Yields are likely to compress further with 52 percent of respondents to the firm’s Global Investor Outlook (GIO) for 2016 survey saying they would move more money into real estate next year. Combined with relatively low levels of debt - compared with the previous market peaks - this flood of capital would further cement a long-term climate of stability for global real estate returns.  

The GIO for 2016 found that despite a reduced appetite for risk, debt would play a greater role in the market next year as investors seek to boost cash-on-cash returns. 

Colliers, a NASDAQ-listed global property company, estimates that up to US$400 billion of institutional funding could begin chasing global real estate to diversify and stop an ongoing bleed of cash driven by the underperformance of traditional fixed-income investments.

Last month, Japan’s Government Pension Investment Fund posted huge losses and announced a move into commercial real estate for the first time with an estimated US$65 billion of firepower. Chinese insurance companies have already snapped up a swathe of billion dollar assets and could have in excess of US$70 billion to spend.

Such investors demand high value assets so they can deploy large amounts of capital in one go. This is why big cities such as London and New York have become such hot markets with yields crunching well below four percent on prime office buildings.

Investors top 10 target destinations

US

79%

UK

55%

Germany

51%

Australia

40%

France

34%

Japan

32%

Spain

25%

Singapore

22%

Netherlands

21%

Canada

19%


It is the tip of an iceberg of global equity chasing real estate in what experts have dubbed the ‘great moderation’. This on account of the usual boom and bust property cycle being elongated by widespread deleveraging, a far greater reliance on equity and a wholesale re-appraisal of returns.

The GIO found that three-quarters (75 percent) of UK-based investors would use debt compared with 65 percent in 2013. Similarly, 87 percent of US investors would use debt, up from 63 percent in 2013. 

Real estate capital has never been more mobile. At circa US$250 billion, global cross border investment accounted for 40 percent of total direct volumes in the first nine months of 2015. This compares with 33 percent last year, and 37 percent at the peak of the previous cycle (2007). 

Debt coming back to support returns.

Price rises and subsequent yield compression across prime property markets mean that taking on more debt is a more prevalent way to achieve some of the lofty returns targets investors have set. By far the most ambitious are US-based investors of whom 40 percent seek internal rate of returns (IRRs) - which essentially measure the return on cash - above 16 percent. It is expected that 63 percent of them will use leverage in excess of 51 percent.

The majority of UK investors are targeting leveraged IRRs of between 11 percent and 15 percent.

In the year to 7 December the FTSE-100 fell by 7.7 percent, while the S&P500 was unchanged. Five-year US Treasury bonds trading at around 1.6 percent.

Attributable quotes from Colliers International and industry experts:

John B. Friedrichsen, Chief Financial Officer at Colliers International, said:

“Our global analysis in this report gives a unique macro-view, providing a comprehensive look at the health of the economy as well as in-depth views of market sentiment that serve as a useful bellwether for local markets worldwide.”


Tony Horrell, CEO UK & Ireland at Colliers International, said:

“While I am aware that Gordon Brown’s infamous pronouncement over ending boom and bust cycles eventually ended in tears, the weight of evidence I see suggests that there is considerable life left in this redefined prime cycle. In real estate, the days of ‘pass-the-parcel’ are over and long term secure investment in core markets will be the norm. It may be that short-term cyclical players will need to focus on assets that are secondary by quality and/or location.”

Richard Divall, Head of Cross Border Capital Markets at Colliers International, said:

“The globalisation of capital markets is now firmly in motion with many crossing borders for the first time. Multi-asset investors – buoyed by poor income performance in core assets – have woken up to commercial real estate. More are expanding their allocations to the sector and a real estate holding of up to 20 percent could soon become commonplace for global pension funds.”

“An ageing population is maintaining the pressure on institutional pension and insurance funds to achieve yields that match long term liabilities. With better regulated debt markets and new macro-prudential tools, we see core property assets, globally, being stripped away from the broader real estate market to become more aligned to bond-like financial instruments.”

Walter Boettcher, Director of Research and Forecasting at Colliers International, said:

“Structural shifts in global investment have broken the usual seven or eight year boom and bust cycle. Investors are now ready to accept lower returns and data suggests we are entering a great moderation.”

Madeleine McDougall, Head of Institutional Clients at Lloyds Bank Commercial Real Estate, said:

“We have seen a fundamental reshaping of property debt over the last five years and what has emerged is a more stable environment and a greater number of participants sharing risk.
 
“Increased appetite for real estate is understandable given its historic outperformance of other asset types. Debt will continue to play a crucial role over the next few years, particularly in the financing of new developments which has fallen behind demand.
 
“Debt plays a vital role in supporting what is one of the key drivers of economic growth and regulators should seek to strike a balance between encouraging responsibility and not hampering positive performance.”

Rob Martin, Director of Research at Legal and General Investment Management Real Assets, said:

“With so much structural change in the sectors which have traditionally dominated portfolios, we continue to see a growing role for alternative sectors such as build-to-rent residential and healthcare in delivering the stable and growing cash flows that investors seek from real estate.”
 
Collin Lau, Founder at BEI Capital and Former Head of Global Head of Real Estate at China Investment Corporation, said:

“Institutional investors from China and across Asia are increasingly mobile. When it comes to top tier locations, however, they are caught in a dilemma between the desire to diversify globally and the apparently fully priced market conditions. Perhaps the solution lies with their ability to deal with operational complexities and seek improvements in yields consistently by value-added approaches."

Peter Cosmetatos, CEO of Commercial Real Estate Finance Council Europe (CREFCE Europe), said:
 

“After the credit drought which followed the financial crisis, 2013 and 2014 saw the market turn remarkably quickly in London and other major centres, with lenders falling over themselves to lend. After two years of a borrowers’ market, a new equilibrium has emerged since the summer, with margins stabilizing or even ticking up.

“While this relative equilibrium in the major investment markets could persist for some time, it could be rocked by interest rates taking an unexpected turn or by geopolitical events. The survey suggests that the biggest current areas for concern are around macro and geopolitical risks, rather than either the occupier market or a return to reckless lending.”

View the 2016 Global Investor Outlook Report 

2016 Global Investor Outlook Website