Property's attraction for investors is undiminished and there is currently $4 of capital chasing every $1 of investment product according to global real estate adviser DTZ in its research report Money into Property. Investment transactions world-wide hit a record high of $600bn in 2006 and even more capital is looking to be invested in 2007 according to the firm.
DTZ estimates that there is $2.4 trillion looking to be invested in real estate world-wide and the report indicates that the proportion of investors below their target real estate allocation grew from around a third in 2005 to half in 2006. Approximately 30% of capital raised over the last two years remains unspent.
Although direct investment purchases continued to show strong growth during the year, the increase in net capital flows into real estate was much more subdued, 5% compared with the 34% in the previous year. Net capital flow was approximately $860billion in 2006. This suggests that it will be reasonable to expect a more moderate growth in investment transactions during 2007-08 according to DTZ.
The firm says that one of the most important features of this activity is the continuing impact of globalisation on real estate. Cross-border activity now makes-up around 40% of investment purchases compared with 30% in the previous year.
The capital surplus continued to compress yields in major markets. However, the firm says the flow of capital in 2007-08 will be more strongly guided by the prospects for rental growth and the well-being of local markets.
DTZ says that survey evidence suggests that investors are generally seeking to increase their exposure to real estate in 2007 and the recovering occupier markets, in Europe at least, indicates investment markets will remain buoyant in the short-term.
However, the firm adds that, world-wide, the interest rate environment has become less benign making the scope for further yield compression limited. With little room for yield compression, there is likely to be a shift towards return through rental growth where stock, location and demand will be fundamental.
Mike Cutteridge, head of DTZ UK capital markets, said: "The market is introducing an increasing number of sophisticated vehicles through which investors can deploy their capital in real estate and this makes real estate a pivotal asset class. At the same time, even with the huge wall of capital available, investors will be looking more stringently at risk as the broader outlook for interest rates and other economic conditions become less certain; and they will want to be convinced of the fundamentals underpinning the market."