Real Estate Guides

LIVING IN A SMALLER, CONNECTED WORLD: THE EFFECTS OF GLOBALIZATION ON REAL ESTATE

Market Report provided by Nest Seekers

From increased business opportunities to advancing technologies, the word “globalization” often pops up in various contexts and is reflected in different ways. Over the years, economic self-sufficiency became more obsolete as people saw a major shift in demographics, different trade policies between economic regions, and more efficient ways to connect to other parts of the world. Economies are now linked between each other, producing a continuing flow of goods, services, investments, people and information. The world we live in is a truly globalized one where diversity produces labor opportunities and concepts such as global GDP which plays a heavy factor in measuring the local economy.

Real estate has been placed in an interesting position with several economic studies agreeing that the globalization phenomena has made it both a global and local asset. As the world becomes more connected, development opportunities pave the way to demand beyond one’s current location. Wealthy investors and international companies may eye a certain land or property, increasing real estate demand  that stems from distant geographies. What follows is a flow of foreign investment that allows faraway assets to be purchased, and this can have major impacts on local economic measures.

The Emergence of “Global Hubs”

New York, Paris, London, Tokyo— these are most likely some of the first names of major cities that come to mind. As a result of globalization, these major cities boast diverse populations, the latest trends and bustling economic activity. These cities fall under the classification of “global hubs” which are essential in performing specific pan-regional functions. Despite the lack of a widely accepted definition of the term, scholars have identified key criteria to describe a “global hub,” such as the density of transport and economic links, presence of major global companies and international political institutions and a concentration of knowledge.

For example, a multinational corporation can use New York as its global headquarters that can overlook all business operations in North America. At the same time, it can easily network and coordinate with its other major headquarters around the world—from a branch in London that oversees European operations to another branch in Tokyo that is in charge of all Asian priorities. From a business stand point, these “global hubs” are strategic since there is a heavy flow of capital, information and labor in these cities which can attract investments and provide an ease of business.

While some cities have maintained this status over the years, globalization has allowed other key cities to emerge—particularly from cities in the developing countries. Significant growth has been seen in markets from places like Beijing, Dubai, Mumbai, Moscow and Sao Paulo where major business activities are conducted.

Cheaper Labor and Production Costs

Because of expanding business practices, the real estate supply chain has undergone major developments, particularly due to offshoring. Because developing countries provide cheaper costs of material and production, key functions have been transferred outside the local region. For example, India labor costs are much more affordable versus U.S. ones, therefore design, finance and property management activities can be offshored to Indian design, finance and accounting firms. At the same time, because Chinese steel is cheaper versus local ones, U.S. real estate and construction firms would rather purchase their supplies there.

Offshoring provides a heap of benefits, especially for developing countries. Globalized business practices presents the opportunities for the sharing of knowledge and skills that further enhances a developing country’s ability to perform in the global stage. At the same time, the affordable labor and production costs that they provide leads to sharper demand for other resources and inputs that drive real estate prices and construction.

Increased Demand and Lower Risk of Obsolescence

Fast growing economies in places like China and India have seen high labor productivity, economic growth and an expansion of the middle-class—a medley of factors that have brought higher demand in residential real estate. Now, more than ever, people wish to migrate to the urbanized global hubs. At the same time, their spending power has increased as financial reforms have made mortgages more accessible to them at relatively low interest rates.

There is a now a race to obtain the best land assets and properties in the global hubs. Rural Chinese citizens are eager to invest in Beijing or Shanghai. Meanwhile, rural Indian home seekers are looking into houses in Mumbai. Some may even consider to look for homes in Europe or the Americas where they may plan to immigrate or spend their vacations in the near future. This continuing demand from both locals and foreigners is highly beneficial to global hubs, increasing their values and lowering any possible risk of obsolescence or vacancy.

Changes in Demographic Profile

With demand bringing in a higher number of people towards major global hubs, there is a shift in the population demographic that can also present new opportunities in real estate. For example, traditional joint families may break down, thus increasing demand for more housing units. Relocation of rural workers to urban settings will mean more apartments. People who can afford for houses in a major city will consider investing for their children who are planning to attend school there. Motivations from different demographics creates higher demand for properties in major cities.

Another interesting change related towards the globalization of real estate can be seen through the increasing aging population in both industrialized and developing countries. The rise in aging dependents leads to the large sales of homes in developing countries where the elderly can comfortably retire.

Changing Effects on Property Values

In theory, globalization connects each region and can provide opportunities that can align international economic links, standardize business practices and can lead to an equalization of property growth in different parts of the world. Similar patterns of property growth values and returns have been seen across different markets. The reality, however, is globalization provides both a converging and polarizing effect on the markets. A comparison of real estate growth will always show major price gaps between urban metropolitan areas and the rural ones which can be attributed to the concentration of investments, goods and services in the global hubs. This causes property price growth and the cost of living to be more expensive in these particular areas, making them less affordable for the general local population.

Thus, there is a shift in the way that economists predict the changes in housing prices. From a local perspective, prices change depending on local factors such as earned income. But, in the global market that we live in today, factors such as the amount of foreign investment pooled into an area plays a bigger role. For example, more U.S. properties purchased by Chinese investors in a specific location can lead to more expensive sales and rental prices. This can be both a pro and a con, depending on how one looks at it. It can be a good thing, especially for existing homeowners since more foreign investments can mean an increase in home value as well as the city’s tax revenues. On the other hand, higher prices can make the cost of living less affordable. Determining both the global and local effects on the market is what real estate players need in order to come up with future investment strategies.

New Foreign Investment Opportunities

With higher property demands in global hubs coupled with easier access to both finances and market knowledge, investors are eager to look into new opportunities outside their local geographies. Many invest in development projects or facilities for production, sales, distribution of supplies or output. Others would invest in real estate financial securities. It is important to note that these investments aren’t exclusive to places like North America or Europe. Foreign investors are highly optimistic to invest in global hubs across the developing world for high yields and stable returns.

Demand due to globalization differs among different property types. This is especially true for the commercial real estate sector. Office properties are highly popular among businesses that wish to expand to other locations. On the other hand, retail space sees less demand due to the rise of e-commerce. Interestingly, however, retail spaces are significantly strong in major cities across Asia and the Middle East where international chains and brands operate in large shopping centers. Manila, for example, has seen significant economic growth and investment in recent years, attracting investors and allowing big international retail brands to operate on its popular malls.

These are some of the major strengths that globalization offers, especially for the real estate industry. Globalization, however, is not perfect and faces some key issues to address such as unaffordable housing due to expensive prices or loose mortgage regulations resulting to a housing bubble. The fact that all global markets are connected also means that economic shocks in one country can affect the others such as the 2008 recession or the EU Referendum earlier this year. Therefore, investors should remain vigilant in studying both the local and global markets in order to come up with the most effective strategies for the best property yields.

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http://fic.wharton.upenn.edu/fic/papers/07/0728.pdf