Why is worldwide real estate so much in demand?

Over the last few months we have seen demand for real estate emerge in a variety of different ways. We have seen fund managers raising new capital, property companies raising debt finance not to mention talk of an expected $200 billion plus investment in US real estate by Chinese investors. So, why is real estate so in demand and why is there particular emphasis on the US?

Real returns

While inflation is relatively low around the world so are interest rates which have a direct impact upon savings interest rates. As a consequence, with rental yields available upwards of 10% there is no real comparison between savings rates and rental yields at this moment in time. This has encouraged a growing number of investors to plough money into the real estate market which has pushed prices higher but even reduced rental yields still remain attractive compared to savings rates and inflation.

You could argue that the current real estate investment environment will eventually change as interest rates finally return to more traditional levels. However, while there is speculation that the US Federal Reserve will increase US base rates in June, they are still well off traditional levels.

Cheap money and impressive yields

The availability of cheap money and the impressive deals in the worldwide property market has created a perfect storm for property investors. Even though the US authorities are on the verge of increasing base rates yet again there has been enormous demand for US real estate especially from the Chinese investment community. The very fact that the US Federal Reserve is even contemplating an increase in US base rates suggests that the economy is relatively strong and could get even stronger in the short term. This would be the only reason why they might consider increasing base rates in the current worldwide economic environment?

European real estate

If we look at the European real estate market, with perhaps the UK side, many are still struggling to regain levels achieved just prior to the 2008 worldwide economic downturn. This, together with historically low European base rates, has prompted more people to look towards the real estate market and especially those “bombed out markets”. Even though we have seen a slight recovery in Spanish and Portuguese property prices this is relatively small compared to the downturn over the last eight years.

There is also the issue of European and worldwide banks being forced to take on properties when customers defaulted on their loans. There are literally billions of euros in unwanted properties held on the balance sheets of large financial institutions. Once European real estate markets stabilise we will likely see some relatively large sales to international investors with a more long-term investment horizon. This will probably keep European real estate prices in countries such as Spain and Portugal relatively subdued, at least until markets rebalance the supply/demand equation.

Conclusion

Cheap money, low inflation and extremely low savings rates have come together to create a perfect storm for worldwide real estate investors. Quite what will happen as and when base rates eventually return to their traditional levels, the cheap money runs out and inflation starts to pick up remains to be seen.


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