Outlook for real estate investment

February 2019  |  FEATURE  |  FINANCE & INVESTMENT

Financier Worldwide Magazine

February 2019 Issue

Global real estate investment has been strong in recent years. In 2017, $698bn was invested in the asset class, according to JLL. In 2018, despite uncertainty surrounding the global economy, investment in the global property market reached a record high of $1.8 trillion, according to Cushman & Wakefield.

Looking ahead, there are headwinds facing the real estate space. The after effects of the recent tax reform in the US, the increased use of technology, the emergence of new business models and increased competition for assets will continue to challenge investors.

Yet, despites these changes, the real estate market remains resilient, thanks, in part, to the continued availability of attractive assets. Even the UK, mired in uncertainty over Brexit, is still a key location, particularly for Asian investors. Asia has been a both a key source of capital and itself an increasingly attractive investment destination, accounting for 52 percent of all activity in 2018. Furthermore, Asian buyers were responsible for 45 percent of all cross-border investment last year, according to Cushman & Wakefield.

The real estate boom is not restricted to just a handful of jurisdictions, however. In Brazil, for example, activity is also on the up. “The Brazilian real estate market is entering a new groove,” says Marc Stalder, a partner at Koury Lopes Advogados. “This has been driven, not only by the positive impact that reform of the country’s labour legislation appears to be having on the Brazilian economy after just a year in force, but also because there is a common belief in employment rate growth, which has also directly impacted the Brazilian real estate market. Also, inflation has been severely reduced, the exchange rate is quite favourable, there is a high demand in some sectors, the Brazilian real estate legal framework is mature and, importantly, the Brazilian presidential election is over.”

Elsewhere, deal activity is being driven by a number of factors. Risk mitigation, attempts to gain control over assets and portfolio diversification are key. However, one of the most important deal drivers is the accumulation of dry powder. The private equity (PE) industry is particularly active in the real estate space and investment has reached record levels in recent years – $294bn in the first three quarters of 2018, according to Preqin.

“We see a buoyant market with an accumulation of dry powder, but aligned with an increasingly specialised focus on alternative real estate asset classes, particularly those that can potentially deliver higher returns than more traditional real estate asset classes, such as retail and offices. Sectors such as data centres are enjoying strong growth underpinned by an increasing shift to a digitally-based global economy,” notes James Dodsworth, a partner at White & Case.

In the Asia Pacific region, the continuing build-up of liquidity is still driving investment in foreign real estate assets. “Strong outflows in the region are likely to continue, especially into locations where there is also currency play,” suggests says Hugh Lumby, global head of real estate at Ashurst. “Broadly, it is expected that investors in Asia, Europe and the US will continue to increase their target allocations to real estate.”

The growth of real estate technology is also shaping new trends. In 2017, venture capital firms invested nearly $13bn in real estate technology, according to Re:Tech. Going forward, the digitalisation of real estate investment will create tremendous opportunities for efficiency, growth and transformation, according to Mr Lumby. “In terms of specific technologies, blockchain has the potential to fundamentally change how real estate transactions are handled and we expect to see the technology continue to evolve in this sector this year. Although complete disruption to the market would still seem to be a few years away, how blockchain interacts with Big Data could have a significant impact on the cost of processes. Driverless vehicles could also disrupt the market by both impacting the value of real estate around transit hubs and reducing the need for parking. And with technologies still developing that require data centres, this is also set to continue to attract investors,” he adds.

“We expect technology to play an increasingly important role in the real estate investment space both in terms of how it shapes the demands around the sectors by, for example, potentially reducing demand for physical office and retail space along historic lines, as well as how the factories of tomorrow are changing from heavy industrial to silent and largely unseen data centres hosting the largest cloud providers and global online retailers – a sector that in its current form did not really even exist 20 years ago,” says Mr Dodsworth.

The digitalisation of industries, particularly in areas such as logistics and retail, will continue to impact the real estate space in the coming years. “E-commerce is already influencing real estate investments in Brazil and this influence will certainly intensify in the coming years,” says Mr Stalder. “However, it is likely too soon for us to really see how impactful technology will be on the industry on a long-term basis.”

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Richard Summerfield