Global direct real estate investment returned to pre-recession levels in 2014, according to research by JLL, and should reach about $1 trillion annually within five years.
Driven by a robust economic environment, last year’s total investment is estimated at $700 billion—a level not seen since 2006. JLL predicts a further increase of 10-15 percent in 2015 and $1 trillion in annual direct real estate investing by 2020.
“We expect investments to continue to grow because the market is on a sounder, more sustainable footing than it was before the recession and has more robust controls and scrutiny on investments,” JLL CEO Colin Dyer said in a statement at the World Economic Forum annual meeting, where he served as a discussion leader in sessions on investing for the future.
The improved controls include reduced reliance on leverage and greater use of equity, stricter underwriting standards and increased scrutiny by investment committees. Other reasons for optimism include new sources of capital from Asia and other emerging markets, and more focus on direct real estate investment from institutional investors lured by low interest rates and an evolving regulatory environment.
Released the first day of the WEF annual meeting, JLL’s research focuses on 30 cities, which together received half of the total $5 trillion directly invested in commercial real estate over the past decade. “JLL is investigating ways to manage or limit real estate volatility for our clients by examining investment trends over time. This week in Davos, we’re keying into businesses’ thinking and using real estate research to advise fellow attendees on ways to grow and develop in 2015 and beyond.”
What does the research on top investment cities say about current real estate market?
Megadeals helped four elite “supercities” retain their places at the top, where they have been for the past few years. Those deals involved single assets, such as the Gherkin and HSBC office towers in London, the Pacific Century Place office tower in Tokyo, the Waldorf Astoria hotel in New York and the Marriott Champs-Elysees hotel in Paris. Two of the deals were made by high-net-worth individuals, who signify an emerging class of investor able to beat institutions for trophy assets.
But overall, a shift in investments to second-tier cities spiked in 2014. This was most apparent in Europe; for example, the number of transactions in London and Paris dropped 17 percent year over year, but increased 37 percent in the next 20 cities.
In Northern Europe, midsize cities experienced particularly high levels of investment as a proportion of their GDP. Municipalities like Dusseldorf, Hamburg and Munich, Amsterdam, and the Nordic capitals of Oslo and Copenhagen attracted corporate tenants and investors with transparent and stable real estate markets that boast strong technology and environmental credentials.
Investment growth also extended to cities such as Dublin and Madrid—considered almost untouchable just a few years ago. Dublin, which jumped to 24th in the global investment hierarchy (from 93rd in 2013), also had the world’s fastest growth in office rents over the past year.
In the United States, commercial real estate investment volumes in primary cities (New York, Los Angeles, Chicago, San Francisco, Washington and Boston) increased 66 percent year over year, compared with 37 percent for the overall U.S. market. This marks the reversal of a trend toward secondary cities seen in 2012 and 2013.
Some secondary markets, such as Philadelphia, Miami and Charlotte, experienced increased interest from domestic institutional buyers; outside of trophy, core-plus deals, foreign buyers were not as active in most secondary cities. Transaction volumes in secondary cities are expected to increase in 2015 as more assets come up for sale.
Most pan-Asian investment in 2014 focused on the major cities of Tokyo, Sydney, Melbourne, Hong Kong, Singapore, Seoul, Shanghai and Beijing. With lower volumes across the region, and lower transparency, there was less appetite for secondary-city opportunities outside of trophy or core properties.
Interest in multifamily assets, a focus of investor activity in the U.S., spread to countries such as the United Kingdom and Australia. Additionally, Chinese residential developers have expanded aggressively into overseas markets in recent years, with a focus on London, New York, San Francisco, Toronto and Sydney.