“The weight of capital is driving a disconnect between pricing and fundamentals,” concludes DTZ’s latest ‘Money into property’ report.
That sounds an awful lot like what is usually described as a bubble.
Property advisor DTZ finds that the total value of the world’s property markets hit a record $US13.6 trillion in 2014, 19 per cent above the previous peak in 2008 and marking continuous annual growth since 2009.
Investment activity has continued to flourish and is set to close in on 2007 peak levels in 2015, as the chart below reveals.
Buyers spent $US771bn on real estate deals in 2014, just short of the previous record set before the global financial crisis.
DTZ estimates a record $US429bn of new capital is targeting real estate this year. Property remains attractive in the current low interest rate environment, but the weight of capital is leading to signs of overheating in some markets.
“Investors need to move now while the window of opportunity remains as yields will compress quickly.”
A number of influential trends stand out in the DTZ report: increased cross-border capital, especially from China and Singapore; a rise in non-bank lending; and the influence of foreign exchange on property demand and prices.
The jump in cross-border investment is helping to drive overall market growth.
As we know, investment in Australia has been supported by strong offshore activity, predominantly from Asia. Chinese and Singaporean sovereign wealth funds and institutions were also highly conspicuous investors into Europe and North America.
DTZ also singles out Sydney and Melbourne as places where “similar trends have been observed”.
“Even in relatively smaller cities we see higher levels of cross border investment, helping to drive higher growth in activity. These include cities such as Madrid, Melbourne, Prague and Brussels,” DTZ says.
In the Asia Pacific, the only region to have seen continuous growth over the past decade, property market values rose 10 per cent to $US5.1 trillion, driven by a 21 per cent rise in money invested in real estate in -- you guessed it -- China. The growth of stock in China was so significant that, when excluded, Asia Pacific rose by just 1 per cent.
The region is now driving itself away from the other regions, propelled by further growth in China, DTZ says, explaining that lack of opportunity and record low yields are leading investors to non-core opportunities.
London continues to attract the largest volume of large investment in deals, with $US35bn invested in the past 12 months. Melbourne and Sydney both rank highly and ahead of Singapore.
Growth in Australia appears muted at 2 per cent, but in local currency growth was 9 per cent.
This significant foreign exchange effect taps into research by IG chief market strategist Chris Weston, who notes that for Chinese investors, Melbourne's property prices have fallen to multi-year lows thanks to the depreciating Australian dollar.
Over the past two years, a Chinese investor who purchased a $1m property in Melbourne would have made around $200,000 on the currency trade, given the depreciation in the Australian dollar against the yuan.
Chinese investors are using funds from a sensational move higher in the domestic sharemarket to buy property. China's stockmarket value topped $US10 trillion for the first time on Monday, with the Shanghai Composite Index rallying 152 per cent in the past 12 months.
In Melbourne and Sydney, Chinese investors were now purchasing around a quarter of new housing stock, Mr Weston calculates, while Credit Suisse predicts a further $60bn in Australian real estate purchases by Chinese investors over the coming six years.
DTZ notes that expectations of rising interest rates could diminish real estate’s attractiveness and lead to a reversal in the flow of equity into funds.
Promisingly though, equity continues to “replace debt in the capital stack”, growing 8 per cent in 2014, compared with 2 per cent debt growth
Leverage fell in every region as cash-rich investors sought returns in the ultra-low interest rate environment. Non-bank lenders also continued to increase their activities at the expense of traditional commercial banks.
The equity component of stock has been in recovery for half a decade and has risen by over 50 per cent, compared to 10 per cent growth in debt. And markets with relatively lower leverage levels have benefitted from stronger growth, particularly markets such as Australia, Hong Kong and Taiwan, the DTZ research finds.
So while growth in the period 2005-07 was supported by a debt-fuelled binge, in recent years we have seen more equity-rich, lower-leveraged markets grow faster.
This doesn’t insure against a reversal in the flow of investments or a fall in property values if investors seek to redeem their investments, particularly if higher rates do emerge and increase the allure of competing assets.
“It is critical that investors focus on a market’s fundamentals -- demand, supply and income,” DTZ concludes.