Politics has dominated conversations and investment debates over the last six months, and 2017 looks set to be just as unpredictable as policies are implemented and further elections take place around the world. This has made investors rethink how they look at risk across all asset classes including real estate and how to quantify the unquantifiable.
Given where real estate markets sit globally at the end of Q1 2017 with yields at historic lows and rental growth prospects improving in many markets the potential of a correction seems overdue, given we are in the 8th year of expansion, and to some commentator’s necessary for longer term sustainable growth. Looking at absolute risk within real estate markets and relative risk with other asset classes is a challenge, as in many instances they prove to be contradictory. Indeed the wider investment environment has proved contradictory in the last nine months, very few forecasts prior to Brexit and a Trump presidency saw economic growth strengthening, equity markets at record highs and even commodities making a comeback – yet that is the reality.
With inflationary expectations increasing in many advanced and emerging markets this is pushing real bond rates lower and making real estate investment look even more attractive, on a relative risk basis. Looking at JLL’s transactional data for 2016 it is obvious that many global investors are starting to steer away from the core investment markets and are looking at alternative, higher yielding investment opportunities, potentially thinking the absolute risk in core markets is now too great.
Global real estate investment markets will always lag bond and equity markets, and Q1 2017 looks as though it may be a slightly slower start to the year than we were initially predicting in transactional markets. However, what we are seeing is that the supply of stock coming onto the market has noticeably picked up since the start of the year and while real estate may be lagging it is starting to pick up on the positive sentiment generated by the Trump Trade in other asset classes.
Historically real estate performance has a much stronger correlation to overall economic growth than movements in short or longer term interest rates, while unemployment stays low, wages grow and companies are looking to expand then real estate should continue to attract capital – the issue may be what price do you need to pay for the exposure and how do you price the risk?
