More than half of investors plan to increase real estate allocations within multi-asset portfolios, according to a major new report by Colliers International.
Yields are likely to compress further with 52 per cent of respondents to the firm’s Global Investor Outlook (GIO) for 2016 survey saying they would move more money into real estate next year. Combined with relatively low levels of debt – compared with the previous market peaks – this flood of capital would further cement a long-term climate of stability for global real estate returns.
The GIO for 2016 found that despite a reduced appetite for risk, debt would play a greater role in the market next year as investors seek to boost cash-on-cash returns.
Colliers, a NASDAQ-listed global property company, estimates that up to USD400 billion of institutional funding could begin chasing global real estate to diversify and stop an ongoing bleed of cash driven by the underperformance of traditional fixed-income investments.
Last month, Japan’s Government Pension Investment Fund posted huge losses and announced a move into commercial real estate for the first time with an estimated USD65 billion of firepower. Chinese insurance companies have already snapped up a swathe of billion dollar assets and could have in excess of USD70 billion to spend.
Such investors demand high value assets so they can deploy large amounts of capital in one go. This is why big cities such as London and New York have become such hot markets with yields crunching well below four per cent on prime office buildings.
It is the tip of an iceberg of global equity chasing real estate in what experts have dubbed the ‘great moderation’. This on account of the usual boom and bust property cycle being elongated by widespread deleveraging, a far greater reliance on equity and a wholesale re-appraisal of returns.
The GIO found that three-quarters (75 per cent) of UK-based investors would use debt compared with 65 per cent in 2013. Similarly, 87 per cent of US investors would use debt, up from 63 per cent in 2013.
Real estate capital has never been more mobile. At circa USD250 billion, global cross border investment accounted for 40 per cent of total direct volumes in the first nine months of 2015. This compares with 33 per cent last year, and 37 per cent at the peak of the previous cycle (2007).
Price rises and subsequent yield compression across prime property markets mean that taking on more debt is a more prevalent way to achieve some of the lofty returns targets investors have set. By far the most ambitious are US-based investors of whom 40 per cent seek internal rate of returns (IRRs) – which essentially measure the return on cash – above 16 per cent. It is expected that 63 per cent of them will use leverage in excess of 51 per cent.
The majority of UK investors are targeting leveraged IRRs of between 11 per cent and 15 per cent.
In the year to 7 December the FTSE-100 fell by 7.7 per cent, while the S&P500 was unchanged. Five-year US Treasury bonds trading at around 1.6 per cent.
John B. Friedrichsen, Chief Financial Officer at Colliers International, says: “Our global analysis in this report gives a unique macro-view, providing a comprehensive look at the health of the economy as well as in-depth views of market sentiment that serve as a useful bellwether for markets worldwide.”
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