By Tom Smith, Global Director, Property and Buildings
WSP | Parsons Brinckerhoff
Over the last six years investment in global commercial real estate has tripled from US$202 billion in 2009 to US$606 billion forecasted this year. Since the financial crisis a new picture is emerging of a more competitive and larger than ever investment boom, fuelling greater opportunities for growth.
What is driving investment in Real Estate?
For investors, real estate is one of the less volatile options and as they gain confidence and funders relax their standards following the financial crisis, there is a surge in the availability of global finance.
In addition, there’s been a huge rise in demand. The United Nations estimates that by 2050 70% of the population will be living and working in cities, compared with 30% in 2000. Australia’s four largest cities, Sydney, Melbourne, Brisbane and Perth, are predicted to grow by around 45% from 12.8 million in 2011 to 18.6 million in 2031. Cities are growing at an unprecedented rate, leading to a huge demand for space for homes, offices, hotels, shopping malls and the accompanying infrastructure. WSP | Parsons Brinckerhoff has seen a huge change in trend towards major projects such as skyscrapers, where by building higher and slimmer, sought-after real estate is optimised in our dense urban environments.
Who is investing?
Real estate offers high return on investments for oil-and-energy-rich countries to stash their cash. The recent instability in China’s market and the fall in oil and commodity prices have amplified the benefits of investing abroad, mitigating risks of the local markets and political insecurity. Major investors include sovereign funds and large private investors. Large developers are also following the trend. For example, WSP | Parsons Brinckerhoff is working for a number of projects, including the Greenland Centre in Sydney, for the Greenland Group, a global front runner in China’s real estate industry with a portfolio covering nine countries.
Is this property ‘gold rush’ sustainable?
After an investment peak in early 2013 we face a number of headwinds. For example, rising land and tender prices are hitting clients’ pockets as contractors and specialists’ price in rising labour costs and increasing project risk leading to stalled projects, particularly in the markets that have experienced the highest growth since the recession.
As city populations grow, fuelling demand for residential and commercial property, so does the value of land in our most successful cities. House price rises and housing shortages are in the spotlight. There are concerns that foreign investors are out-pricing locals, making it very difficult for first-time buyers and, since investors don’t typically live in these properties, they are not contributing to local economies.
So how can cities benefit from foreign investment?
I believe that these headwinds represent the growing pains for successful cities rather than, as some fear, a bubble ready to burst. In fact, I believe they present opportunities for innovative companies to further facilitate, add value to and profit from growth in global and local cities.
The rapid development of smart technologies and faster travel options are revolutionising the urban experience, reigniting the appeal of cities and enabling companies to expand globally, creating new jobs and attracting talent from all over the world.
Overseas investment stimulates new-build and therefore props up local real estate markets. For example, the Shard, in which WSP | Parsons Brinckerhoff had a major role, was finally brought to fruition thanks to backing from Qatar, stimulating the revitalisation of a previously dilapidated part of London.
As prices increase in central locations, investment ripples out to neglected areas which are in turn being rejuvenated with new transport links, shopping malls and infrastructure, significantly contributing towards solving many social problems. WSP | Parsons Brinckerhoff is working on several urban regeneration programmes like Sydney’s Central Park Precinct development, where it is anticipated that new shops and offices will attract new business, services and jobs to the area and effectively double the local population.
Finally, a stronger global economy continues to drive demand for real estate world-wide. The majority of the investment volume in London is from foreign sources, and this situation is mirrored in the USA and in Australia.
Benefiting the broader market
The luxury, high-end property rush may be short lived, but the broader market can remain sustainable as long as we continue to find innovative ways to deliver value for our clients and the communities they serve. Developers may need to shift their attention to addressing local housing issues but can only succeed where there are strong local economies, which is where foreign investment comes in. If governments have a wider vision for their cities, with visibility of future demand, they can put in place policies and strategies to help the market adapt to changing requirements and to better plan and invest to provide for our future cities in a way that benefits us all.