Proceed with Caution
The outlook for global real estate

By Dr. Robert Edelstein, Real Estate Development Professor at the Haas School of Business, University of Berkeley, Chair of the Haas Real Estate Group

Real estate, along with other economic activity, is today being driven by a set of economic and social forces, including increased international competition, globalization and economic integration. The latter two factors are considered a two-edged sword—on one level, it is said that it engenders the unfair economic treatment of less-developed nations, while others argue that globalization will equalize incomes over time. The argument that globalization causes inequity would suggest that it may be the cause of much socioeconomic and political unrest in the future, meaning that integrated international economic markets are likely to be much more volatile and responsive to changes across the countries. One example of this can be seen in the recent meltdown of the Shenzhen Stock Exchange, which had repercussions across global markets.

At the same time, the locomotives of global growth continue to be China, India and the United States, with future growth determinants related to technology innovations, globalization of markets, demographics, environmental degradation, and energy resource utilization.

Real estate going forward
So what do these factors mean for global real estate? In the short term, real estate markets around the world are much riskier now than they were five years ago. In the longer term, however, the factors that generate general economic growth will cause real estate values and rents to grow. How might real estate markets change for the worse in the short run? A U.S.-precipitated world recession caused by U.S. consumer problems may impair consumer ability to spend. That recession could be caused by fewer and smaller equity cash-outs because of rising interest rates and sub-prime problems, energy-cost increases acting as a tax on the consumer, and wage growth less than inflation, the U.S. taxation system and so forth. A lag in consumer spending in the U.S. may have ramifications for local U.S. real estate as well as markets that depend upon the U.S. consumer, such as China.

If China’s economy should falter, this could lead to economic slowdowns in Asia and Europe. These conditions could precipitate a worldwide slowdown in real estate value changes, which could be further exacerbated by the unravelling of real estate credit and geopolitical risks around the world. An unanticipated jump in interest rates might also take the wind out of real estate performance vis-à-vis other asset classes. This could transpire even if there were continued liquidity worldwide. Moreover, the debt-swollen environment in the U.S. and elsewhere could handcuff economies from adjusting to higher interest rates.

All in all, any unanticipated systems stress may be amplified due to securitization and leverage. Hence, one needs to invest in global real estate with great care and not be driven to invest overseas because of the perceived diversification benefits. These may be elusive in downtrending real estate markets.

To view Dr. Robert Edelstein's presentation, click here.