It’s natural that in a publication of this name, one would expect to find a fair amount of coverage of globalisation in property markets. Our feature on the big global agents (pages 6-7) shows how the pace of globalisation is increasing.
The biggest broking and advisory firms are the oil that lubricates the engine of the global market. In their own businesses, they’ve tended to be ahead of the curve. The genesis of the current big three came more than 10 years ago through transatlantic tie-ups that were cemented by M&A activity later. However, a sense of urgency is revealed by the way that the big firms are looking to cement their position by filling geographical gaps or building on their presence in the major regions.
The driver for this has been the growth of global capital flows. It wasn’t so long ago that, apart from the major investment banks, very little real estate capital travelled cross-border. A couple of years ago it became the norm. Now capital jumps from continent to continent without a second thought. I recently spoke to an adviser whose firm had been raising capital for a fund. The fund was structured in Europe, invested in China, and the major chunk of the equity came from the Middle East. Similar globe-trotting deals are commonplace.
There is still a significant challenge ahead for the big advisers, who must get their networks and knowledge base up to speed to cope with client demand. Statements such as “we don’t know too much about that market” or “can we refer you to our affiliate in that location” will not be warmly received by clients in this smaller world.
There has been a lot of talk that the US property market has hit its peak. The $39bn acquisition of Equity Office Properties REIT by Blackstone in February was seen as a signal that the top had been reached. Since then, the US economy has not looked in the best of health. The housing market has gone wobbly, with falling prices in some major cities and rising defaults in the sub-prime mortgage market. First-quarter GDP growth was 0.6%, the lowest quarterly rise since 2002.
This doesn’t look good and suggests that EOP founder Sam Zell sold out at the right time. However, Zell says that had EOP belonged to him rather than to its shareholders, he’d have hung on to it rather than sell. He says his fiduciary responsibility to those shareholders meant he had to accept Blackstone’s bid. Presumably what Zell meant was that, although his instinct was to hang on and see where the market went, he knew that was the more risky option and that his responsibility to his shareholders was to minimise risk.
Where are the positives for the US market, then? Firstly, despite rising interest rates and problems in the housing market, consumer spending is growing and at a faster pace than a year ago. Furthermore, most economists expect GDP growth to bounce back later this year. And – although opinion is divided on this – interest rates may start to fall later in the year. Finally, there is still plenty of capital to go around, and that will ensure that the US stays hot, for this year at least. And it’s smart capital. Tishman Speyer and Lehman Brothers, which bought Archstone-Smith for $22bn, are both big global players.
The next 12-24 months will be a crucial time. Supply in all sectors is set to increase during that time and oversupply is the key to a property crash. Some reckon that 2009 could be the peak. By that time, will Sam Zell have a few regrets about selling EOP, or be greatly relieved?
