Global Real Estate Capital Market and US Housing Market

We often hear or read of reports about global capital markets, but just how do they impact the US Housing Market? As I was researching this topic, I read a report that shed some light.

In its annual report, The Great Wall of Money, Cushman & Wakefield provides an in-depth analysis of the state of the Global Real Estate Capital Markets and critical insight into the 2017 landscape of commercial real estate investing trends in America.

The Great Wall of Money report series tracks the amount of newly-raised capital, including debt and equity, targeting real estate at a global level and has been doing so since the onset of the financial crisis in 2009. The report monitors capital available predominantly from funds, listed companies, and institutions and explores the geographies and asset types it targets.

In 2017 the total global wall of money (debt and equity) targeting direct real estate fell for the first time since 2011 to $435bn, a 2% drop over 2016. However, current levels are the second highest on record, reflecting the extraordinary rise in capital targeting the sector (real estate) in this cycle.

Key Takeaways specific to the United States

Here are some excerpts from the report:

  • The wall of money targeting the US has been building steadily as institutional investors have bumped up their allocations to the highest levels in history, and offshore investors swarm to park money in high-quality US assets.

  • Demand tends to outstrip supply in many key markets, pushing down cap rates (yields) and challenging investors.

  • Unable to find enough existing core assets, investors are targeting development or redevelopment projects that create core assets in top markets.

  • For the first time, more equity is targeting the US ($79bn) than Europe, the Middle East and Africa (EMEA) ($72b) and Asia-Pacific (APAC) ($65bn). One of the most striking trends in global real estate is the growth in capital targeting Asia Pacific. Also for the first time, we see more capital targeting Asia-Pacific (APAC) than EMEA reflecting the maturity and growth of opportunities across the region as well as attractive long-term return prospects.

  • Opportunistic strategies continue to dominate Asia Pacific and EMEA, while Value add remains the preferred strategy in the Americas.

  • The US is likely to remain the most targeted investment market in 2017. Although investment activity has slowed during 2016, the great wall of money targeting the region remains high with many investors still under-allocated to the sector vis-à-vis investment intentions.

    US Housing Market

  • Residential is preferred target property type. Of funds targeting a single property type, residential remains the clear preference. US funds targeting the domestic, multi-family sector continue to be sought after despite a long run of exceptional returns post GFC.

  • Moderate loan-to-value (LTV) ratios trending marginally lower. The average LTV globally is 50%.

It is my opinion that main street investors holding or buying or flipping residential real estate will benefit from the continued supply vs demand rise in real estate values perpetuated by a flight to quality (yield and safety) of US assets, and propagated by no significant new construction in housing units, whether SFR or Multi-family being added to the housing stock, coupled with tight underwriting as evidenced by a low MCAI, and a slow to recover jobs market.