Convergence in views and mechanisms of real estate markets

It wouldn’t be incorrect to say that real estate is the most prominent asset class for the general public in many countries and cultures, apart from commodities like gold and silver, due to the strong association with security and stability for the long-term. This especially holds for inflation-prone countries.

In many Western countries however, while real estate was one of the main asset classes institutions like pension funds invested in, it is quite recent that the general public became aware of the importance of possessing an own house and the potential for real estate to go up in value. There are different reasons for this:

 

  • In many Western countries the population tends to be more distributed over the country as for example big corporations, universities and other facilities tend to be less concentrated in large/mega cities;

  • Availability of alternative asset classes available for the general public that offered a good yield. Even the savings rate was appealing for a very long time;

  • A stable and low inflation environment.

 

Factors like these led to strong differences in views between countries and cultures regarding real estate as an investment class. However developments have occurred in mainly the last decade which challenged this situation and views up to the point of making it even a frequent national news item in many Western countries.

 

Recent developments and scarcity in the real estate market

An increase in scarcity within the real estate market can be seen globally This has many causes but should be seen holistically in light of large global and socio-economical changes:

  • Increase in the price of commodities and materials needed in the construction of houses. This is caused by general inflationary effects but also due to the development of formerly underdeveloped economies which leads to more competition for these necessities;

  • Higher likelihood of inflationary shocks in at least the near future;

  • More mobility in the world population which leads to more investment in properties abroad, this most notably holds for prestigious cities, areas and projects;

  • Mass immigration, partly also driven by climate change;

  • Tendency of people to live more on there own which leads to a higher demand for houses;

  • Reduction in the workforce for constructions, which drives up wages and expenses, in conjunction with a general decrease in craftmanship;

  • Generally higher standards for constructions.

 

Regulations

So countries that were previously not used to the (problematic) dynamics in the real estate market have also experienced this recently. The general population has become more aware of the importance of possessing an own home at the least and real estate as an asset class in general. In this regard, while this has not been historically the case, we see a convergence in the views and real estate markets in developing and developed countries.

As a response there is more pressure on governments to intervene and provide relief. While there are certainly beneficial decisions that the government can make and implement, for example aimed at the increase in the construction of affordable housing for the population, not rarely governments tend to come with price controls in the short run. This strategy has proven to be damaging in practice as it tends to make the core issue of scarcity worse.

 

Implications

We have provided quite generic views in a very limited piece of text, but what does this imply and why does it make it so interesting to invest in real estate and particularly properties abroad?

Very simply said, our view is that similar real estate dynamics are perceived globally which might be new to certain countries but here to stay. We don’t see issues as scarcity being resolved quickly while in certain cases being made worse by government intervention. Overall this makes real estate an even more interesting asset class than in the past while an international orientation is not only a virtue but a necessity.

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