CBRE’s global chief economist, Richard Barkham, shares his insights on global economic trends and their impact on commercial real estate markets worldwide.
This week, we look at real estate and the global reflation trade:
- Economic growth has picked up, and more stimulus is on the way.
- The reflation trade—short bonds and long equities—worries real estate investors.
- But there is upside for real estate in times of inflation.CBRE’s global chief economist, Richard Barkham, shares his insights on global economic trends and their impact on commercial real estate markets worldwide.
For three months now, the economic news has been relentlessly positive, despite a highly eventful political environment.
The global economy picked up speed in August 2016, and this momentum has carried into 2017, particularly in EMEA. Our recently released 2017 Global Market Outlook paints an optimistic picture of global real estate in terms of rents and capital values. Yet, nagging doubts remain. Global REIT stocks have firmed this year, but are still trading at a meaningful discount to NAV.
One source of worry is the “global reflation trade”—namely, short bonds and long equities.
The fiscal stimulus President Trump has in mind for the U.S. is front of mind for investors, but global reflation goes well beyond that. China has been increasing government spending as has Japan, and to a lesser extent it is taking place in Europe as well.
This is what bothers property investors. How will real estate fare in a world of higher growth and higher interest rates?
Investors can see the benefits to growth that will flow from a late-cycle fiscal boost. Many also think that this is the right way to ease some of the political tensions created by 20 years of unchecked globalization. But, it’s not all positive. As one American said to me recently: “We don’t want to be out there on our own, trying to face down the bond market.”
But growth has upside for real estate as well.
Gavyn Davies has noted that markets have recently started to price a markedly higher rate of inflation in the long term. The sharp pickup in inflation expectations in the U.S. to 3.5% and in the U.K. to 2.4% is perhaps understandable, given the low level of unemployment in these countries. The fact that long-term inflation expectations are higher in Japan and the Euro area suggests that something more fundamental is going on at the global level.
Figure 1: Five-year inflation, five-year forward, by region
Could it be that the “new normal era” of low growth and low interest rates is finally drawing to a close? Maybe so. We will explore this theme in more depth in future issues of Ahead of the Curve.
For the time being, investors should draw comfort from the fact that a well-constructed global real estate portfolio has equity- as well as bond-like characteristics. In particular, it has the ability to keep up with inflation in the long term. As the global reflation unfolds in the next two years, we will hear quite a lot more about rising prices as well as rising interest rates, and this has some upside for real estate.