The Massive Global Real Estate Boom

November 4th, 2013 by Diane Moore

Immediately after the financial crisis there were talks about how people might keep off commercial real estate property for a while. However, this mentality did not last long. From East Asia, London to California, new developments and real estate property prices are red hot. This was a good exhibit of how weird and unpredictable markets can be.

The Massive Global Real Estate Boom

The Massive Global Real Estate Boom

The run up in commercial real estate prices has been fueled by speculation and demand. The global real estate prices have risen due to the increasing demand in the face of limited supply. It has taken quite long to replenish the high demand thus pushing the prices of real estate property higher.

United States of America (USA)

 

According to the US commerce department, new home sales have increased by 38% since the year 2012 hitting a five year high in June 2013. Additionally, the sale of homes that were previously owned was 15% higher than 2012. This is attributable to the tight inventory and surging sales activity has caused the sharp rise in home prices which is expected to continue through out the second half of 2013 into 2014.
Prices across all 20 major metro markets in the U.S were 12% higher in April this year than in April 2012. The current path of fast growth is expected to continue and remain positive for several years.

More homes in the US market

There is a boom in the number of new constructions across the U.S as more homebuilders gain confidence and start rolling out new developments. This has been observed in places where the housing demand is quite high coupled with spurring job growth in both housing related industries and construction. Such areas include Northern California, Texas and Carolina. The largest percentage of new construction in these areas is multifamily property. Additionally, an increase in investment in real estate has been observed in areas such as New York, Illinois, Florida, New Jersey and Maryland. This is attributable to the delayed distressed inventory that is being experienced by lenders.

 

Investor activity has also been on the rise especially among institutional investors who have specialized in buying single family houses and converting them to rentals. Commercial real estate property purchases have been increasing steadily with several southeastern markets such as Georgia and Florida logging more than 200% yearly increases.

 

The spring buying season has been marked by a sharp rise in demand of real estate property. This has been fueled by scarcity of listings and the drive to push borrowing costs down (an initiative by the Federal Reserve).

 

As compared to March 2012, home prices in the United States rose by 11% in March 2013 with the biggest gains being limited to hard hit markets such as Las Vegas and Phoenix and San Francisco which is a thriving job center.

Phoenix and Atlanta

 

90% of all metropolitan areas showed increases in real estate prices in the first quarter of this year with areas such as Atlanta, California, Nevada, Reno, Phoenix and Silicon Valley posting a more than 30% increase. This indicates one of the strongest buyers demand witnessed in the past few years which has lifted sales despite the tighter inventory.

Brooklyn boom

Up-and-coming neighborhoods in Brooklyn such as Bedford-Stuyvesant, Bush wick and Crown Heights have surged in popularity in the past one year because real estate property buyers have already been priced out of Manhattan and other exclusive Brooklyn neighborhoods such as cobble Hill, and park slope. Due to the sort inventory, many people are vying for the same property in a bid to buy properties as fast as they can.

 

While sales for new homes are being driven up by the tightness in the existing home market, home builders can’t match the demand since production cannot be increased fast enough due to the rising competition for the lots in prime locations and labor shortages.

 

In places such as Menlo Park, houses are sold long before they are completed. The shortage in land has driven investors to purchase million dollar homes just to knock them down and put up mansions.

 

20 condominium towers with 3,300 units are currently under construction in South Florida. Moreover, another 14,600 unit are planned, and three quarters of them are for Miami-Dale County.

 

The 10.9% jump in 20 metropolitan areas in the U.S indicates that Americans are filling more bullish than any time before since February 2008. This has been proven by the dramatic gains in home prices in some of the largest cities in the U.S. These big price gains have been witnessed in cities such as Los Angeles, Las Vegas, Miami, Vegas, and San Francisco. Furthermore, the prices of single family homes in 20 metropolitan areas in the U.S rose by 12.1% in April which marked the biggest gain in seven years.

 

Stronger government oversight of the mortgage industry and tightening of lending rules has ensured that a property crash is unlikely. The leading price gains include; 24% in san Francisco, 22.3% in Las Vegas, 21.5% in Phoenix, 19% in Los Angeles and 13% in Miami. In Los Angeles, homeowners are being shut out of the real estate market because they do not have the financial capability to make all cash offers.

 

Investors are now making structural and/or cosmetic fixes on run down homes in areas such as Silver Lake and Venice, adding new floors, windows or square footage by simply building a second storey and putting the property back in the market in order to earn significantly more money.

United Kingdom (UK)

 

The real estate prices in London have been rising steadily for a long while. A large quantity of this demand (over half for real estate property priced at above £1 million) is coming from overseas buyers who are mainly buying for investment purposes. The demand for housing in London is higher than in other places in the UK mainly because London is a desirable place to live. London is a very rich and diverse place socially and culturally boasting a wide variety of parks, shopping, art galleries, restaurants, creative communities, lawyers, think tanks, landmarks and monuments, venues and theaters, financial service providers, universities, technology startups, scientific institutions, infrastructure and sports clubs.

 

Factors that contribute to the UK boom:

 

  • Britain’s straightforward and clear tax structure especially for wealthy foreigners has proven to be highly attractive to super rich foreigners and locals. London’s real estate has proven to be perennially popular an attribute which has been enhanced by the global low interest rates environment that has cheap and easy borrowing for speculation purposes. Therefore, it is highly unsurprising that rents and prices have pushed upwards as the global super rich alongside hedge funds and pension funds sitting on huge piles of cash seek to achieve higher yields than bonds and cash by speculating in commercial real estate.

 

  • In some aspect, London’s real estate and also the real estate in various globally desirable cities has become the new reserve currency. Additionally, price rises in real estate prices in the United Kingdom have proven to be increasingly cyclical as both speculators and residents seek to buy. As the prices rise higher, London residents and foreign investors are becoming increasingly desperate to get on the real estate property ladder in fear that they might never be able to do so. Additionally, more speculators are being drawn in by simply seeing London real estate property as an asset that is keeps going up.

 

Buying commercial property as a premise business, or a residential place is not problematic. However, buying commercial real estate property can be quite problematic since real estate is like gambling on an asset that deteriorating under the guise of buying safe assets. However, in the UK where real estate property especially housing has been treated by most governments as an investment and also as a haven mainly for pensions and savings real estate property owners have continued doing particularly well.

For instance, in October 2013 the real estate prices in London jumped 10%. Most United Kingdom governments have popped up the market through scheme such as “Help to Buy” and other restrictive planning laws in order to rig the market and restrict supply. This has made the government to feel particularly secure. However, the biggest challenge that comes with restricted supply and continually rising prices is that most people cannot afford to buy a home.

 

Regardless of the severe pressure that may face the government to subsidize house building within the next few years, such a reversal policy would not crash the London real estate market.

 

In the UK, the relatively low income musicians, artists, designers, technologists, academics, artisans, professionals, academics and service workers who make London priced out have moved to other communities where housing costs and rents are lower. This has put an upward pressure on rents and housing costs in other areas locally and outside their country such as Manchester, Birmingham Paris, Glasgow, and Berlin.

 

Despite moving deep into the English countryside, to places where a three bedroom house would cost the same as a studio apartment in London, they still live a socially and culturally connected life without this being socially, professionally and culturally prohibitive mainly because the fast and ubiquitous internet allows it.

 

London is quite desirable to the global super class mainly because of its advanced amenities. The global competition for capital has skyrocketed in the past few years, however, despite the competition from faster growing, cheaper and newer eastern metropolis and London being an old metropolis; it has done quite well since 2008. Therefore, housing property in London is a very safe place to pool savings and not speculation.

This is attributable to the fact that even in the case of a deteriorating real estate; prices in London can never fall bellow UK’s average. Therefore, commercial real estate will yield higher returns that most productive business investment since the UK government continues to protect the real estate investors. This will be reflected in the stable and fast rising commercial real estate prices as large flows of capital from foreign investors continues to flow into London.

Dubai

 

The Dubai property market prices are shooting up as developers continue announcing new projects and mega development. Over the past one year, prices in the emirates shot up by 21.7% as new mortgages surged. One of the new mega projects is Mohammed bin Rashid City which will be a multi-billion dollar undertaking to be fully completed in less than a decade. It includes the world’s largest crystal lagoon, 350,000 square meter Water Park and 1,500 villas. The recent real estate price movements have been stimulated by stronger economic fundamentals, and real demand rather than excess speculation.

Dubai’s economy has been growing

 

Moreover, the housing market in Dubai is mainly influenced by broader economic trends. Therefore, Dubai’s economy has been experiencing solid and sustainable growth rates over the past three years. From the year 2012 through 2015, Dubai’s economy may grow at a rate of 4.6% on average.

Demographics

The image is the courtesy of associatestoursandtravel.com

 

Due to the high rate of population growth in Dubai, the demand for housing has been rising. Dubai has the second largest population in the country which largely comprises of expatriates. Dubai has cemented its status as a stable and safe haven in a region of economic and political turmoil. This has attracted people from unstable countries in East and North Africa and The Middle East with an increasing interest from foreign investors mainly from unstable countries.

Final Thoughts

Loosening of credit underwriting coupled with low interest rates in most areas has brought investors in the market thus fueling demand even further. Other demographic and general economic trends have also fuelled the global demand for commercial real estate property.

 

The sharp increase in prices in real estate property is expected to continue. This has created a gap for prospective investors from all over the world to invest in various real estate properties in order to enjoy the huge profit in this highly unpredictable niche. This historic wealth building opportunity is winding down to a very healthy real estate expansion. Some of the commercial real estate properties whose prices are increasing at a very fast rate include office buildings, shopping centers, houses, condominiums and houses. In the current global real estate boom, the cycle will run its course as the market price corrections take place gradually. In the long run, the prices will not dip immediately. However, it is likely that prices might settle down gradually to more realistic levels.

 

 

Diane is a highly-qualified translator of the English, Italian and Spanish languages. She has studied extensively in Italy and Switzerland. She writes about a variety of financial services industries including insurance. She has a love of life and a curiosity that drives her both personally and professionally.

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