Real estate’s ‘battle for assets’

The battle for prime real estate assets is going global as institutional and sovereign wealth fund capital, much of it from Asia, floods back. As a result, many investors are seeking value further up the risk curve, looking beyond the core cities and conventional asset classes.

Capital flows are strong and growing in Europe and the US, according to the Emerging Trends in Real Estate® 2014 (ETRE) Global Outlook for 2014, which draws together the results of the ETRE regional surveys.[1] In Asia, the picture is more complex as US investors repatriate assets in reaction to the Federal Reserve tapering its economic stimulus.

Showing the strength of capital flows, sales of large lot size commercial property around the world surpassed the trillion dollar mark in 2013, for the first time since 2007. Data from Real Capital Analytics reveals flows totalling over US$1.1 trillion.

Investors are responding to 2014’s intensifying competition for assets by looking to alternative strategies. Some are concentrating on specialist asset classes such as student accommodation or distribution centres. Others are considering secondary cities.

Another new trend is the increasing global recognition that ‘place making’ – the development of successful places that contribute to health, productivity and consumer activity – has potential significant financial, as well as social, benefits.

Moving up the risk curve

In the US, investors are looking beyond the investment heartlands of Boston, Chicago, Los Angeles, New York City, San Francisco and Washington. Not only are opportunities in these core markets harder to find, and the best assets more expensive, but also the economic recovery is driving an improvement in occupier demand and rental growth across a wider range of cities.

Respondents are also optimistic about US industrial warehouses, as the sector benefits from major advances in supply chain distribution and manufacturing, due to both e-commerce and so-called ‘re-shoring’ of factories.

In Europe, the biggest perceived issue facing the industry is a shortage of prime assets to buy. Investors are looking beyond such key markets as London, Munich and Paris, and into solid, income-producing property in secondary cities. They are looking at housing with renewed interest, as an imbalance between supply and demand becomes a defining characteristic of many European cities. Furthermore, sentiment towards Spain has revived with remarkable speed.

In Asia Pacific, strong flows of sovereign wealth, institutional and Chinese capital protected real estate from the effects of US stimulus tapering in 2013, according to survey respondents. Some investors have been looking up the risk curve, broadening their exposure to include sectors such as senior care and logistics. Propelled by Prime Minister Shinzo Abe’s massive economic stimulus plan, Japan has risen to the top of investment prospects in Asia. But with local investors cornering the market for core assets in Tokyo, foreign funds are looking for opportunities in secondary assets and sectors.

A bright picture

Broadly speaking, the Emerging Trends in Real Estate® surveys paint a bright picture for real estate, summed up in their Global Outlook for 2014. Looking to the second half of the year, the scene is set for an escalation of the 'battle for assets'. Capital flows are likely to continue to increase. Investors are likely to respond with a variety of different strategies which, for most, will lead to moving up the risk curve in the search for value.

[1] Based on interviews with the most senior property professionals, the Emerging Trends in Real Estate® US, Asia and Europe reports, produced annually by PwC and the Urban Land Institute, are a key indicator of sentiment in global real estate.