With everything that has happened in recent months, including the Federal Reserve's interest rate hike and the turmoil in global equity markets, many investors will likely be seeking refuge in real estate.
For them, real estate may seem like a less risky investment with potentially significant returns.
The year is already shaping positively for real estate worldwide. To be sure, that could change. However, a solid U.S. economy and strong demand for housing and business space throughout the world should keep the real estate industry percolating. A recent report by the real estate company Collier's International indicates as much.
Let's examine some of the factors that will shape the landscape in 2016.
1. Growing Appeal
Sentiment about real estate has been rising for several years in the U.S. Last year was a good one for the industry. This momentum should continue and become a more pronounced global trend.
Due largely in part to the volatility of other markets, the appeal of global real estate has increased exponentially.
Roughly a year ago, global real estate kicked off a nine-month period which saw $625 billion allocated toward direct property investments. That number eclipsed the previous year by about 11%. Many investors clearly find certainty in real estate, a trend corroborated by Colliers' 2016 Global Investor Outlook. The survey of more than 600 investors globally found that more than half would likely be allocating more capital in real estate in 2016. Of that number, 51% own multi-asset portfolios.
2. Gateway, Secondary Cities Will Prosper
Major gateway cities will benefit the most. These include such major business hubs as London, New York, San Francisco, Miami, Tokyo, Los Angeles and Sydney. Demand for housing, office, manufacturing and retail space in these metropolitan areas is strong.
However, there opportunities in secondary cities that also offer a strong business climate, along with in many cases, a better quality of living. San Diego with its nearby hot biotech scene may be among the most likely targets for international investors.
"The days of 'pass the parcel' are over, long-term secure investment in core markets will be the norm," says John Friedrichsen, Global CFO at Colliers International. "At the other end of the risk spectrum, large volumes of capital already raised will increasingly seek out opportunities in tier-two cities and recovering markets."
3. Minimizing Risk
The declining Chinese economy, depressed oil prices, political uncertainty in the Middle East and beyond, and other issues have made investors particularly wary in recent months, and they are likely to become even more careful over the next year.
The Colliers' report found that "44% of respondents are likely or highly likely to take on more risk over the next 12 months, compared to 59% a year earlier."
Some geographical regions are more risk averse than others. Asia and Australia/New Zealand, for example, are less likely to commit to risky investment opportunities than Continental Europe, the Middle East and Africa.
Buying and holding assets, in particular, should be popular. In a volatile atmosphere, longer-term investments are more attractive than short-term trading.
4. The Reemergence of Debt
Those looking to partake in the global real estate market are expected to use more debt than in the past. The Colliers' report found that respondents looking to accumulate debt hoping to realize a higher return increased to 82% from 78% the previous year.
According to the survey, 100% of Middle Eastern investors plan on using debt as a means to fund their investments, whereas 91% of Asian investors were expected to do the same. European investors followed closely behind with 90%. The number of European investors intent on using debt to fund their investments increased 31% from the previous year. These investors likely want to take advantage of interest rates while they remain low.
5. U.S. Real Estate
U.S. economic fundamentals continue to look strong. Unemployment is roughly half of what it was during the Great Recession. Additional Fed rate hikes will be testimony to this strength.
Moreover, the climate bodes well for U.S. real estate. New and expanding businesses require space, and families who are benefitting from the ongoing economic upsurge will be looking for places to live. This should spur development projects and keep the commercial and residential real estate sectors heated.