Bostok Hathaway Team at Berkshire Hathaway HomeServices
From the beginning of 2022, global real estate markets were strong, but headwinds began to emerge, including rising inflation, tighter monetary policies, and the geopolitical risk posed by the Russian invasion of Ukraine, found a report from real estate services firm JLL.com. Capital market investment volumes set a new record in Q1-2022, with quarterly leasing volumes up 35% year-over-year, likely due to the waning threat and eased restrictions posed by the COVID-19 pandemic. Demand is still below pre-pandemic levels, but the commercial rental market is robust. Increased retail spending and the lifting of travel restrictions should support a recovery in the retail and hospitality sectors.
The outlook for commercial real estate is closely tied with what happens in residential real estate, so it’s important to know the “occupier take up”, jargon that measures gross leasing activity, or commercial space that is physically occupied. As supply diminishes, rental growth increases. Rented space means more jobs and more interest from investors. It also means more immigration and migration for workers to robust markets, which in turn puts pressure on residential real estate and how much available land is allocated to commercial VS residential interests.
“The recovery of physical office occupancy and leasing, robust consumer spending and rebounding leisure and business travel has broadened the appetite of investors,” who are aligning their investment strategies to longer-term economic and demographic shifts, primarily to urban environments.
Currently, about 55% out of 4.2 billion people live in cities. By 2050, seven out of 10 people will live in cities. Most of this urbanization will take place in the developing world in cities such as Lagos, Bangalore, Beijing, and many other Asian, African and Latin America cities. India, China, and Nigeria are expected to account for 35% of the growth in global urban population, according to a recent report Residential Real Estate Market- Growth, Trends, COVID-19 Impact, and Forecasts (2022-2027). Between 2022 and 2027, the global residential real estate market is expected to grow more than 9%.
In most global metros, residential space is at a premium, and there’s a threat that commercial interests might prevail on land use, due to the need for urban logistics. Urban logistics means building warehouse and distribution facilities close to their final delivery points in a way that avoids as much traffic congestion as possible.
One such contest between industrial and residential units is taking place in London. Savills.com reports that nine percent of homes to be built in 2022 could be at risk due to the rising land values of industrial sites – up 175% to £8.3 million since 2017. Residential land values in London are beset by “rapidly increasing build costs, weaker house price growth and lower affordable housing values, particularly in Outer London.”
The London Plan Housing Target recommends that 52,000 new homes should be built per year over the next 10 years. The British Property Federation suggests that each additional new home requires 69 sq ft of warehouse space to support it. If the building goals are met, London would require 36 million sq ft. of new warehouse space to serve the new residents. The London Plan was meant to alleviate competition between competing interests for land, by having residential and industrial units co-locate, but it didn’t account for the much greater rise in industrial land values.
Residential developers are up against tighter building standards, sustainability regulation, tax changes, and rapidly rising build costs, which means they are increasingly outbid by industrial interests. At risk are approximately 130,000 badly needed new residences that likely won’t be built, compounding the problem of affordability for Londoners.
Across the UK, home prices are expected to rise by 7.5% in 2022 and 12.9% through 2026, following two years of 20% growth through April. However, Savills says that the rising cost of borrowing and cost of living pressures will most impact affordable homes. The top end of the market is likely to outperform the mainstream as wealthier residents are less impacted by rising interest rates and other economic conditions. Value growth will be strongest in the North, Wales and Midlands, with slower growth in London and the South where affordability pressures are greatest.
Affordability is an issue worldwide, as building supply interruptions, rising material costs, escalating home prices and interest rates, and other costs of living are reversing the post-pandemic housing boom in cities hit by “raging inflation, stock-market turmoil and a grueling war” says a recent Reuters.com survey. Central banks across continents are increasing interest rates, with slowdowns occurring in previously hot real estate markets, including Canada, the U.S., Australia, the Czech Republic, and New Zealand.
Market experts say housing price declines will occur in many markets, but it won’t make buying a home any more affordable, under the circumstances. Two-thirds of participating analysts say that affordability will worsen for first-time homebuyers, even in areas like India and Dubai, which largely avoided high post-pandemic market appreciation. Soaring costs in building and supply interruptions are keeping homes from keeping up with demand.
Most analysts missed the run-up in housing due to the pandemic as people moved to larger homes and suburbs to be more comfortable during lockdowns and to work from home. Flush with quick equity, many may not return to the cities. Bloomberg Economics along with the Organization for Economic Co-operation and Development (OECD) showed that 19 OECD countries combined price-to-rent and home price-to-income ratios and found they were higher than they were ahead of the Great Recession, suggesting that “prices have moved out of line with fundamentals.”
Markets that appear to be in a bubble include Portugal, Austria, Germany and the Netherlands and South Korea. According to Globalpropertyguide.com, “the canary in the coalmine is momentum.” Most markets are rising, but less so than a year ago. Some markets, such as Europe are still going strong but the pace of growth is slowing. Asian, Pacific and Middle Eastern markets are mixed, and Latin American markets are weakening.
In Turkey, inflation was 61.4% in March 2022 and 73.5% in May and home prices have risen 30.30% in the year through Q1-2022. Other strong markets are Russia (+18.78%), HCMC, Vietnam (+15.49%), Slovak Republic (+12.88%) and Australia (+12.18%), using inflation-adjusted figures. The biggest year-over-year price declines were in Colombo, Sri Lanka (-19.84%), Cambodia(-19.15%), Bogota, Colombia (-11.55%), Morocco (-10.57%), and Peru (-8.35%).
The global trend is that the housing boom may be weakening.