Real Estate and Globalisation

Citation

French, N. (2012), "Real Estate and Globalisation", Journal of Property Investment & Finance, Vol. 30 No. 5, pp. 528-532. https://doi.org/10.1108/jpif.2012.30.5.528.1

This is a really interesting book not just because of the topic but because of the unique way it looks at last decade of global trends in real estate. The book is actually a reprint of a series of research briefings from Grosvenor that were published in the public domain over the last ten years. So not only does the reader get to see the briefings as they were written at the time, but the author, Richard Barkham (Group Research Director, Grosvenor, and a Director of Grosvenor Fund Management) offers an insightful commentary on each. The structure of the book (see below) is sectioned under grouped topics; a technique that really helps to focus the reader on the links between the broader economy and real estate markets. What is really interesting about the book is seeing the fruition of many of the suppositions made at the time and, likewise, the misinterpretaions of some of the conjectures. It is testimony to Grosvenor Research that the former outnumber the latter.

However, before I continue this review, I must nail my colours to the mast. I do know the author well both as an erstwhile colleague and as a friend. Indeed, we also share a love of Arsenal Football club; which, to many, probably casts doubts upon the eruditeness of both the author and the reviewer. But, that said, a substantial amount of the book is the briefings written by many other contributors (all of whom are acknowledged in the book) and many of them written before Richard embarked upon his role at Grosvenor. In fact, I might be one of the few commentators who can say that they read all the briefings at the time of publication; I have been on the Grosvenor distribution list for so long that I actually remember the days when they were printed and posted to me rather than the e‐distribution that prevails today.

So my review, I believe, will not be sycophantic but based on my own views of a very interesting, and at times, frightening, period for the real estate industry. The fact that my own interpretation of the events and the linkages mirrors that of the author is coincidental. The naughties were a significant decade for real estate. Not only do those ten years straddle the booming years of the early 2000s but it ended with the revelation of the worldwide toxic loans finacnial crisis that directly followed. More interestingly, it was the first time that global linkages led to a more synchronised boom and bust in real estate world wide rather than the geographical negative correlations that once existed. This was a time when all real estate succeeded and failed at the same time; the latter leading to a world where there are few safe havens where real estate investment fundamentals still prevail.

The book starts by looking at this boom and slump in real estate values that led up to the Great Financial Crisis. And, as noted above, the briefings are 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. The full list of the briefings and commentaries is:

1 Introduction

• A remarkable decade for real estate

• Based on a flawed global economic model

• The real estate research agenda

• Background to this book

2 Macro‐economics and real estate

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

• Germany (April 2002)

• Germany's economic situation (April 2003)

3 Real estate and recessions

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

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

• The sub‐prime storm – impact on Europe (October 2007)

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

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

• How close are we to a new “Great Depression”? (October 2008)

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

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

4 Inflation and real estate

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

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

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

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

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

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

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

5 Retailing and retail property

• Splitting retail property into food and non‐food can increase portfolio performance (November 2003)

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

• Examining European retail rents (January 2006)

• Perspective on international retail (October 2001)

• Consumer confidence and consumer spending (June 2003)

• The outlook for UK retail (August 2009)

• USA retail outlook (August 2004)

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

• Retail fundamentals (January 2003)

• US retailing in recession (May 2009)

• Luxury retailing in Europe (June 2007)

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

6 Property companies and REITs

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

• Listed real estate in a “perfect storm” – the case of Spain (November 2008)

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

7 Real estate and construction

• What factors determine construction costs? (March 2006)

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

• UK construction costs and the recession (March 2006)

8 Asia

• China/WTO (January 2002)

• Chinese currency reform (December 2004)

• What's the outlook for the Chinese economy? (June 2009)

• Will China's problematic inflation subside? (June 2008)

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

• What's happening to Japan? (March 2004)

• Japan capital values (September 2004)

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

• The growing significance of Asia‐Pacific real estate (November 2007)

9 Real estate returns

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

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

• The economics of global property returns (May 2007)

• Does gearing work? (October 2010)

10 Residential real estate

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

• Investment opportunities in US housing (July 2010)

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

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

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

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

• US home prices looking more exposed (August 2005)

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

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

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

11 Yields

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

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

• Cross‐country determinants of investment yields (March 2005)

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

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

• Capital flows to emerging markets (May 2006)

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

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

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

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

• Appendix: modelling global real estate yields (November 2008)

12 Global office markets

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

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

• Europe's largest office markets are set to lead the recovery (April 2004)

• Supply risk in international office markets (June 2005)

• Office markets and the global economy (April 2008)

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

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

• Convergence continued – the US case (July 2006)

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

13 Looking forward

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

The author then brings together all the themes in a final chapter looking at the future for real estate in the context of the ongoing financial crisis. As with all the briefings, this is based on a mixture of a strong economic understanding tempered with a pragmatic viewpoint that comes from active involvement in the real estate industry. The forecast presented here (and in the briefings themselves) tend not to be quantitative analysis in the pure econometric sense but rather considered opinions and views. As with any form of forecasts, they are prone to being wrong but can equally proved to be right. The unique contribution of this book is that it takes ten years worth of analysis, opinion and data and, with hindsight, proffers explanations and insights in the forecasts made at the time. I once argued to my students that forecasting was not perfect but was the equivalent of having a flashing torch in field of land mines; it will not be perfect but it might show you enough to get across safely. But as one of my more cynical students observed, would not it be better not to know that you were in a field of land mines? Maybe that was once the way of the property profession and, particularly, of developers but I strongly believe that this should not be the case. Research and understanding goes hand in hand with better decision making. This book shows that in a turbulent decade for real estate that this is still be the case.