From crisis to critical mass

Commercial property investment’s 10-year journey


Lee Elliott, Head Of Commercial Research

During the past decade the commercial real estate landscape has transformed, now neatly encapsulated in one word – globalisation. For an asset class that in its essence is inherently local, this international influence has been nothing short of remarkable.

Invariably, globalisation has ushered in significant cyclical and structural changes to the marketplace. No 10-year retrospective can ignore the onset of the greatest economic catastrophe since the Great Depression – the global financial crisis.

It was a crisis derived from the dramatic unravelling of the flawed inter-connection between residential real estate assets and sophisticated, but flawed, financial instruments.

Almost immediately the commercial real estate market entered a downturn as asset prices tumbled and highly leveraged investors ran into difficulty. Demand for commercial real estate assets slumped and investment volumes fell. Yet, ironically, the crisis generated a macro-economic backdrop that proved conducive to significant and sustained capital flows into commercial real estate.

Perhaps the most significant transformation in the commercial real estate market is the emergence of a deeper pool of prospective investors

The combination of low growth, low inflation, low interest rates, a huge injection of liquidity courtesy of quantitative easing and a lack of performance from other mainstream asset classes, all pointed investors to commercial real estate. At the bottom of the cycle in 2009, investment into global office, retail, industrial and hotel properties stood at $216bn, according to data from Real Capital Analytics (RCA).

One year later global investment across the same asset types had risen by 67% to $362bn. Four years on and volumes stood in excess of $700bn.

What is telling, in the context of private wealth, is despite this variability in investment volumes, the proportion of private investment remained remarkably consistent from 2009 to 2015 – 23.4 to 26.6% of total volumes. This illustrates perhaps the most significant transformation in the

commercial real estate market over the past decade – the emergence of a deeper pool of prospective investors. A host of new sources of capital have emerged, not just the likes of sovereign wealth funds, Asian pension funds and petrostates, but also UHNWIs and other private interests. The role of these private interests should not be underestimated.

There was clear capacity, willingness and opportunism to fill the space left by debt finance following the global financial crisis, and to adopt higher-risk development positions critical to market momentum. In this sense, private wealth has had an important role in sustaining and, in some cases, effectively kickstarting, global commercial real estate markets.

While the pool of prospective investors has broadened, so has their geographical focus. The globalisation of demand has taken hold.

After building expertise and understanding in their domestic markets, Asian and Middle Eastern investors have increased their share of cross-border investment in global real estate in an attempt to diversify portfolios, mitigate risks and benefit from currency variance.

According to RCA, total cross-border investment from Asian and Middle Eastern capital equated to just 18% of the global total at the height of the last commercial property investment cycle. With a structural shift in overseas investment, that figure has moved to in excess of 35% – often focused on major global gateway cities, such as London, Paris, New York and Sydney.

These levels are unlikely to be sustained given current global oil price dynamics, but, in a retrospective context, the emergence of these truly global investors has been a central feature of the commercial real estate market over the past 10 years. Other key developments include the new real estate investment products. As real estate has matured as an asset class, more countries have passed real estate investment trust (REIT) legislation.

Increasingly sophisticated products, like unit trusts and even derivatives (which did ultimately fall foul of the global financial crisis), have made property more accessible to a wider range of investors.

The tangible qualities of direct investment into ‘bricks and mortar’ do, however, continue to hold sway over the wealthy private investor.

Finally, the past decade has witnessed marked improvements in market transparency. There is now more data, more information and more expertise across more markets.

This will enable private investors to overcome knowledge gaps and inform their investment strategies. The past 10 years has witnessed a maturing of commercial real estate into a sophisticated and truly global asset class open to a deep and varied pool of investors.

What is certain is that the next 10 years will be no less transformative than the last. I fully expect private investors to, once more, be at the vanguard of this transformation.