Real Estate Is A Dominant Asset Class by Savills
The new march of money
World real estate is a global stage on which a variety of economic and monetary acts are played out. Some actors have access to large amounts of equity, others to cheap debt. Many players in recent years have been operating under much looser monetary conditions than in previous decades so money has become cheaper and opportunities have been presented in those countries where asset prices were hit by domestic recession.
This means that cross-border activity in real estate has generally grown since the global financial crisis of 2008. The proportion of deals done where buyers originate in different countries has increased from a low 17% in 2009 to 20% in 2015. Over the same period, cross-border volumes have grown by 334% from $65 billion to $217 billion.
In this issue of Around the World in Dollars and Cents, we have taken a look at how much real estate there is in the world and how much of that is available for investors, both domestic and cross-border. For the first time we have included agricultural in our assessment, so we are presenting a complete cross-sector picture that includes residential and commercial assets.
We then take a look at how asset values are distributed across global regions and how recent flows of money from one region to another may be in the process of changing this. Differences in monetary conditions and investor practices in global regions are then examined. The results have important and profound implications for global real estate trends.
[drizzle]Looking to the future of world real estate, we study the investing intentions of the equity-rich private sector and see that some money is becoming not only footloose but also more adventurous in the asset classes it is willing to invest. This is a theme that has been picked up by many of our researchers around the world who have each given their tips for real estate investment in 2016 and beyond.
What price the world? Real estate in the global asset universe
Worldwide real estate assets comprise nearly 60% of the value of all global assets, including equities, bonds and gold
We estimate that the value of all developed real estate in the world amounts to approximately $217,000,000,000,000 (217 trillion US dollars, see fig. 1). This covers retail property, offices, industrial, hotels, residential, other commercial uses, and agricultural land.
The world owns real estate assets of nearly three times its annual income. Global property value in 2015 amounted to 2.7 times the world’s GDP and represents an important store of national, corporate and individual wealth. It accounts for roughly 60% of all mainstream global assets. The value of all gold ever mined (in the region of $6 trillion) pales into insignificance next to the value of all developed real estate.
The fact that the value of global real estate exceeds by almost one-third the total value of all globally traded equities and securitized debt instruments highlights the important role it plays in economies worldwide (see fig. 3). Real estate is the pre-eminent asset class that will be most impacted by global monetary conditions and investment activity and which, in turn, has the power to most impact national and international economies.
In recent years, quantitative easing and resulting low interest rates have suppressed real estate yields and fueled high levels of asset appreciation globally. Investment activity and capital growth have swept around the major real estate markets of the world and led to asset price inflation in many instances.
We estimate that around one-third of the value of the global real estate market identified here is readily investable at scale (see fig. 2), with the remaining $145 trillion not being publicly traded in any meaningful way. Most of it, even in the commercial sector, is owner-occupied or owned by small and private entities.
Of the $72.5 trillion of commercial and residential real estate that we count as ‘investable’, around $1.05 trillion or 1.45% was traded in big ticket deals of over $10 million in the 12 months to Q3 20151. This investment grade stock has increased in value by 3.56% in the two years since our last estimate of world real estate value in Q3 2013. This represents average annual growth rate in global capital values of 1.77% per annum but covers a range of experiences, from high-growth in the US to negative or no growth in parts of Asia.
This year we have included for the first time the value of agricultural land, at an estimated $26 trillion, of which about $7.8 trillion (around 30%) is corporately and institutionally invested. Most agricultural land is owned by non-investing entities, operators and occupiers, especially in emerging economies where this is a sector with great potential for further growth and investment. If the land is owned by non-investing entities, it is likely to be non-investable.
Not included in the global calculation is the value of local commercial properties: workshops, work-spaces, shops and small business premises that are not part of the high quality commercial real estate universe that constitutes global property markets, but which are important components of economic growth and prosperity, especially in emerging markets. They are almost impossible to value at a global level but have huge potential for future investment as economies mature and real estate markets develop within them, adding to the global stock.
Overall, the most important component of global real estate value is the homes that people live in. By far the biggest proportion of these are owned by the people who inhabit them, which makes this sector the least concentrated, in terms of ownership, and most closely tied to the fortunes of ordinary people. There are approximately 2.5 billion households on the planet and those in developed economies occupy housing at much higher price points than those in less developed economies. We estimate that the median value of the dwellings occupied by all these households is $43,000.
Total assets breakdown
Old world economics contain the highest share of global real estate value so potential for growth in emerging markets is significant
The value of the world’s real estate is unevenly distributed across the globe. Western nations contain the lion’s share of asset value, while less developed nations contain the least.
The dominance of real estate in Western economies is most noticeable in commercial markets, where nearly half of the total asset value resides in North America and over a quarter in Europe (see fig. 2). Asia and Australasia contain 22% of commercial asset value, leaving just 5% for South America, the Middle East and Africa.
Part of the reason that the US market is so big is because it is the most mature. The US market is much more transparent than many others and is therefore easier to measure well and in detail. Consequently, it is where data coverage is most comprehensive. This is assisted by the fact that it is also probably the most institutionalized market and therefore recorded and reported on by those entities. The US also contains more of the most valuable real