Investing in real estate - picking the sweet spots


Which global developed cities will deliver the highest returns in the next 10 years?

It was my pleasure to moderate a panel discussion at the PERE Asia Summit 2017 held in Hong Kong earlier this year. TMF Group was one of the sponsors of this event, where more than 500 busy delegates from leading global institutions converged to exchange views on the global PERE landscape.

Which global developed cities will deliver the highest returns in the next 10 years?

The panel assembled to answer the above question at the summit formed a very good cross-section of the global PERE community:

  • Ronald Dickerman, President, Madison International Realty
  • Peter Reilly, Head of JP Morgan’s Real Estate business for Europe
  • George Agethen, Senior Vice President Asia-Pacific Growth Markets, Ivanhoe Cambridge
  • Vikas Kaul, Group Head of Research, Lendlease.

To set the background and momentum for discussion, I posed a broad question to members of the panel:

“A global developed city is, to a large extent, characterised by its attractiveness to pull and retain global financial capital, its good regulatory and corporate governance framework, rich concentration of talent, innovation and technology. In light of the current global economic uncertainties or directions, what in your view, would likely drive the real estate investment returns for these global cities?  How would the evolving global dynamics impact them?”

Each panel member adopted a general approach to answering the question, and presented their views based on their related experience and geographical coverage.

Asia Pacific

For the Asia Pacific market, the discussion centred on emerging protectionism, domestic consumption, capital flows/controls, shifting of focus and capital among developed cities in this region. Also, the underlying ingredients that will drive the stellar returns of each developed city in the region.

Europe and the USA

With respect to Europe and the United States of America, the discussion revolved around issues concerning the Federal Reserve’s stance on interest rates, geopolitics in Europe; especially forthcoming elections, impact of post-Brexit, economic policies from the new US administration and emerging protectionism.

After a comprehensive discussion on each region, I posed the following question to the panel:

“Let's say a group of investors approach each of you, and ask you to construct a real estate investment portfolio with a fund life of 10 years, focusing on just three global developed cities in your region.  Which three global developed cities in your view, will be included in your portfolio?”

Global developed cities to include in your portfolio

One panel member highlighted Shanghai, Tokyo and Sydney, whilst another listed Sydney, Shanghai and Kuala Lumpur. Others earmarked New York, London and Berlin.

The panel examined the underlying long-term fundamentals of each global developed city before all reaching a consensus. Here are the five global developed cities that they believe will deliver the highest returns in the next 10 years:

  • Berlin
  • London
  • New York
  • Shanghai
  • Sydney

But what about San Francisco? Vancouver? Paris, Milan, Madrid, Dubai and Mumbai? Should they be featured in this ten-year portfolio? Whilst the panel favoured the outlook and growth of these cities, they still expected them to lag Berlin, London, New York, Shanghai and Sydney over the next decade.

The panel was also asked whether e-commerce will, going forward, displace any of these cities which they have selected, especially from a retail perspective. The panel viewed that the forces of e-commerce would still gravitate to the five chosen global developed cities, due to their underlying long-term fundamentals.

The session wrapped up with the audience being asked to vote on which five cities they feel will be the front runners with regards to return on investment.  Consensus and support was reached for the same five cities the panel came up with.

Conclusion

There are a lot of moving parts to consider when one constructs a real estate portfolio. Obviously risk appetite plays a vital role in the process, as does diversification of the portfolio according to the risk appetite. Diversification in location but also in property type, for example between retail, industrial, hotel, residential or office real estate. One thing became apparent from the panel discussion and subsequently the testing of the waters with the audience is that the top cities to consider for a real estate portfolio are those cities that can be considered modest risk cities to be held in a portfolio for a longer period of time that will offer significant returns.

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