Bursting the property bubble: why 2015 is not 2007


For many involved in the business of buying and selling global real estate, the memory of 2007 is fresh.

As today’s commercial property prices and yields begin to exceed the levels seen in the months leading up to the crisis, concern is mounting in some quarters of the global economy that this property cycle is reaching its peak.

New numbers from JLL, which track the movement of money around the world’s property markets, show soaring demand for commercial real estate and unrelenting investor appetite.

Second quarter global investment volumes are nine percent higher than this period last year at US$177 billion and all three regions saw greater investment levels over the first six months of 2015.

“A lot of investors are asking what will bring this period of sustained growth to an end,” said David Green Morgan, Global Capital Markets Research, JLL. “This is partly because so many people remember the last downturn but we do live in a very different global capital market.

“Some of the pricing being paid is extraordinary and without broader economic support we’d be worried.”

Broader economic support is a key factor that should mitigate financiers’ nerves, according to Green Morgan: “The property bubble of 2006-2007 blew up because rates were low for too long. But, today, investors are flocking to thriving economies where there is strong underlying demand.”

Investors flock from East to West

The U.S. is the prime target for foreign investors by some margin. 60 percent of outbound investment from Asia Pacific alone landed on American soil and there’s been a definite shift in focus from East to West.

This may seem counter-intuitive in a market clouded by the threat of rising interest rates. On 20 July, U.S. Federal Reserve chairman Janet Yellen said the central bank was on course to raise interest rates ‘at some point this year’.

“If anything the U.S. has become more expensive but we saw the same in Australia when the Australian Dollar ticked up,” said Alistair Meadows, Head of International Capital Group, JLL, Asia Pacific.

“Instead of abandoning saturated cities in search of better value assets elsewhere, investors are taking the threat of rate rises as a sign of economic prosperity.”

Investment volumes into New York, for example, rocketed by 45 percent in Q2, outpacing London.

What makes the market in 2015 fundamentally different to 2007 is the level of corporate and consumer demand.

The U.S. Fed may raise rates this year, but it appears to be the only central bank considering such a move.

In the last quarter Sweden, China, Canada and Australia all cut rates and the prospect of the Euro Zone and Japan raising rates anytime soon looks unlikely.

Grexit, what Grexit?

Damning headlines around the threat of Grexit did little to dampen demand for European property. North American private equity funds were involved in 50 percent of all inter-regional transactions and London remains the standout real estate investment market, with deal volumes up 30 percent since January.

Elsewhere in the region, cross-border volumes hit new highs in Munich and Milan and JLL’s latest Global Capital Flows report indicates that investors are exploring opportunities across the continent.

“There are always negative stories – Chinese stocks, Greece – but if you look at the underlying data, things are moving more or less in right direction,” added Green Morgan.

Shockwaves from China’s stockmarket crash could even prove positive for property markets.

Chinese money is now firmly established as a global source of capital and overseas investments increased by another 20 percent over the first half of this year. Although this only represents tip of the iceberg.

“China is one of the largest saving nations in the world and we must remember that Asian capital is a new source of capital, five years ago it was unseen, so there’s potential for lots and lots of money to come out of China and Asia in coming years,” said Darren Xia, head of JLL’s International Capital Group in China.

The slowing Chinese property market and the risk of currency depreciation are two factors forcing some groups, including developers, to look offshore.

“Many Chinese groups are yet to spend a single penny outside of China. But they want to,” said Xia.

Chinese insurance companies, in particular, have stepped up their international buying activity in recent years but there is significant scope for them to increase their allocations to real estate.


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