A new report by Jones Lang LaSalle (NYSE:JLL) revealed that investors were already responding to shifting economic conditions by funnelling more capital into commercial real estate, particularly in the Asia Pacific region. In fact, the firm estimates that the direct commercial real estate transactional market will exceed $1 trillion per annum by 2030, compared with 2012 volumes of nearly $450 billion.
“Capital growth ambitions that dictated many investment decisions before the financial crisis have given way to a global hunt for secure income streams in a low-interest-rate environment,” Colin Dyer, President and CEO of Jones Lang LaSalle, said.
“While real estate asset values have shown no immunity to the financial shocks of recent years, real estate nevertheless is emerging as a preferred option for many investors.”
“Asia Pacific has outpaced other regions in real estate activity since the global financial crisis, achieving commercial real estate investment volume in 2012 equal to 77 percent of the previous peak reached in 2007. The Americas have only reached 62 percent of that level, while Europe’s investment volume is 46 percent of its peak amount,” the report, titled “The Advancement of Real Estate as a Global Asset Class,” claims.
The impact of the growing pool of capital seeking exposure to real estate can be substantial. A 1.2 percent reallocation to real estate by the 30 largest sovereign wealth funds would increase capital allocation by $50 billion, equivalent to the entire Sydney CBD office market.
Investors are targeting a limited number of super-prime assets, chiefly office and retail buildings in major gateway cities that have emerged as the most desired assets for some institutional investors’ intent on owning the most stable, best-located assets, fully leased to the most desirable tenants. Competitive bidding has driven prices on many of these properties up to and beyond pre-crisis levels.
Across eleven major global markets, spreads between real bond rates and prime-grade office market yields are on average 195 basis points wider now than in the fourth quarter of 2007, JLL found. Those higher returns are convincing many investors to increase exposure to real estate.
“With sovereign bond market yields at multi-decade, and in some cases multi-century, lows, and with the outlook for capital growth subdued, yield becomes a core driver of investment returns,” said Dyer. “The spread between real estate and sovereign debt yields remains high, offering generous compensation to investors for the additional risk associated with real estate.”
To a lesser extent, increased allocations to real estate also reflect investor efforts to reduce risk by diversifying away from the traditional portfolio mainstays of bonds and equities, JLL’s report concludes.
“The Asia Pacific region is emerging as the long-term winner in the global contest for investment capital, boosted by the rise of domestic pension funds and private wealth. Since 2008, strong economic growth that contrasted with recessionary contraction in Europe and North America has fuelled real estate activity.
“Operational challenges, low levels of liquidity and in some cases undeveloped capital markets currently constrain institutional investment in the region, which partly explains why most western institutions are underweighted in the Asia Pacific region relative to the size of its real estate markets. Over the long term, however, JLL expects relative portfolio weightings to move in favour of the region as high rates of saving, rapid urbanisation, the inexorable rise of the middle classes and evidence of improving transparency increase investor confidence and interest in the region.”
JLL’s report identifies several other trends emerging around the globe, including efforts to increase transparency, the rapidly expanding practice of sale-leasebacks in Asia, and the increasing pace of renovations or replacement of aging real estate to better meet the needs of modern commercial tenants.