Speculation of a coming crisis often dominates the conversation regarding global capital markets. How close is the world to an economic crisis? How should this affect investment decisions?
Luckily, there are answers that reveal global themes across a diverse real estate market. Tom Arnold, head of Americas Real Estate at Abu Dhabi Investment Authority (ADIA), shared insights on how to create and implement a successful global investment strategy at the 2016 UNC Alternative Investments Conference.
Since its inception in 1976, ADIA has focused on creating long-term value for Abu Dhabi’s government. Arnold manages a diverse global portfolio encompassing a range of asset classes. He points to the following drivers and cycles to evaluate the global commercial real estate landscape and make future projections.
There are three main drivers that influence the global commercial real estate market.
- Business cycle drivers include common economic indicators such as the labor market, corporate health and retail sales. There’s a focus on indicators that have implications on consumption, which can account for as much as 70 percent of gross domestic product in many nations.
- When it comes to capital markets cycle drivers, it’s all about the cash flow. Making money in real estate can be easy if you anticipate capital flows. Penetrating a market before the capital gets there yields amazing returns – but it’s easier said than done.
- Space and fundamentals cycle drivers refer to the demand for space – think vacancy rates and rent prices.
Here’s what Arnold says the current environment reveals about the market:
- Monetary policy remains key to determining how people think about hard asset values. Interest rates are impossible to overlook – and so are the projections of where these rates will end up.
- Generally speaking, economic downturns are faster and faster to come while the recovery process is becoming slower and slower. What does this mean for returns on real estate? Expect to see better five-year returns than 10-year returns when comparing your real estate investments to other asset classes.
- Investors have reduced activity in emerging markets. 93 percent of U.S. investors are maintaining a focus on their home market, with similar trends evident across Europe.
Looking to the future, these are Arnold’s predictions:
- Events that could trigger global market volatility or uncertainty include an emerging markets crisis, the further collapse of commodities – including oil and natural gas – and stress in the European Union stemming from Brexit.
- On a more positive note, be on the lookout for the U.S. Federal Reserve to delay its interest rate hike and have less concern about deflation.
Remember that markets vary. As a global investor, you have the opportunity to dial up or dial down investment activity based on market signals. It’s a privilege to have the opportunity to make decisions about where leading markets are – an advantage local sharpshooters don’t have. Keep this perspective in mind when worrying about impending doom.
By Jonathan Ponciano