New investors, new capital
The trend is supported by increased institutional allocations directed toward commercial real estate as they are focused on higher-yield opportunities, in addition to new sources of capital that are being unlocked around the world from countries like China, Taiwan and Malaysia.
“New capital targeting real estate is only part of the story; experienced real estate investors are also allocating more money to direct real estate opportunities,” said David Green-Morgan, JLL Global Capital Markets Research Director. “As these groups tend to be well versed in allocating capital, they are able to direct large sums of money into the sector relatively quickly.”
According to JLL, by 2020, cross-border investment globally could account for more than 50% of all activity as inter-regional flows grow.
One of the most striking trends in commercial real estate is the rise of China as a major player in global real estate markets. As of the third quarter 2016, China overtook the U.S. as the world’s largest cross-border purchaser of commercial real estate assets.
Real estate reigns as a global asset class
The last two real estate cycles have seen an extraordinary rise in the amount of capital targeting the asset class across the world. Growth in the sector over the last 10 years has been impressive, but real estate still lags behind the bond and stock markets in terms of total U.S. dollars.
To continue its rise as a preferred asset class, a further improvement in transparency is essential. JLL’s 2016 Global Transparency Index pointed to steady improvement in the majority of countries, which is an encouraging sign for investors.
U.S markets remain strong
Investment activity in the United States, the world’s largest real estate market, is strong. It’s the home to 16 of the top 30 cities for real estate investment in 2016:
- New York was the global leader (for the second year in a row), with over $33.1bn in transactional volumes (Q1-Q3 2016), nearly double the activity of second place London.
- Los Angeles moved into third position (ahead of both Tokyo and Paris), with a 22% increase over the first nine months of 2016 to $15.7bn, due to an increase of foreign investment.
- By contrast, San Francisco dropped out of the Global Top 12 for investment, having occupied one of the top global positions for several years, with investment levels dropping 46% (Q1-Q3 2016) against 2015.
- Washington DC (6th) and Chicago (8th) held their positions in the Global Top 12 despite modest falls in volumes in 2016.
Competition benefits New World Cities
As increased demand has placed stress on core urban assets in cities like New York, London and Paris, competitive pricing and lack of product in the marketplace has investors looking to “New World Cities.” This group is comprised of mid-sized cities which typically excel in high-tech and high-value sectors supported by robust infrastructure, a favorable quality of life and transparent business practices, which combine to boost momentum and real estate market activity.
In the U.S., New World Cities include metropolitan areas like Boston, Dallas and Seattle, while in Europe cross-border activity has boosted investment volumes in cities such as Stockholm, Brussels, Oslo, Vienna, and Dublin.
A changing geography on investment?
“Despite the fact that there are more cities than ever on investors’ radars, they continue to be overwhelmingly focused on the more transparent and liquid cities in the mature economies,” said Jeremy Kelly, JLL Director, Global Research. “There are huge opportunities for emerging cities to capture a greater proportion of capital directed at real estate but, to do so, they will need to significantly improve transparency in order for investors to continue to gravitate toward the established investment market.”
JLL (NYSE: JLL) is a professional services and investment management firm offering specialized real estate services to clients seeking increased value by owning, occupying and investing in real estate. JLL is a Fortune 500 company with, as of December 31, 2015, revenue of $6.0 billion and fee revenue of $5.2 billion, more than 280 corporate offices, operations in over 80 countries and a global workforce of more than 70,000. On behalf of its clients, the company provides management and real estate outsourcing services for a property portfolio of 4.0 billion square feet, or 372 million square meters, and completed $138 billion in sales, acquisitions and finance transactions in 2015. As of September 30, 2016, its investment management business, LaSalle Investment Management, has $59.7 billion of real estate assets under management. JLL is the brand name, and a registered trademark, of Jones Lang LaSalle Incorporated. For further information, visit www.jll.com
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