From London to New York to Sydney, the world's major cities have been awash with investment and will continue to attract interest next year, Peter Hayes, Prudential Real Estate Investors' global head of investment research, said. But in these heated markets, investors are looking further up the yield curve and seeking opportunities in secondary and even tertiary markets, making 2016 the year of “yield-seeking buyers.”
Hayes, managing director at PREI, said cross-border investment has been rising, but major cities' development pipelines have not kept pace with increased activity, pushing investors to new areas.
“You see yields and cap rates compressing, even though the number of deals is falling,” Hayes told PERE . “That speaks to the fact that a lot of investors want to buy assets, but there's not a lot to buy” in core urban areas.
In 2016, Hayes said this mismatch may lead “frustrated buyers,” particularly pension funds and institutional investors, to finally look outside gateway cities. He anticipates that this push for diversification will cover all asset classes.
This year saw the highest level of cross-border deals since 2007 – $340 billion transacted worldwide – leading PREI to suggest that capital deployed outside its domestic markets will continue gaining a bigger share of global volume.
Investors who are frustrated, but not such that they deploy capital outside gateway cities, will pay more attention to multifamily and alternative real estate investment strategies for income-generating opportunities, Hayes said. Particularly in Europe, student housing, senior living and hotels buoy a market where Hayes said the opportunities for growth are not as obvious.
Some of investors' hesitation to take location risk stems from anxiety around how continued quantitative easing and other monetary policies could affect real estate, a fear Hayes predicts will lessen in the coming year as the US Federal Reserve started raising interest rates this month for the first time since 2006.
“This uncertainty will dissipate in 2016 as investors become a bit more confident that rising interest rates means a broadened recovery,” Hayes said.
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