A ‘flight to quality’ has been a Global response by real estate investors to the economic turmoil experienced over the past five years. Looking for secure real estate with stable income, and growth in asset value, property investors have flooded into major cities around the World buying up the trophy buildings, driving up prices.
“There has been a concentration of investment activity in the core markets and we have seen the CAP rates come down” explained Tom Boytinck, Managing Director, Allegro Securities LLC who was speaking on a panel at the Global Property Forum. “You can’t sell these assets on Park Avenue the way you can a Government bond”, he added “ so in the long run the purchase of quality assets ends up being ‘overpayment for quality’ instead of delivery of an attractive, stable, inflation adjusted, risk adjusted return.”
“We are getting to the position where everyone in their domestic market thinks their market is expensive compared to everywhere else, which clearly doesn’t add up, and so they are starting to look further and further away but they are really looking at the same kind of assets” said Russell Chaplin, Chief Investment Officer, Property, Aberdeen Asset Management. As a consequence, “prime trophy assets to us, are looking pretty over priced,” he added.
As the availability of core assets in major cities has dried up investors are looking beyond their traditional comfort zones for property. “As economies grow and state of the art real estate is being added to the (emerging) markets, whether distribution or retail, apartments or condos, that is going to become part of the core definition. Certain markets even some in the U.S. are going to be brought under the core umbrella by necessity,” explained Jeffrey Barclay, Managing Director, Goldman Sachs & Co..
Strong population growth, investment in infrastructure and increased consumer spending power is rapidly evolving the real estate markets in China, India and Brazil. At the Global Property Forum Jacques Gordon, Global Investment Strategist, LaSalle Investment Management described how massive investment in China’s transportation system has connected non-coastal, second tier cities that were previously inaccessible to the major urban areas. While the infrastructure remains in poor condition in India, a rising middle class in second tier cities is spurring real estate growth in those locations. Brazil’s real estate sector is also flourishing as it has a very productive, diversified economy with natural resources, a literate work force and it is striving to partner with other BRIC countries.
“We work in an investment world of 50 to 70 cities, and they are not all in six countries, it is broadening. I agree I think we are getting into an era of a broader definition of core, also sectors as well as cities”, said Blair Hagkull, Managing Director, Jones Lang LaSalle Canada .
“Flight to quality doesn’t have to be trophy assets that have modest returns but increasingly there’s a focus on the familiarity of what we are investing in”, said Hagkull. The asset that you know is the one that will provide the solution going forward.
“Many people are more familiar today with Brazil and China and Eastern Europe than they were five years ago. I agree that we are returning to the familiar, but the definition of familiar is broadening dramatically and we are not even aware of it,” said Jeffrey Barclay, Managing Director, Goldman Sachs & Co.
“Core is now going to include cities such as Hudong (China which wasn’t considered core. It wasn’t there three years ago. What is going to happen is the definition of a core asset is going to broaden,” explained Barclay.
“What we are trying to do is find assets with the same kind of attributes, either income or growth (as core real estate) that may have been overlooked in the last two or three years” said Russell Chaplin, Chief Investment Officer, Property, Aberdeen Asset Management. His firm has invested in tier two cities in Finland, not just Helsinki, and made satisfactory returns.
“In the emerging markets there are investor groups who know more about the mature markets than we do about the their markets. In the long run this is going to be a challenge,” said Tom Boytinck, Managing Director, Allegro Securities LLC, “It is to everyone’s advantage to expand the definition of core, asset classes and geography.”