these markets will also increase as both the middle classes grow and their savings and investment needs develop.
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