JLL: Flight to Quality Benefits U.S.
A “flight to quality” mentality has spurred record capital flows into U.S. commercial real estate, reported JLL, Chicago.
Last year’s biggest increase in capital investment came from the Middle East as oil plunged while volatility in China’s financial markets spurred a capital outflow from that country.
New York beat out London last year as the world’s most popular target for overseas capital as investors sought safe haven, said JLL New York Head of Capital Markets Gavin Morgan. New York transaction volumes reached a new high of $48 billion while London volumes fell about 12 percent to $39 billion.
“The turnaround in New York is quite remarkable and it all started at the beginning of the year when Anbang Insurance from China purchased the Waldorf Astoria [hotel] for close to $2 billion,” Morgan said. “Since then the momentum has been building with further large deals throughout the year.”
The U.S. now houses five of the world’s top 10 cities for real estate investment, JLL said. This pushed Americas transaction volumes to $313 billion, up four percent from 2014 and above the previous $304 billion record set in 2007.
Worldwide transactional activity could reach $730 billion this year, JLL predicted. But it noted that market headwinds in early 2016 noticeably modified investor sentiment and said transactional activity could moderate as economic growth becomes more fragile and downside risk increases.
“Outside of the volatility of the Chinese stock market, which spooked markets globally back in August and has done so again recently, there is a wider concern about global economic growth,” said JLL Global Capital Markets Research Director David Green-Morgan.
The International Monetary Fund recently trimmed its global growth forecasts, citing concerns that a slowdown in China will likely slow growth in other regions as the Chinese government looks to rebalance its economy toward a more consumption-driven model.
JLL said further turmoil in China, the increasing likelihood of a United Kingdom exit from the European Union and a non-mainstream winner of the U.S. elections will “undoubtedly” make investors more cautious both from a domestic and cross-border standpoint. “On the plus side, the amount of capital looking to be deployed into direct real estate continues to increase, with the definition of core real estate investment continuing to broaden to include healthcare, student housing and particularly residential; from development to multifamily,” Green-Morgan said.
At a time of excess volatility in the financial markets, the advantages of real estate investment, such as a low correlation to other asset types and relatively high, stable income returns have come into greater focus, JLL said. In fact, real estate investment outperformed other asset classes last year with estimated global returns of between 10 and 12 percent. The S&P 500 returned 2.85 percent during that time and benchmark U.S. 10-year notes returned 0.8 percent.
“Given the volatile start to 2016, there is every expectation that investors will approach the year in a more cautious manner, however we continue to see an increase in the amount of capital targeting the sector and waiting to be deployed,” Green-Morgan said.
