Anomalies in real estate markets turn into a great stimulus for investment


Uncertainty and risk create arbitrage and opportunity

Already deep into 2010’s first quarter, property markets worldwide are trying to benefit from the aroma of economic optimism – although its source is unclear, especially in light of the current financial markets positions. Despite 18 months of continuous stimulus, positive economic growth remains elusive, but much desired not only in UAE. In January, for instance, UK reported a 0.1% GDP growth for Q4’09. Although that’s a discouraging ninety times slower than China’s, a UK Government spokesperson hailed it as a “continuing abatement of the deterioration”. Despite continued economic uncertainty and the consequent elevation of market risk, capital allocations to real estate as an asset class are again reaching record volumes according the latest Global Capital Trends report from Real Capital Analytics, showing that this investment asset has survived the worst of its excesses and has emerged with investor respect intact.

To explain this controversial development, analysts and fund managers from around the world agree that risk in a recovery year,  managed and minimized, represents opportunity. Therefore,  2010 real estate investment strategy involves core assets. However, the current appetite for opportunistic or value-add assets remains thin. Inevitably by overcrowding the traditionally stable markets of London, Paris, and parts of Asia, there is  also a demand for assets  in  markets with raising prices and lowers yields. Big-time investors are also  reluctant to invest back heavily into the US despite the higher yields and relatively under-priced opportunities that are emerging in many US cities.

Apart from the asset allocation anomaly, despite calls for global collaboration in such areas as the environment, social housing, financial regulation, banking and perhaps most importantly, the breaking down of trade barriers, the world’s trading blocs remain fragmented. Neither the G20 nor the Davos debates have proven effective catalysts for change. Post-recession temperament across Asia, Europe and the US remains disparate.

Asia, flush with stimulus cash yet still struggling to raise domestic spending, is enjoying a higher level of investor confidence. By contrast, the Eurozone’s 20-year unity appears to be unraveling. Growing economic and political imbalances across European countries reflect a similar and parallel divisiveness in Washington. But internal political dissension does little to arrest severe job losses.

On the periphery, the improving economic news from Latin America and the young mineral-rich economies of Australia and Canada appears inadequate to balance such concerns as a struggling Dubai ,and in general ,unstable Middle Eastern property market or  the glaringly tragic rich-poor gap exposed by the Haiti earthquake. Meanwhile, an irrelevant grouping  of the high-growth economies of China and Brazil  opposes the less agile business environments of Russia and India.

Uncertainty and risk create arbitrage and opportunity. It seems the greater the anomalies in real estate investment markets, the greater the stimulus for investment. The open question is whether big time investors – managers and lenders – will seize the advantage that presents itself on a broad scale.


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