Real Estate Now A “Preferred Alternative”: Cushman & Wakefield’s Mirante
3 May, 2006, Tampa, FL
Record investment in real estate in 2005 is a clear indicator that real estate has become a distinct asset class and is now an increasingly important component of global asset investment portfolios, Cushman & Wakefield President of Global Client Development, Arthur J. Mirante II, said in a speech before the CFA Conference in Tampa, Fla. on April 28.
“Real estate has unique return characteristics that combine relatively high yields with the prospect of preservation of capital by virtue of its inflation hedging characteristics,” Mr. Mirante said. “Investors have been increasingly attracted to real estate, especially given the downturn of the global equity markets that has occurred the last five years.”
Huge amounts of capital are being allocated to real estate. For example, with $6 trillion in pension fund assets under management, a recent 1 percent increase in pension fund allocations to real estate will add an additional $60 billion to be placed in the real estate market in the next several years.
Investment in real estate has grown exponentially in recent years and a fundamental shift has occurred in the allocations for real estate among investors. Global real estate volume has tripled since 2001 and the $500 billion transaction volume in 2005 is an all-time record.
Investment in the U.S. has led the way, doubling since 2003. The global market is now $6.2 trillion, with the U.S. market estimated at $2.4 trillion, or 40 percent of the investable universe. The U.S. is also considered the most transparent and liquid market, with over 200 properties sold in excess of $200 million in 2005.
Mr. Mirante said that cap rates have compressed by 240 basis points in the U.S. in the top eight major office markets. He also said that “despite terrorism concerns” New York and Washington, D.C. have the lowest cap rates, the highest price per square foot and the highest transaction volumes.
“In 2006, investors are targeting San Diego, Washington, D.C., Los Angeles and New York City, with the opportunistic markets of San Jose and San Francisco making the top ten list,” Mr. Mirante said.
Globally, Mr. Mirante said that London, Paris and Tokyo are the lowest cap rate markets and “are most favored.”
“However, there continue to be significant structural differences between countries in terms of leases, tax and legal structures, transparency and liquidity,” he said. “It is this variety in global real estate markets that creates pockets of opportunity which should allow the best informed investors to outperform the pack.”
The Cushman & Wakefield executive said many investors are looking for higher yields in “the not so transparent” hyper-growth economies like India and China, in Eastern Europe, or in secondary cities and markets of developed countries.
Turning back to the U.S., Mr. Mirante said “as our economy has rebounded from the recession and because growth in white-collar employment has been slow but steady, our real estate fundamentals have been recovering.”
As a result of restrained speculative development for much of the last decade, dramatic net absorption of available office space has occurred in Boston, Los Angeles, and San Francisco, where no speculative construction has taken place, and Manhattan, where minimal new construction has been dwarfed by demand.
Looking ahead, Mr. Mirante said “if interest rates continue to rise and the equity markets improve, it is fair for us to assume real estate’s historical yield advantage over other asset classes will dissipate and eventually there may be a moderation of the capital flowing into real estate. But I do not see this having any meaningful impact on pricing.”
Mr. Mirante said pricing would remain strong because of the expanding global economy, improving real estate fundamentals, and strong investor desire for real estate. Real estate will be a “preferred investment alternative for the foreseeable future,” he said. “I see downside protection against the bubble in the large amounts of capital across all asset sectors allocated to real estate and the rapidly improving fundamentals.”
CFA Institute is the global, non-profit professional association that administers the Chartered Financial Analysts curriculum and examination program worldwide and sets voluntary, ethics-based professional and performance-reporting standards for the investment industry. CFA Institute has 82,000 members in 124 countries. Its membership includes 129 affiliated professional societies and chapters in 50 countries and territories. CFA Institute is headquartered in Charlottesville, Va., with additional offices in London and Hong Kong. More information can be found at www.cfainstitute.org or by calling 1-800-247-8132 or 1-434-951-5499 in the U.S., 44-207-712-1719 in London or 852-2868-2700 in Hong Kong.
Cushman & Wakefield is the world’s largest privately held real estate services firm. Founded in 1917, the firm has 189 offices in 57 countries around the globe, and 11,000+ talented professionals. Cushman & Wakefield delivers integrated solutions by actively advising, implementing and managing on behalf of landlords, tenants, and investors through every stage of the real estate process. These solutions include helping clients to buy, sell, finance, lease, and manage assets. C&W also provides valuation advice, strategic planning and research, portfolio analysis, and site selection and space location assistance, among many other advisory services. To find out more about Cushman & Wakefield, please call 1-800-376-3133.