KPMG: Investors Bullish But Cautious
Investors remain optimistic about U.S. commercial real estate, with 91 percent expecting fundamentals to hold steady or improve, reported KPMG, New York.
But many executives reported taking steps to “de-risk” their portfolios as the current expansion ages, KPMG said.
“Investors are becoming more cautious in their decision-making as we near the end of the economic cycle, leading to changes in operations, portfolio management decisions and the timing of their investments,” said KPMG National Sector Leader Greg Williams. “They need to be prepared for the coming change in momentum.”
Indeed, Williams noted that only eight percent of investors said they will enter new markets this year, down from 28 percent last year.
As investors compete for the right assets at the right prices, predictions that market momentum could soon slow have caused investors to seek opportunities with lower downside risk and to reduce their portfolio’s risk profile, Williams said. “This de-risking seeks to balance the sustained interest in U.S. real estate with a growing conviction that the market’s growth trajectory may be turning soon,” he said.
Commercial property price growth moderated in January, reported CoStar, Washington, D.C.
Both the equal-weighted and value-weighted segments of CoStar’s repeat-sale indexes slowed in January from late 2015’s “robust” pace, CoStar said. The value-weighted index, which tracks core property assets, increased by 0.6 percent in January while the equal-weighted index–which captures smaller deals–declined by 0.3 percent. Both indices averaged 0.8 percent monthly growth in the fourth quarter.
Nearly three-quarters of KPMG’s survey respondents said they expect foreign investment in U.S. real estate to increase over the next 12 months. Investors cited low interest rates and U.S. tax incentives as well as favorable risk-versus-return equations for U.S. real estate as the main factors.
“Strong economic fundamentals, a reliable legal system and other structural advantages in the U.S. have continued to fuel foreign interest in the U.S. real estate market,” Williams said. “The continued inflow of foreign capital has led to a significant increase in competition for the best investments, leaving many investors with a major challenge in their hunt for yield across a variety of assets and markets.”
KPMG Chief Economist Constance Hunter said the firm believes that solid domestic demand will benefit the multifamily and retail sectors especially.
“When one also considers that interest rates remain low, this provides a positive backdrop for the continuation of happy days in building and construction,” Hunter said in KPMG’s Room to Run 2016 report. “KPMG projects the 2016 outlook for the real estate sector to remain mostly upbeat. Interest rates are expected to stay low. Strong jobs growth will continue to lift demand for apartments and retail space. Demographic trends will drive the use of healthcare and assisted-living properties.”
But real estate investors know that risks remain, Hunter said: “The slowdown in the young-adult population may dampen the demand for apartments, and currency shifts or a rout in the bond market could sway demand in a variety of sectors.”
