The Global Investors' Vision – What Will Keep Them Awake at Night?

During a panel at MIPIM, I joined industry leaders as we gave cross-continental perspectives on the real estate investment market.

Global Views on Debt

Unsurprisingly, debt was a major topic of conversation, which was particularly interesting given the marked difference between European, U.S. and Asian markets.

• U.S. - With large levels of U.S. debt tied to real estate in the U.S., there are concerns about the stability of some lenders.
• Europe - In Europe, around 95% of real estate loans are from the banking sector, which, post-Global Financial Crisis, has been tightly regulated with lower loan-to-value ratios than the US. Europe's debt market has stabilized, enabling banks to resume lending and helping to underpin the real estate market.
• Asia - There is minimal distressed real estate lending in Asia, except in China and Hong Kong, where there is considerable pullback from traditional banks and lenders. For the first time in decades, Japanese and Chinese banks are expected to increase their lending rates in line with base rate changes this year, making them seek higher-yielding real estate opportunities.

Global Office Market Differences

• Impacts of the Pandemic - Practically all global economies experienced inflation following the pandemic. However, the effect of the pandemic on the U.S. and European job markets differs. In the U.S., around 15 million people became unemployed, resulting in many people becoming disconnected from their jobs and where they lived. In Europe, however, people stayed in their jobs and homes due to furlough schemes, providing stability in the market.
• Working Trends - Hybrid working is increasingly impacting office markets around the world. In the Australian office market, for example, Sydney has vacancy rates of 16% and Melbourne 12%, which is similar to the rate in the Canadian office market. This contrasts with Asian markets, including South Korea, where offices are the best-performing asset class, as well as in Singapore and Tokyo, where office is performing well. The contrast was attributed to office workers in markets such as Australia and Canada being more likely to commute by car and choosing to work from home. In contrast, in South Korea, Singapore, and Tokyo, office workers commute using relatively cheap and efficient public transport.
• Outlook - The key to success for office assets is to design assets that appeal to those working in them, particularly the younger generation entering the workforce over the coming years. As tech-accelerated changes in consumer shopping patterns have swept through industrial and retail sectors, changes in generational behavior and preferences, underpinned by the ongoing tech revolution, will impact the office sector.

What Do Investors Want?

Capital is seeking the best returns. Pension funds and other investors are increasingly comparing rates daily and evaluating if real estate matches the requirements for the sector to grow. As a result, if real estate is unable to provide strong returns, funds will look elsewhere. In some instances, credit and infrastructure are attracting more investment, given the more compelling returns offered.

Investment platforms that provide the option to optimize portfolios while benefiting from scale and synergies are increasingly the focus of major overseas institutional investors. Those groups also seek to retain basic elements of control, as they continue to scale up globally.

Who is Active in the Market?

Active investors include private family offices, Asian high net worth (HNW) buyers, private equity groups and discretionary funds, who are not dependent on debt finance and are looking for long-term investments. More active investors are coming onto the market and are aiming to acquire assets in the next five to 10 months as caution is starting to fade, being replaced by a sense of opportunity.

Conclusion

We are more optimistic than we have been in recent months. With the Federal Reserve signaling interest rates have peaked and, given that we expect up to two cuts this year, we are already starting to see transactional activity increasing.

Since December last year, we have seen offers increase in the US, across the CRE sectors. For example, on some major office sale mandates, we are having up to 80 tours on an asset that would only have had 10 last year. This year, we expect to see more institutional capital enter the market – both domestic and off-shore.

Although in the early stages, the healing process is beginning. With central banks in most major economies following the Federal Reserve's lead, global investment in commercial real estate will increase as we progress through 2024.