Global commercial property investment markets have been a mixed bag so far in 2016 with volumes down 10% over the first half of 2016, all be it from the cyclical highs of 2015. While we don’t expect the market to fully recover and beat the 2015 numbers we are not forecasting a dramatic downturn in activity either, despite the uncertain political and economic outlook for the rest of 2016.
Over the longer term the market is set to increase dramatically, surpassing US$1 trillion a year by 2020 according to our estimates, as institutional investors dramatically increase their allocations to real estate. This has been a trend that has been growing in popularity over the last few years but which in 2016 has received an additional boost as more and more investors look seriously at real estate investment of all kinds.
Within the last few months, institution after institution around the world have announced that they are looking to increase their allocations to alternative investments. This encompasses a wide range of investment possibilities from hedge funds to fund of fund investments, but by far the biggest element of alternative allocations are to real assets. That is another aspect of the changing investment trend, infrastructure and real estate are increasingly being seen as one and the same type of investment, with the focus on securing sustainable income over the medium to long term.
As China Investment Corporation (CIC) noted in its latest annual report – “For long-term asset investment, we ramped up investments in assets that generate stable returns such as real estate and infrastructure.” To date, it says, that has translated into more than 40 real estate investments across North America, Europe, Asia and Oceania.
In this ‘lower for longer’ global interest rate environment, real estate is being seen as no longer an alternative – it is transforming into a mainstream asset class. Despite these announcements actually spending these increasing allocations is another matter. The supply of investible real estate is very inelastic and good quality infrastructure projects, despite the obvious need in many countries, are not easily accessible.
For investment activity to significantly increase above the US$600-630 billion we expect for 2016 we are going to have to see more markets become more investible, such as China, India, Africa and Latin America. The risk is that if new locations do not open up then pricing in core and developed markets will be pushed ever higher.
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