In early 2016, the Savills World Research team reported that global real estate values totalled US$217 trillion. Our research this year shows that figure has risen. Global asset price inflation has now increased the amount to US$228 trillion at constant prices – an increase of 5 per cent in real terms.
Comparing asset values
Global real estate is a more valuable asset class than all stocks, shares and securitised debt combined – which, together amount to just US$170 trillion. The value of all the gold ever mined throughout history pales into even greater insignificance at a mere US$6.5 trillion.
Real estate’s high annual growth
Total world real estate values have grown by 5 per cent over 2016. GDP (at constant prices) grew by 2.3 per cent in 2015/16, so the world’s real estate asset value has grown faster than its income. This means that the world now owns real estate assets worth 2.8 times its annual income (GDP). This real estate asset to income ratio has increased from 2.7 in 2015.
However, total commercial real estate value grew faster, at 7 per cent, than residential during the year. This asset price growth has been much more rapid than global bonds (2 per cent), but slower than global equities, which increased in value by 9 per cent.
Most world real estate value is contained in residential property, which makes up three quarters of all real estate stock. By itself, this amounts to US$168.5 trillion. There are approximately 2.05 billion households across the world, so the average home is valued at around US$82,000. That value is of course concentrated in developed countries, though, chiefly in North America and Europe.
North America contains only 7 per cent of the global population, but 22 per cent of all residential property assets by value. Similarly, Europe contains 11 per cent of the world’s peoples, but 23 per cent of residential property by value.
The greatest potential for growth is in less developed economies. Much of Asia has already seen real estate asset price growth alongside the region’s rise of per-head GDP. But Africa appears to have the greatest potential yet for value growth as national economies and household incomes increase. The Middle East & Africa region currently contains 19 per cent of the world population, but residential property on that continent is only worth 6 per cent of the global total.
Because most of the world’s households are homeowners, we estimate that only 34 per cent of all world residential property is ‘investable’ – actually capable of being let to occupants and traded between investors.
The proportion of global commercial property that is investable is 67 per cent. That’s higher than residential but, even in this sector, there are a large number of individuals, companies and organisations that own and occupy their own buildings.
The greatest real estate asset price growth has been in the commercial sector, which stands 7 per cent higher than it did last year. Commercial real estate value totals US$32.3 trillion, of which US$21.8 trillion is classed as investable.
Agricultural land, farms, estates and forestry total US$27.2 trillion – an increase of 7 per cent on last year’s figure. Even in this sector, 30 per cent of land by value is operated or farmed without third-party investors.There’s scope for more land to be brought into agricultural production in future, increasing the size of the asset class. Much of this expansion will be through infrastructure projects in developing countries built to enable produce to reach market. Once again, sub-Saharan Africa offers great potential for growth.
The changing role of real estate
The role of real estate across the world is changing. It is the globe’s most important asset class and accounts for a significant proportion of personal and household wealth in developed economies. Along with other assets such as commodities equities and bonds, it has increased significantly in value since the global financial crisis of 2008, spurred on by the intervention of central banks and their suppression of gilt yields.
Now that yields have little room to shift further downward, the scope for capital growth becomes more limited and dependent on rental growth happening first. This means that the income-generating capabilities of real estate have become more important and currently look attractive in many markets compared to local interest rates.
The investing world’s shift of emphasis to a search for income has arguably changed the status of real estate as an asset class. Its qualities of being a tangible, real-world asset capable of development, management and change has always put it in a special investment category but, in the past, its illiquidity and ‘lumpiness’ have been seen by some investors as adding to risk. We think the nature of real estate risk has changed in the new investing environment. The characteristics of real estate have a new value in the global hunt for long-term income.