While the property market remains buoyant, too many investors base their decisions on gut feel, which could lead to missed opportunities.
I am looking forward to joining colleagues from five Grant Thornton member firms at MIPIM 2016, the annual event for property professionals in Cannes, France.
I expect to see confidence still high in the property market as we saw at last year’s event. But there is also a backdrop of rising uncertainty in the wider global economy, fed by a wide range of factors. The slow-down in China, higher interest rates in the US, falling oil prices, Britain’s potential exit from the European Union, and increasing turmoil in the Middle East are all leading to increased stock-market volatility and concerns about future growth.
These fears have contributed to a surge in overseas real estate activity as investors seek the haven of bricks and mortar in areas of political and economic stability. I anticipate this trend will continue, pushing global real estate transactions towards pre-financial crisis levels this year.
This trend ties in with our recent research, which shows that the property market is highly sentiment driven. One thing we will be looking out for at the conference is whether investors are using the deep analysis and local expertise that they need to spot emerging pockets of opportunity in a competitive market. I think many could be missing these opportunities.
According to a Grant Thornton International report 'Uncovering opportunities for overseas investment', soft power and gut instinct are driving an estimated US$250 billion a year in overseas real estate investment. I feel wider fears about the economy could be exacerbating this mindset, clouding investors’ vision and leading them to rely too much on sentiment to guide their decisions.
The uncertainty is driving real estate investors towards areas that they perceive to be low-risk. Stable regions will provide secure returns, but there are also valuable opportunities in areas that have become friendly to investment or development more recently. For example, cities such as Nairobi, Kuala Lumpur and Bangkok are all earmarked for major development projects.
Population shifts are affecting the market in ways that are not always obvious. So local insight is necessary to make informed decisions, because what works in one culture or region might not in another.
New opportunities in less-established areas are opening up as developed cities become saturated.
The UN predicts 2.5 billion new urban dwellers by 2050, of which 90% will live in Africa and Asia. It expects just three countries – India, China and Nigeria – to account for more than one third of global urban population growth. Many more cities will appear and super cities such as the one around the Pearl River delta in China will keep growing. Another of the many areas to watch is the industrial corridor between Mumbai and Delhi that the Indian government is supporting.
Where economic conditions are stable, smart investors can get into these secondary markets while the costs of entry are low.
We should never ignore cultural understanding and instinct, but investors need to apply robust analysis to check their assumptions about which countries and areas are safe. To back the best overseas projects, they need to engage with local experts to understand the opportunities fully.
Kersten Muller and Jeremy Toone are members of Grant Thornton's global real estate and construction team.