Real Estate and Globalisation

2000 to 2010 was a remarkable decade for real estate. It started with the dot.com bubble and ended with the putative recovery from the Great Financial Crisis. The period in-between featured the world's first coordinated real estate boom and slump. This book is based on a series of briefings on the relationship between macro economic events and real estate markets in the era of globalisation that covered the period. Collectively they offer unique insights, new ideas and practical approaches to real estate economics, grounded in the day-to-day realities of investment, development and fund management operations in a leading international property company.

All the briefings are based on research conducted by a sophisticated in-house research team with expertise in macroeconomics, urban economics, financial economics and econometrics, led by a well- known specialist in the field. The topics highlight the relationship between real estate markets and global economic and political events – an area not well covered by academic journals.

A compelling introduction considers the dramatic boom and slump in real estate values that led up to the Great Financial Crisis. The briefings are then presented, grouped into broad themes: macro economics and real estate; GDP, recessions and inflation; REITs; construction; Asia; retail, offices and housing markets; the formation of investment yields. A final chapter considers the medium-term future for real estate in the context of the ongoing financial crisis.

Topics span the key sectors of office, retail and residential real estate in over 40 countries, with a focus on private sector investment, development and management. The perspective is long term, reflecting Grosvenor's unique position in real estate as a privately owned group.

The author provides a commentary on each topic, giving context to the research and the implications for strategy, drawing out two unifying themes: the effect of globalisation; and the importance of macro economics and geo-politics in real estate research.

Together, the briefings offer a penetrating analysis of real estate markets in the era of globalisation and financial crises. The era of crises is far from over, and Real Estate and Globalisation provides invaluable insights for property professionals worldwide – developers, occupiers, investment analysts and planners – on the nature of the processes that create such intense property market volatility. The book is also a unique source of guidance on practical property research for final year undergraduates and postgraduates on property courses, as well in geography, planning, architecture, and construction.

Foreword xi

Preface xiii

Acknowledgements xv

1. Introduction 1

A remarkable decade for real estate 1

Based on a flawed global economic model 12

The real estate research agenda 17

Background to this book 18

2. Macro-economics and real estate 21

Impact of the recession on US property markets – evidence so far (November 2001) 24

State of global property going into 2004 (January 2004) 26

Is the global recovery running out of steam? (November 2004) 28

The outlook for private business investment in 2010 (January 2010) 31

Are we heading towards global deflation? (December 2001) 34

Deflationary conditions may be already present in parts of the West (October 2002) 35

Are buoyant asset markets enough to stimulate recovery? (March 2010) 37

Has the global economy passed its worst? (July 2001) 40

How will rising interest rates impact real estate markets? (January 2011) 43

Is the USA really in recovery? (December 2002) 45

Investment could lead the recovery – but not yet (July 2003) 48

UK savings rates have recovered, but the USA still looks out of balance (September 2002) 49

How to save the world: by not saving (December 2009) 51

Events to watch – is OPEC about to set off a second oil crisis? (October 2000) 54

How is this oil shock different from the 1970s? (October 2005) 56

Global financial markets – remaining challenges to a sustained recovery (August 2010) 58

The Euro finally arrives – but will that make much of a difference? (January 2002) 61

Germany (April 2002) 62

Germany’s economic situation (April 2003) 64

3. Real estate and recessions 67

An overheated housing market may cloud the Spanish economic landscape? (November 2006) 69

When will the US housing market turn? (January 2009) 72

The sub-prime storm – impact on Europe (October 2007) 75

A year on: the sub-prime crisis from a Spanish perspective (August 2008) 78

Global headwinds – US real estate debt (February 2010) 81

How close are we to a new 'Great Depression'? (October 2008) 83

Printing money – will it work? (April 2009) 86

Are recessions bad for real estate? (February 2008) 89

4. Inflation and real estate 93

Does property provide a hedge against inflation? (September 2009) 96

Linking rents to construction cost inflation – the French case (March 2008) 98

Oil prices, inflation and real estate (July 2008) 101

Is inflation building up in the world economy? (June 2010) 104

Can oil prices cause a global inflation problem? (June 2004) 107

Are food prices driving inflation up? (December 2007) 108

Real wages and real estate in the UK (February 2011) 111

5. Retailing and retail property 115

Splitting retail property into food and non-food can increase portfolio performance (November 2003) 118

A prosperous future for UK shopping places? (December 2006) 120

Examining European retail rents (January 2006) 123

Perspective on international retail (October 2001) 126

Consumer confidence and consumer spending (June 2003) 129

The outlook for UK retail (August 2009) 130

USA retail outlook (August 2004) 133

What will an end to the run-up in house prices mean for consumer spending? (April 2005) 135

Retail fundamentals (January 2003) 139

US retailing in recession (May 2009) 141

Luxury retailing in Europe (June 2007) 143

State of health in the retail market in continental Europe (October 2009) 146

6. Property companies and REITs 149

Small investors should wait for the REIT moment to invest in property securities! (January 2007) 151

Listed real estate in a 'perfect storm' – the case of Spain (November 2008) 154

Beta and the cost of capital to the UK property sector (May 2008) 157

7. Real estate and construction 161

What factors determine construction costs? (March 2006) 163

Is there a global construction boom? (April 2007) 165

UK construction costs and the recession (March 2006) 167

8. Asia 173

China/WTO (January 2002) 176

Chinese currency reform (December 2004) 178

What’s the outlook for the Chinese economy? (June 2009) 179

Will China’s problematic inflation subside? (June 2008) 182

Is real estate in China heading for a hard landing? (March 2011) 184

What’s happening to Japan? (March 2004) 188

Japan capital values (September 2004) 190

Bank of Japan ends quantitative easing – the impact on property will be neutral (April 2006) 193

The growing significance of Asia-Pacific real estate (November 2007) 195

9. Real Estate Returns 199

Do investors care about the standard deviation of property investment returns? (July 2009) 201

Returns and capitalisation rates in US real estate (August 2006) 203

The economics of global property returns (May 2007) 207

Does gearing work? (October 2010) 210

10. Residential real estate 213

The potential for investment in European residential property property (September 2007) 216

Investment opportunities in US housing (July 2010) 219

Trends in owner-occupied residential prices and not always a guide to value trends in the investment sector (August 2003) 221

How important is confidence in the Asian luxury residential market? (October 2002) 224

Luxury residential – the tale of three cities (September 2005) 225

What drives Prime Central London residential prices? (September 2006) 227

US home prices looking more exposed (August 2005) 230

Why do commentators continue to talk of a UK housing crash that never seems to come? (June 2002) 231

Australian residential outlook – as safe as houses? (December 2010) 233

Australian residential prices – city trends drive performance (October 2006) 236

11. Yields 241

How far can yields move out? (January 2008) 244

Bond yields, real estate markets and globalisation (May 2010) 247

Cross-country determinants of investment yields (March 2005) 250

How does the risk of rising interest rates affect property yields and expectations for property performance? (February 2006) 252

Can movements in corporate bond yields tell us anything about movements in property yields? (December 2005) 255

Capital flows to emerging markets (May 2006) 257

Real estate investment yields – bouncing up or down? (January 2005) 260

Signs of change in the investment market? (January 2003) 262

Lease flexibility and income security in international property markets (February 2004) 264

Impact of tighter regulations on bank lending (November 2009) 266

Appendix: Modelling Global Real Estate Yields (November 2008) 270

12. Global office markets 297

Just how rewarding is office sector investment? (February 2003) 300

Supply-constrained office markets do deliver stronger rental growth – but not always (January 2004) 302

Europe’s largest office markets are set to lead the recovery (April 2004) 303

Supply risk in international office markets (June 2005) 307

Office markets and the global economy (April 2008) 307

Can local office markets buck international market trends? (July 2003) 311

Euro zone convergence – economic myth and property reality (June 2006) 312

Convergence continued – the US case (July 2006) 314

Does income inequality affect office rents? (November 2005) 318

13. Looking forward 321

The case for increased pension fund allocation to real estate (September 2010) 331

Index 335

Dr Richard Barkham MRICS, Group Research Director, Grosvenor, and a Director of Grosvenor Fund Management, heads a global research team of ten full time real estate economists. He has an extensive track record of highly cited real estate research and is a regular presenter at major conferences on real estate trends.