New York’s Fifth Avenue stores are shutting down and the £800m worth London luxury apartment development project in the Spire building site has been silenced among other such trends globally. It is evident the post-2008 Financial Crisis boom in global real estate growth is slowing down and diverse speculation of the potential aftermath continues with investors facing significant uncertainties - as the FT reports the insolvency and instability developers face in the market today, price falls of more than 20 per cent in the prime London Real Estate market, millions of Chinese property becoming unused, and listed real estate securities are now traded at a significantly lower price than its book value. This global issue is predicted to contribute to a further significant fall and in prices and the rapid fluctuations in market performance, introducing further uncertainties to investors worldwide.

It is true the demand and prices for offices in major cities remain relatively stable and unaffected despite the current paradigm, but according to Evans from the FT certain influential figures within the real estate market - namely Sam Zell, ‘Chicago-based real estate billionaire’ who has ‘disposed of almost all the properties within Equity Commonwealth, a $3.9bn real estate investment trust’ - are selling their office property portfolios and invested interests in the current market. The demand, and thus price, for office space will take a fall consequently and relevant shareholders should secure their assets until the volatility settles.

It is not to say that the current real estate market is not performing, however. The current capital accumulation in the real estate sector is massive and the pool of resources have led to the current situation where prices of property in global cities are observed to be ‘45% higher than at their previous peak in 2007’ according to Real Capital Analytics. According to data collected from Preqin, capital is still being pushed into the real estate sector with the accumulation of ‘342 billion USD of still-undeployed capital worldwide at the beginning of April…, of which 62 billion USD was committed to debt fund’ despite widespread concern and investor uncertainty. Certain arguments that the current market is facing a crash are, upon evaluation of evidence, exaggerated reactions but financial institutions must nevertheless provide effective ‘downside protection’ to sector investors in the face of current risks.

An interesting market trend alongside the commotion is that ‘maverick’ ownership within the real estate sector is at a decrease, and it must be noted that such property markets are ‘becoming home to trillions in pension and insurance capital,’ as is observed from Blackstone’s real estate assets expansion from 19.5 billion USD to seven times that amount this year. Such shift away from corporate ownership reflects the current market paradigm where capital accumulation is heading to such areas characterised by steady cash flow, i.e. pension funds and insurance, and away from banks and corporate transactions. General industry instability has resulted in the shift in market paradigm and investors must brace for impact of the further incoming market volatility to protect their current interests and to assess future opportunity - regardless of the speed with which prices are expected to fall.

William S. Lee

Implications of the Global Real Estate Market Slowdown