21 June 2006
Going global in real estate - universal measures apply
Investing in global real estate requires a comprehensive understanding of the markets and fundamentals, says Macquarie’s annual Real Estate Market Outlook (the Outlook) released today.
“It’s never been more important for investors looking at global property to understand the real estate fundamentals. Assessing value against a backdrop of competition for assets and yields will be essential for investors looking to invest offshore,” said Head of Research, Macquarie Real Estate, Rod Cornish. “Last year, the market saw a global dash for cash (reflected in yields); this year, it will be necessary to find well-grounded techniques for assessing value against a backdrop of greater competition for assets.”
“Just as the basic unit of real estate measurement across the world is the square there are universal measures of value developed by Macquarie to predict property prices both domestically and globally. This goes hand in hand with strong local knowledge and partnerships.”
Officially launched today, by Macquarie Real Estate and now in its seventh year, this year’s Outlook, entitled “The World Squared”, investigates the state of the global property market and the need to apply fundamental and universal analysis to understanding the real estate markets. “Real estate investment fundamentals must be applied on a global scale,” he said.
“Australian investors have joined the race around the world for opportunities and yield. This year, the Outlook looks at the fundamental drivers of real estate in the our home grown property markets as well as the world's four dominant economies,” said Mr Cornish.
Residential real estate in Australia is a tale of East versus West. Where resources are playing a part (West), prices are doing well. In the East, where values have been high, prices are growing more slowly, such as in Brisbane, or marginally declining elsewhere, such as in Sydney.
“The Melbourne residential market is emerging from a stabilisation phase which began late last year earlier than other cities. Melbourne didn’t become as overstretched to the same degree as other cities such as Sydney and Brisbane and now even Perth. However, we still expect relatively flat to moderate growth in residential prices over the next few years as long as the interest rate cycle is moderate,” said Mr Cornish.
The Outlook reports that the strong global economy continues to boost the Australian office market recovery. “This has translated into the strongest leasing demand and lowest vacancies in up to 25 years in some markets. Rents in Brisbane and Perth have already shown significant growth. Our models predict stronger growth in Sydney’s office market, with improvements in Melbourne expected later in the cycle,” said Mr Cornish.
As Australia’s most reliable non-residential property class, retail provides solid returns with low volatility even in lean years. “As we reported last year, retail is approaching the peak of a cycle – however this means a moderation from exceptional growth rather than a slump. With limited potential for yields to firm further, returns are likely to be solid rather than sensational. Non-discretionary retail such as food based retailing should be one of the out-performers,” said Mr Cornish.
“Industrial is showing solid rental growth for the first time in almost a decade - thanks to previous rises in land value and construction costs, and confidence in the distribution sector. While land around infrastructure will continue to outperform for investors, returns are also coming from rising rents,” he said.
In the global analysis, the Outlook looks at four central pillars supporting the world's economy and real estate markets - the United States, China, Japan and Europe. “The strength of these economic pillars is the key to the overall health of global real estate. The fortunes of global office markets, for example, are inextricably linked to the state of the global economy”, said Mr Cornish.
According to the Outlook, Japan is now re-emerging as a force to be reckoned with as it recovers from the economic distress and deflation of the last decade. Opportunities exist in Tokyo’s residential investment and office markets underpinned by the tightest labour market in 14 years and evidence that Japanese banks are recapitalised and ready to lend and invest.
China has cemented its place as a leading world economy, following two miracle decades of economic revolution. Booming growth in domestic and export demand has increased incomes, encouraged urbanisation, and promoted the emergence of a consuming middle class.
In the United States, the focus is on the strength of a critical foundation stone - domestic residential property. “While affordability is reasonable overall, our models show parts of the United States housing market are hurting,” said Mr Cornish.
“Lessons can be learnt however from our own residential markets here in Australia, which over time have led trends in key US markets. There is hope that the United States housing market may head into a controlled slowdown the way our own market has. A risk is that a slowdown in the housing markets could have broader a impact on the overall US economy.”
“While the enormity of the European market is attractive, investors cannot afford to treat Europe as one country. Europe is a significant force in the global economy and we have focussed on office markets. The European office market recovery is mirroring the strength of global economic conditions,” Mr Cornish said.
“In the strongest world economy for 30 years, the big message for investors is that global conditions are providing more momentum for real estate markets, and that capital will continue to favour real estate. Local knowledge is always critical in property, and it is increasingly important for investors to be discerning - applying common methods of analysis to property markets not just here, but the world over. Macquarie applies this fundamental approach with a view to successfully predicting movements in the Australian real estate market,” said Global Head of Macquarie Real Estate, Stephen Girdis.
"There are an increasing number of real estate investment options internationally and with our global platform and partners around the world, Macquarie Real Estate can provide investors access to a broad range of opportunities,” he said.
The Macquarie Real Estate Market Outlook report has been produced annually for the last seven years. In that time, it has predicted trends in the property market including the influence of the baby boomers, the move to community lifestyle property, the move to apartment living, the out-performance of industrial property located around new and emerging infrastructure, the surge in residential property in south-east Queensland and Perth, the softening of residential markets and the resurgence of office markets and last year the race around the world for global property assets.
The report is available at www.macquarie.com.au/remo
For further information, please contact:
Head of Research
Macquarie Real Estate
Tel: (61 2) 8232 3545
Snr Communication Manager
Macquarie Real Estate
Tel: (61 2) 8232 6989
Mobile: (61 4) 16 237 358