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Real estate: A false sense of security

Investors can’t get enough of real estate. But property developers should get ready for the wall of money to shift to emerging markets.

The amount of money in property is staggering: the total invested stock of real estate worldwide is $7.98 trillion. But despite the sector’s size, the total investment allocated to it exceeds the amount it can digest by some margin. Investors simply can’t get enough of this asset class.

The reason for this happy situation is straightforward: real estate has outperformed just about every other asset class by any measure in recent years and has acted as an attractive alternative for institutional money looking to move out of equities. Products such as Reits and CMBS have oiled the wheels of investment and there is now massive, internationalized issuance of capital.

Property companies in the US and Europe have, as a consequence, enjoyed a very nice run and their fundraising costs have fallen through the floor. And even with the expected weakening in economic performance, particularly in the US, few expect this to change. Or will it?

In the short term, property companies and developers can relax, as the wall of money falling at their feet is not going anywhere. But these companies should be thinking to the long term. The ballooning demand for real estate investment from high-growth economies such as India and China means that investment will inevitably be redirected away from traditional markets – and at astonishing speed.

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