The Tectonic Forces of Global Real Estate: Implications for Global Investment and Portfolio Managers
Lynn, David J., Journal of Real Estate Portfolio Management
There are major shifts underway in the fundamental structure, or the underlying tectonic plates, of the global commercial real estate industry. These massive plate movements are creating an entirely new landscape within real estate, challenging long-held assumptions about commercial real estate investment, development, and ownership. The industry is transforming from a highly localized, deal-driven business to an international market characterized by lower transaction costs, abundant information, lower risk premiums, and increasing sophistication. Even the perception of real estate as an investment class is changing-investors increasingly see real estate as a stable, secure investment, producing solid returns with less volatility than stocks or many other investments.
Five fundamental and powerful tectonic forces are at work altering, in some cases irrevocably changing, the very bedrock of the global real estate industry, and creating new opportunities for investors through the following real estate plate shifts:
1. Falling transaction costs-greater information and transparency;
2. The changing perception and growing investor interest in real estate;
3. Lower interest rates around the world;
4. Growing integration with the capital markets; and
5. Global growth and change: demographics, emerging markets, and urbanization.
Many of these underlying factors are mutually reinforcing and compound the impact of any single transition. For example, the increased integration with capital markets is improving the quality and transparency of information. Other influencing forces have been addressed in the literature, such as changing global demographics. The moving magma underlying these global commercial real estate plate shifts is a combination of accelerating globalization1 and global economic growth.
Falling Transaction Costs: Greater Information and Transparency
Globalization is helping to drive down transaction costs by increasing the speed of information transmission along with reducing the associated costs. Transaction costs are the costs of transferring goods or services from one individual to another. A key transaction cost is the cost of information needed to determine the best use of resources and appropriate actions. Optimum economic decisions require information about preferences, resource availabilities, motivation of agents, and technological opportunities. Instead information is localized and dispersed throughout the economy. Even if the relevant information were available, determining what should be produced, for whom, by whom, using which methods and materials is overwhelmingly large and complex-and would likely be cost ineffective if this information were available.
Because information is generally localized and dispersed, no one has the knowledge to make these calculations, even if they are feasible in principle. Real estate is characterized by two types of transaction costs in particular: informational incompleteness and asymmetries. The first, informational incompleteness, describes situations in which the parties to a potential or actual transaction do not have all the relevant information needed to determine whether the terms of the agreement are mutually acceptable and the second, asymmetries, describes the difficulty of determining whether the implied or agreed upon terms are actually being or will be met.2
Greater Information and Transparency
Real estate has traditionally been a murky, highfriction sector with high transactions costs. Most real estate firms have been locally based, rarely venturing out beyond their market areas. The cost of sourcing, investigating, bargaining, investing in and managing real estate outside of a particular investor's market has been seen as prohibitive for many investors, both large and small. Nevertheless, an expanding array of information providers, an increasing number of professionals, media coverage, technology, and the increasing popularity of the sector have all served to reduce transaction costs and to increase transparency, which in turn have brought more investment opportunities and increased information transfer. …