While today's global capital markets have been dominated by near-term volatility such as China's slowdown, the collapse of oil, and geopolitical unrest among other things, there are a number of long-term structural trends in play that have a more lasting impact on global commercial real estate. Being able to distinguish between these short-term cyclical factors and long-term structural changes is resulting in smarter investment strategies - and giving savvy investors a leg up.
A whitepaper from leading commercial real estate services and investment firm, CBRE, titled "Leading Global Capital in a Time of Uncertainty: Navigating Structural Change," shows three key structural drivers that global investors need to watch.
1. Asian and Middle Eastern capital
A huge influx of capital is entering the global market from Asia and the Middle East, as key investors are looking to expand international holdings. Institutional investors in South Korea, Singapore, Taiwan, and Malaysia, among others, are increasing their allocations to commercial real estate. And this capital pool is as massive as it is diverse - an estimated $8.6 billion in Chinese investments and $5.6 billion in Middle Eastern investments were made in the US commercial real estate market last year alone. And according to research, similar volumes are expected in 2016.
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While some have argued that this surge in capital is unsustainable, the sheer size of the capital pools and the diversity of country origin as well as investor and asset types speak to the lasting power of this capital. Peter Senst, president of Canadian Capital Markets at CBRE says, "Asian capital has helped to provide a 'wall of capital' into commercial real estate in developed markets, and a wave that big just doesn't disappear."
2. Regulatory and tax changes
Regulatory and tax changes also have the potential to impact global capital flows. On the negative side, provisions such as Basel III and Dodd-Frank could add additional scrutiny on banks, and therefore increase the costs of lending to commercial real estate. Other regulations, such as FIRPTA, could have positive effects by creating favorable tax treatment for foreign investors in the US leading to gains in existing investments and attract new ones.
Foreign regulations have a profound effect on the market as well. Due to easing of regulations, Chinese and Taiwanese insurers are now allowed to invest in international real estate. Similarly, Japan's government pension investment fund plans to begin allocating a portion of its $1.2 trillion of assets to alternative investments, including about $1.8 billion in overseas real estate.
3. Tenant demand
Technology has always been a dominant force of change in the world at large. And its impact on commercial real estate is no less profound. Consider the effect tech has had on modern retail: E-commerce now accounts for about 8% of all retail globally (and it's growing), resulting in a slowdown of new construction among retail stores.
Tech advancement and adoption has also had a noticeable impact on the modern office. New technologies are un-tethering workers from their physical locations and creating a highly mobile workforce, which has resulted in businesses requiring less square footage, but more flexible office space.
It's never easy to predict what financial markets might do, but successful investors need to understand all the factors, both short and long. Given this change Chris Ludeman, CBRE's global president of capital markets advises, "Investors and owners of commercial real estate need to constantly reassess their assumptions."
This is an excerpt from Brief #2 in CBRE's Global Capital Thought Series - Navigating Structural Change. To download the full piece click here.
Learn more about navigating today's global capital markets.
This post is sponsored by CBRE.
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