For years, commercial real estate has been an attractive asset for global institutional investors. Although 2016 is expected to remain a strong year for real estate, volatile financial markets across the globe have left many investors concerned about its future stability.
To help make sense of the current volatility, CBRE, one of the world’s leading commercial real-estate and investment firms, has prepared a report that explores what is driving volatility within global markets and their impact on real-estate investments. Here are 5 major factors:
Although China’s rapid economic growth has helped boost the global economy over the past two decades, in recent years the country has faced a slowing economy and weakened currency, leading to fears that economies and growth outside of China might be impacted. To counteract the slowdown, Chinese policymakers are aiming to shift the economy away from debt-fueled capital investments, state-owned heavy industries, and exports toward more sustainable growth such as domestic capital markets, private-sector entrepreneurship, and services and household consumption. While these steps have the potential to boost demand for commercial real estate within the country in the long term, some observers are losing confidence in the government’s ability to steer the economy, accentuating global market volatility.
Declining oil prices mean less money spent at the pump for consumers. But for global investors, lower oil prices have sparked a number of concerns in market stability. The drastic drop in oil prices has caused a sharp decrease in capital investment and sparked economic shocks in oil-producing regions such as Saudi Arabia and Russia. Despite oil prices rebounding slightly, experts say it will be some time before they return to the levels we saw in mid-2014. Factors such as Iran’s return to the market and the drop in demand growth from China and other emerging markets haven’t helped the oil market’s volatility either.
3. US domestic concerns
The Fed’s decision to raise interest rates in December was met with a positive reaction by both the stock market and the bond markets, given the US’s rebounding economy. Stock market volatility in China, however, caused many to fear that the Fed’s four predicted interest-rate increases for 2016 may be too ambitious. Fortunately, the stock market recovered strongly and experts expect the Fed to raise interest rates only twice this year.
In addition, discrepancies exist in the market’s view of where we sit in the cycle with market “bears” believing the economy is nearly at the end of its recovery stage because of low unemployment and skyrocketing rent. In contrast, “bulls” believe there is room left in the economic cycle, citing unprecedented volumes of foreign capital flows and strong underlying US economic fundamentals.
Although the economic impact of geopolitics is difficult to measure, political risks have even more power to undermine investors’ confidence. Europe has long been considered a global real-estate safe haven, but ongoing political challenges — such as the steady flow of refugees from Africa and the Middle East, terrorist attacks, and the upcoming June vote by the UK to leave the EU — have the potential to alter investors’ plans to do business on the continent.
While investors have never had more real-time data at their fingertips than they do today, as useful as technology can be, there is a such thing as being too connected. Access to vast amounts of data has left many investors overwhelmed by the daily swings in global markets, creating a reactionary-mindset. Additionally, data is democratizing investor’s access to information creating a connected system amplifying the potential for swings in the availability of capital on a global basis.
What does this mean for real-estate investments?
Despite these factors in global-market instability, real-estate investors remain confident. In a recent report, CBRE found that 82% of global investors surveyed planned to invest the same or more globally in 2016 compared with 2015. While many real-estate investors are resetting expectations and asking more questions, market uncertainty appears to have a minimal effect on real-estate gains. In fact, CBRE Capital Markets experts believe investments will actually improve across North America and Europe despite market volatility.
To learn more about navigating today’s global capital markets, visit CBRE.com/GlobalCapital.
This is an excerpt from Brief #1 in CBRE’s Global Capital Thought Series – Volatility: The Near-Term Normal? To download the full piece click here.
This post is sponsored by CBRE.