V I E W P O I N T   GLOBALIZATION

Globalization
and Real Estate:
Where next?
 V I E W P O I N T   GLOBALIZATION

Richard Barkham, Ph.D.

Chief Economist, Global
Siena Carver
Analyst, Global Research
Darin Mellott
Director, Research and Analysis,
Southwest
Dennis Schoenmaker, Ph.D.
Economist, Global

Executive summary
Globalization’s impact on the real estate industry has been far-reaching:

Capital markets: Cross-border investment in real estate trebled in the years leading up to
the global financial crisis and have since surpassed pre-crisis levels.

Yields: Office yields have fallen by more than 275 basis points (bps) in the past 20 years
as inflation and interest rates have trended down, boosting real estate values and
contributing to the decline in affordability in certain markets.

Regions: East Asia has grown astonishingly during the past 30 years, creating new real
estate markets and new sources of capital. Since 2012, China’s share of global real estate
inventory has grown from 7% to 12%.1 There is now an estimated $3.9 trillion of
investable commercial real estate in developed Asia.2

Cities: Global cities have acted as gateways for an increasingly internationally mobile
labor force that in turn has boosted demand for high-end residential property and retail
outlets. Global gateway cities are the primary target for cross-border real estate
investors.

Sectors: The growth of global trade in goods and services has led to expansion of the
industrial & logistics and services sectors both in new locations and existing hubs.
Growth in tourism has also enabled the hotel sector to expand in a larger number of
destinations.

1. Fiorilla, P., Kapas, M., and Liang, Y. (2012) ‘A Bird’s Eye View of the Global Real Estate Markets: 2012 Update’, Prudential Real Estate Investors
2. CBRE (2016) ‘How Much Real Estate Stock Is There?’ https://researchgateway.cbre.com/Layouts/GKCSearch/DownloadHelper.ashx

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The future of globalization is not possible to divine at the present moment. While there
have been a series of political events to indicate a populist movement away from further
global integration, one cannot accurately predict their far-reaching outcomes. In
addition, the rhetoric of anti-globalization in the U.S. appears to have cooled in recent
months and populist parties in the recent elections in the Netherlands and France in
Europe have failed to secure power. However, there seems to be general consent that two
broad scenarios are possible:
1. A temporary slowdown of the global integration process with modifications to current
trading patterns and migration.
2. A substantial reversal of integration due to increased protectionism both in trade and
immigration.

Although the first scenario is the most likely of the two, we will examine what both
scenarios might mean for real estate in this CBRE ViewPoint.

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INTRODUCTION
As the world has become more globalized over the past 30 years, the structure and
growth rate of individual economies has changed. Emerging markets—led by China,
India, Russia and Brazil—have experienced rapid GDP growth and a very material uplift
in average incomes and standard of living. Four billion people or more have been lifted
out of poverty.3
Real estate has also seen dramatic changes in the sources and levels of demand. China,
for example, has experienced huge growth in floor space in all sectors (office, industrial
and retail) purely due to economic growth. In the U.S., logistics property around West
Coast ports has boomed due to increased imports from Asia. More recently, office
absorption in Bangalore, India has surged due to the relocation of business service
activity from the U.S. and Europe.
It is not just patterns of occupancy that have been affected; patterns of ownership have
also radically changed due to the increase in cross-border investment that has taken
place since the mid-1990s. No one now is remotely surprised if Chinese investors acquire
hotels in New York. A bigger global economy has led to a much bigger real estate
universe but also more diverse and diversified ownership patterns.4
Despite the many positives of globalization, such as cheaper manufactured goods made
in China and lower interest rates, there have been adverse effects and significant social,
cultural and economic disruption. In developed countries like the U.S. and the U.K.,
middle- and lower-income workers have not had real wage increases for many years.
Mass immigration from poorer parts of the world into the OECD countries has, in some
cases, created tension and put a strain on public services.
Only a patchwork of policies have been implemented to alleviate the negative effects of
globalization. As seen in the recent U.S. election and the Brexit referendum,
disillusioned citizens made their voices heard at the ballot box.5 The full implications of
these political shifts are yet to be seen, but there is a possibility of more protectionist
trade policies, limitations on capital flows and checks on immigration. In the short and
medium terms, the pace of globalization in its current form could slow and this may
have consequences for real estate.6
In this CBRE ViewPoint, we examine the following:
• What the word “globalization” actually means;
• The positives and negatives of globalization;
• How globalization has impacted real estate;
• Where we go from here.

3. Paul Collier, The Bottom Billion, OUP, 2007

4. CBRE (2016) “How Much Real Estate Stock Is There?,” http://cbrecapitalwatch.com/?p=2744
5. We do not imply that the vote for Brexit in the U.K. and Donald Trump in the U.S. is entirely due to and anti-globalization backlash; issues of principle, sovereignty and
international relations are also important.
6. And other asset classes.

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W H AT I S G LO B A L I Z AT I O N ?
At the core of globalization is international trade and cross-border financial flows. Other
important components include the mingling of cultures, increased immigration, richer
and more diverse cross-border information flows, more extensive global supply chains
and the increased power of multinational corporations.

Trade as a percentage of global GDP increased from around 30% in the 1960s to nearly
60% by 2015.

Figure 1: Trade as % of Global GDP

70

60

50

40

30

20

10

0
1960
1962

1966
1968
1970
1972

1976
1978
1980
1982

1986
1988
1990
1992

1996
1998
2000
2002

2006
2008
2010
2012
1964

1974

1984

1994

2004

2014
2015
Trade as % GDP Long-run average (60-79) Long-run average (80-99) Long-run average (00-15)

Source: World Bank, CBRE Research (2016). All trade, constant prices.

The reduction of trade barriers such as tariffs, the creation of free-trade areas such as the
EU, advances in transportation and communication, and financial liberalization have all
enabled very rapid growth of trade. Average tariffs between the OECD and the rest of the
world have decreased by 50% in the past 20 years7 thanks to successive rounds of
negotiations and political shifts in low-cost countries such as China. Some 35.6% of U.S.
personal consumption on clothing and shoes in 2010 was on items made in China.8
However, only 38.8% of the retail price of these goods accounted for the cost of these
imports, making them extremely profitable for the companies that retail them.

Cross-border financial and capital flows have broadened and deepened as both cause
and effect of economic integration. Foreign direct investment (FDI) has flowed from the
advanced economies to emerging markets in search of lower-cost production. Portfolio
investment flows have also surged due to the desire for higher returns and lower

7. OECD (2007), OECD Economic Outlook, Vol. 2007/1, OECD Publishing

8. FRBSF (2011) “The US Content of Made in China,” http://www.frbsf.org/economic-research/publications/economic-letter/2011/august/us-made-in-china/

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volatility from investing overseas. Portfolio investment, such as that into real estate, has
been facilitated by the reduction and elimination of national capital controls, improved
communications technology, rapid innovation in financial markets and alternative
investment vehicles such as REITs. In Europe, between 1984 and 2004, the result has
been an increase in the ratio of cross-border financial positions (i.e., any financial
arrangement, such as a loan, occurring between nations) to GDP from 130% to more
than 450%.9 Stock market returns across the globe today are also significantly more
correlated with one another than they were 20 years ago.

Figure 2: Stock Market Returns

Monthly price return (% y-o-y)

140%
120%
100%
80%
60%
40%
20%
0%
-20%
-40%
-60%
May-98

May-09
Aug-06

Mar-11

Nov-14
Nov-92

Mar-00

Nov-03
Sep-94

Feb-12

Dec-13
Dec-91

Feb-01

Dec-02

Jun-08
Jan-02

Jan-13
Apr-99

Apr-10
Oct-04
Oct-93

Aug-95
Jul-96

Oct-15
Sep-05

Jul-07
Jun-97

Degree of correlation U.S. UK Hong Kong Euro Area

Source: Macrobond, CBRE Research (2016)

More recently, digital globalization—involving flows of data and information—has

further facilitated cross-border trade and investment. E-commerce platforms allow
individuals to purchase overseas goods directly and to the extent that e-commerce now
constitutes 12% of global trade.10 As well as physical goods, data flows enable streams of
information, ideas and financial products to be bought and sold. According to McKinsey
Global Institute,11 900 million people have international connections on social media,

9. Lane, P.R., and Milesi-Ferretti, G.M. (2007) “Europe and Global Imbalances,” https://www.imf.org/external/pubs/ft/wp/2007/wp07144.pdf
Note: Cross-border financial positions is defined as the sum of foreign assets and liabilities (as a ratio to GDP) for a group of European countries, including intra-European
cross-holdings.
10. McKinsey Global Institute (2016) “Digital Globalization: The new era of global flows,” http://www.mckinsey.com/business-functions/digital-mckinsey/our-insights/
digital-globalization-the-new-era-of-global-flows
11. McKinsey Global Institute (2016) “Digital Globalization: The new era of global flows,” http://www.mckinsey.com/business-functions/digital-mckinsey/our-insights/
digital-globalization-the-new-era-of-global-flows

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with implications for shopping, networking and the cross-border mobility of labor. As
the graph below shows, global flows of data and communication have increased rapidly
since 2005, with a predicted ninefold increase in the next five years.12 It is argued that
global GDP has increased by 10.2% more than it would have without the corresponding
increase in digital flows.13 Even if new forms of trade protectionism impede cross-border
flows of physical goods, there is little evidence that it will be possible to reduce flows of
information in digital space.

Figure 3: Global Flows of Data and Communication

Total used cross-border bandwidth (thousands of gigabits per second)

250

200

150

100

50

0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Cross-regional Intra-regional
Source: OECD (2016)

12. McKinsey Global Institute (2016) “Digital Globalization: The new era of global flows,” http://www.mckinsey.com/business-functions/digital-mckinsey/our-insights/
digital-globalization-the-new-era-of-global-flows
13. McKinsey Global Institute (2016) “Digital Globalization: The new era of global flows,” http://www.mckinsey.com/business-functions/digital-mckinsey/our-insights/
digital-globalization-the-new-era-of-global-flows

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I S G LO B A L I Z AT I O N A G O O D T H I N G ?
Globalization has been extraordinarily positive in many respects. Over the past 20 years,
approximately 4 billion people, largely in emerging markets, have seen their income
dramatically increase from subsistence levels.14 GDP per capita in the G7 nations in 2015
was approximately 33% higher than in 1990 in real terms, and 150% higher in emerging
markets. The level of inequality between developed and developing economies has been
significantly reduced over time.

Figure 4: GDP Per Capita Growth: Emerging Markets vs. G7

GDP per capita ($ developed countries) GDP per capita, emerging markets
50,000 6000
45,000
40,000 5000
35,000 4000
30,000
25,000 3000
20,000
15,000 2000
10,000 1000
5,000
0 0
1990
1991
1992
1993
1994

1998
1999
2000
2001
2002
2003
2004

2008
2009
2010
2011
2012
2013
2014
1995
1996
1997

2005
2006
2007

2015
G7 Emerging markets

Source: Oxford Economics, CBRE Research (2016).

14. Roser, M. (2016) “World Poverty,” OurWorldInData.org.

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Some of this change can be explained by the shift of manufacturing to East Asian
economies, which have become increasingly integral to global value chains due to low
labor costs and manufacturing expertise. As emerging markets became more deeply
ingrained in patterns of global trade, employment in the manufacturing sector boomed.
An illustration of this is the twentyfold increase in foreign direct investment (FDI)
inflows to Asia between 1991 and 2015, compared with a sixfold increase in Europe.

Figure 5: FDI Inflows Since 1990

FDI inflows (% change since 1990)

2500%

2000%

1500%

1000%

500%

0%
90

92

94

98

00

02

04

08

10

12

14
96

06
19

19

19

19

20

20

20

20

20

20

20
19

Europe North America Africa 20

Asia Latin America
Source: World Bank (2015)

The developed economies have felt the benefit of this in the long-term suppression of
import prices.15 According to the OECD, this has led to a 0.1% p.a. reduction in inflation
in the U.S. and 0.3% in Europe.16 The resulting boost to levels of real disposable income
over a prolonged period (shown in Figure 6 below) has allowed households in the
advanced economies to enjoy the purchase of more and better-quality goods. In turn,
this has sustained demand for emerging market manufacturers.

15. Pain et al. (2008), “Globalization and OECD Consumer Price Inflation,” OECD, Paris
16. OECD (2006), OECD Economic Outlook, Vol. 2006/1, OECD, Paris.

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Perhaps the most important macro-economic change over the past 30 years has been the
decline in inflation and the consequent fall in interest rates. While other factors, such as
successful inflation targeting by central banks and the labor market reforms of the
1980s, partly explain the decline in interest rates over the past 30 years, globalization is
also an important part of the story. Two factors are important:
• The flow of cheap manufactured products from low-cost manufacturing locations
such as China helped central banks achieve their goal of stable low-inflation
expectations and moderate year-on-year wage growth.
• The introduction into the global trading system in 1989 of 1.5 billion additional
workers from the formerly closed communist labor forces of China, Russia and
Eastern Europe made workers in the OECD less able to demand cost-of-living pay
increases.17

Figure 6: Interest Rates, OECD Countries

10%
9%
8%
7%
6%
5%
4%
3%
2%
1%
0%
Q3-1993
Q2-1994
Q1-1995
Q4-1995
Q3-1996
Q2-1997
Q1-1998
Q4-1998
Q3-1999
Q2-2000
Q1-2001
Q4-2001
Q3-2002
Q2-2003
Q1-2004
Q4-2004
Q3-2005
Q2-2006
Q1-2007
Q4-2007
Q3-2008
Q2-2009
Q1-2010
Q4-2010
Q3-2011
Q2-2012
Q1-2013
Q4-2013
Q3-2014
Q2-2015
Q1-2016
Interest rates, OECD

Source: OECD (2016)

17. The Globalization of Labor, Chapter Five, IMF World Economic Outlook, 2007

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While reduced barriers to trade have delivered higher returns to multinational

corporations able to relocate functions to low-cost locations, reduced barriers to
immigration have allowed workers to migrate to locations with greater potential for a
comparatively high wage. The result has been a general increase in the percentage of
foreign-born people living and working in OECD countries.18 While most economic
studies attest to the benefits of immigration, many communities in economic decline
due to globalization have faced increased competition for jobs and resources from
immigrants. In particular, immigrants are often willing to accept lower wages in
occupations traditionally held by less-well-skilled native-born workers. This has likely
reinforced higher levels of perceived insecurity and a hardened attitude towards further
immigration.19

Figure 7: Attitudes Towards Immigrants

% agreeing that 'immigrants in our country today want to be distinct from our society'
90%

80%

70%

60%

50%

40%

30%

20%

10%

0%
Italy Germany France Greece Spain UK Poland

Source: Migration Policy Index (2014)

Interestingly, evidence suggests that many immigrants use social media to integrate in
new cultural surroundings.20 Thus, just as digitization has facilitated flows of capital, it
has also facilitated movement of people.
At the same time as low-skilled workers in the advanced economies have faced near
stagnant real wages, those at the top end of the income scale have done very well. This is
evidenced in the growth in CEO pay and the number of high-net-worth individuals. Of
course, running a modern corporation with multiple geographies, highly extended

18. OECD (2014) “Is migration really rising?,” http://www.oecd.org/berlin/Is-migration-really-increasing.pdf

19. “Migration Integration Policy Index 2014,” http://www.mipex.eu/play/
20. Sawyer, R. (2011) “The Impact of Social Media on Intercultural Adaptation,” http://digitalcommons.uri.edu/cgi/viewcontent.cgi?article=1230&context=srhonorsprog

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supply lines, fast-moving consumer markets and public shareholders to please is much
more difficult than it was. Even so, the growth of CEO salaries, and income inequality
more generally has become a political issue in some countries.

Figure 8: Percent Change in CEO Compensation, Stock Prices, and Typical Worker Compensation, 1978 to 2014

% change in compensation (cumulative, since 1978)

1400%

1200%

1000%

800%

600%

400%

200%

0%

-200%
78

80

82

84

86

88

90

92

94

96

98

00

02

04

06

08

10

12

14
19

19

19

19

19

19

19

19

19

19

19

20

20

20

20

20

20

20

20
CEO pay S&P 500 Typical worker pay

Source: Mishel, L., Davis, A. (2015). 'CEO Pay Has Grown 90 Times Faster than Typical Worker Pay Since 1978': http://www.epi.org/publication/ceo-pay-has-grown-90-
times-faster-than-typical-worker-pay-since-1978/

More recently, many corporations have utilized the geographical limitations of national
authorities and lack of international policy coordination to reduce their tax liabilities.
The flipside of this is low or negative growth in government expenditures in OECD
countries,21 increasing the resentment felt by many voters towards large global
companies, particularly in Europe.
Just as the tax base has been eroded, there is a growing sense that the knowledge base of
advanced countries is also under threat. Not only are factories offshored, but so is
intellectual property with digital globalization.22 So the monopoly of OECD nations on
the use of industrial-manufacturing intellectual property is broken, allowing high-tech
ideas to be combined with low-wage workers in developing nations. Digital globalization
has exacerbated the trend towards redistribution of manufacturing worldwide and is
much less easy to control.

21. Kawa, L. (2016) “Get Ready to See This Globalization ‘Elephant Chart’ Over and Over Again,” Bloomberg.com
22. Baldwin, R. (2016) “The Great Convergence: Information Technology and the New Globalization,” Belknap Press

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As goods and ideas have crossed borders more and more easily, so have consumers.
Increases in disposable income, alongside cheaper air travel and the rapid development
of leisure infrastructure, have allowed many people to travel the world more widely.
International visitor numbers in the past six years have grown by more than 40%, aided
by the availability of low-cost flights.23

Figure 9: Global GDP Growth vs. International Tourism

Growth index
150
145
140
135
130
125
120
115
110
105
100
2009 2010 2011 2012 2013 2014 2015
Total International Overnight Arrival (132 cities) World Real GDP
Source: Mastercard (2015)

The accessibility of other cultures has resulted in less measurable but nonetheless
important cross-fertilization of cultural ideas and tastes. For example, since 2004 there
has been more than 40% aggregate growth in the number of restaurant groups serving
Chinese, Mediterranean or Indian/Pakistani food in the U.K. (although part of this trend
can be attributed to the general tendency towards eating out more).24 In addition, multi-
national companies are seeking to actively alter tastes in new markets. For instance,
Starbucks recently announced an aggressive expansion plan in China, with 500 stores
rolling out this year and plans to open another 3,400 by 2019.25

23. Mastercard (2015) “Global Destination Cities Index”, https://newsroom.mastercard.com/wp-content/uploads/2015/06/MasterCard-GDCI-2015-Final-Report1.pdf

24. Horizon Analytics (2016) The Foodservice Market Database
25. Yan, S. (2016) “Starbucks adding 1,400 new shops in China,” http://money.cnn.com/2016/01/12/investing/starbucks-china-expansion/

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Figure 10: Restuarant Growth in the UK

% growth in number of restaurant groups

70%
60%
50%
40%
30%
20%
10%
0%
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Chinese/Oriental Mediterranean Indian/Pakistani

Source: Horizon Analytics (2016).

R E A L E S TAT E
While globalization has had profound social impacts, it has also fundamentally
altered the real estate industry. Real estate has value both for its physical use and as
an investment asset class, so it is affected both by changing occupier trends and finan-
cial flows.

C A P I TA L M A R K E T S C O N S E Q U E N C E S
Capital flows and market integration
In the years leading up to the global financial crisis, cross-border investment into real
estate tripled26 and subsequently increased by another 23% by 2015, the latest peak. For
example, the level of foreign ownership in the city of London has now surpassed that of
domestic, having been at only 3% in 1972.27 Between 2000 and 2007, rates of growth in
cross-border investment were greater than those of domestic investment.28

26. Hobbs, Chin and Topintzi (2008) Moving towards a global real estate index", Journal of Property Investment & Finance, vol. 26 (4), p.286-303
27. Lizieri, C. Reinert, J. and Baum, A. (2011) “Who owns the City?,” http://www.landecon.cam.ac.uk/pdf-files/news/WOTC2011.pdf
28. INREV (various) (2009) www.invrev.org

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Figure 11: Ownership in the City of London

100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014
UK Germany USA Middle East Europe ex Germany/Ireland International Ireland Japan Other/Unknown

Source: Lizieri, Reinart, and Baum (2014) “Who Owns the City?”

There is increasing evidence that real estate prices are determined more by international
investors than by domestic ones.29 Detailed analysis of the Nordic markets has shown
that foreign investment flows have a greater impact on yields than domestic investment.30
One possible explanation for this is that foreign investors have a greater appetite for risk;
another is that they have a lower cost of capital due to an excess of savings over
investment in their home economy. The result is increasing foreign ownership of real
estate assets in countries where real estate is freely traded, particularly those of the G7.

Globalization of real estate investment and pricing has been facilitated by the
securitization of real estate markets, particularly through the growth of real estate
investment trusts (REITs) and listed property trusts. For several decades, only the U.S.,
the Netherlands and Australia allowed REIT structures, but since the early 1990s their
use has grown internationally. During the seven-year period from January 2000 to March
2007, the value of listed property markets increased by 170% from $350 billion to $945
billion.31 The standardization of government approaches to taxation of REITs is part of
the trend towards more uniform practice and regulation of the real estate and financial
industries globally.

As a standard product across markets, REITs can aid “price discovery” in the property
industry. As small units can be easily bought and sold, transactions can occur at a

29. McAllister, P. and Nanda, A. (2014) ‘Do Foreign Buyers Compress Office Real Estate Cap Rates?’, DTZ Research Institute.
30. CBRE (2016) “The effect of foreign investments on prime office yields in the Nordics,” https://researchgateway.cbre.com/Layouts/GKCSearch/DownloadHelper.ashx
31. Yunus, N. (2009) Increasing Convergence between U.S. and International Securitized Property Markets: Evidence Based on Cointegration Tests, Real Estate Economics, 37,
3, 383-411

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significantly faster rate than with direct property investments. In some cases, this means
that the REIT market is more prone to sentiment swings, as illustrated when the FTSE
NPRA/NAREIT UK Index fell 9% in the week after the Brexit vote. Globalization of real
estate investment structures has therefore come with the greater risk that economic
shocks in one part of the world are transferred to another. After the 2008 global financial
crisis, where the performance of real estate securities was highly correlated between
markets, there was a peak-to-trough decline of 60% to 70% in the U.S., Europe, East Asia
and Australia.32

REITs are not the only example of how regulation and taxation of the real estate industry
is becoming increasingly standardized internationally. In 2014, the first International
Ethics Standards Coalition met at the U.N. to provide leadership in reducing the
perceived problem of uneven ethical standards in the real estate industry between the
increasingly interrelated markets. The RICS International Property Measuring Standards
are an attempt to harmonize measuring practices so that comparisons between
properties from country to country can be made more easily. Other real estate
associations, notably the Urban Land Institute, have been highly successful in their
global expansion programs and their diffusion of best practice.33

Interest rates and yields

Over the past 30 years, interest rates have fallen substantively due to the effects of
globalization. One reason for this is the decline in inflation. While central bank policies
are important in keeping inflation levels low, the role of cheap imported goods from
China (and Asia) is also important. Moreover, real interest rates have fallen due to the
global savings glut which is associated with globalization. As interest rates have fallen,
so also have real estate yields. Falling yields have meant rising prices, higher levels of
real estate lending and greater investor interest in the sector.

Figure 12: Global Office Yields vs. G7 Bond Rates

12%
10%
8%
6%
4%
2%
0%
Mar-90

Mar-93

Mar-96

Mar-99

Mar-02

Mar-05

Mar-08

Mar-11

Mar-14
Sep-91

Sep-94

Sep-97

Sep-00

Sep-03

Sep-06

Sep-09

Sep-12

Sep-15
Dec-90

Dec-93

Dec-96

Dec-99

Dec-02

Dec-05

Dec-08

Dec-11

Dec-14
Jun-92

Jun-95

Jun-98

Jun-01

Jun-04

Jun-07

Jun-10

Jun-13

Jun-16
Oct-16

Global Composite Office Yield G7 bond rate

Source: CBRE Research, OECD, 2016

32. Gordon, J. (2011) “The Global Financial Crisis and International Property Performance,” http://realestate.wharton.upenn.edu/research/papers/full/661.pdf
33. Property Wire (2015) “RICS continues its expansion into African property sectors,” http://www.propertywire.com/news/africa/rics-real-estate-africa/

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Lower interest rates have also had an impact on housing markets, where large
increases in the real value of housing—supported by lower interest rates—can be seen
over the past three decades. The result has been highly beneficial for those who own
houses, but less so for those like the millennial generation who have lower levels of
home ownership.

Figure 13: House Prices and Disposable Income

House prices, index OECD Countries house prices, index

165 140
155 120
145 100
135
80
125
60
115
105 40

95 20
85 0
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
OECD Countries, House Prices Germany Canada UK Japan

Source: Atlanta Federal Reserve Bank, 2016

Market integration
As a result of common practice and better information, real estate markets are becoming
more and more integrated. Property returns between cities, particularly those of the
same global status, are much more highly correlated than they were. For instance, office
yields in the city of London are now more correlated with those in Tokyo than in
Birmingham, England. As we have previously noted, this means that shocks to the
economic system in one part of the world reverberate around all parts of the world
very quickly.

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Figure 14: Real Estate Yield Correlation

% Yield change (y-o-y)

20%
15%
10%
5%
0%
-5%
-10%
-15%
Q1 1991
Q4 1991
Q3 1992
Q2 1993
Q1 1994
Q4 1994

Q2 1996

Q3 1998
Q2 1999
Q1 2000
Q4 2000
Q3 2001
Q2 2002
Q1 2003
Q4 2003
Q3 2004

Q1 2006
Q4 2006

Q2 2008
Q1 2009
Q4 2009
Q3 2010
Q2 2011
Q1 2012
Q4 2012
Q3 2013
Q2 2014
Q3 1995

Q1 1997
Q4 1997

Q2 2005

Q3 2007

Q1 2015
Q4 2015
Office Retail Industrial
Source: CBRE Research, 2016

Regional and National Consequences

Due to the structural changes in the global economy outlined earlier, Asia has grown
immensely both economically and in terms of real estate supply. Between 2005 and 2015
alone, Asia Pacific’s share of world output rose from less than 30% to almost 40%.34 The
region now accounts for 33% of the global public real estate investable universe and
24% of the combined global public and private institutional real estate universe.35 As
such, emerging markets in Asia Pacific represent a significant proportion of investment
opportunities on a global level.

34. Oxford Economics, August 2016 – comparison based on GDP at Purchasing Power Parity rates
35. CBRE (2016) ‘How much real estate stock is there?’, https://researchgateway.cbre.com/Layouts/GKCSearch/DownloadHelper.ashx

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Figure 15: Global Real Estate Investable Stock

Real estate stock (US $, trillions)

35
30
25
20
15
10
5
0
2000

2001

2002

2003

2004

2008

2009

2010

2011

2012

2013

2014
2005

2006

2007

2015

2016

2017
Developed Europe Emerging Europe Developed APAC Emerging APAC North America Latin America Rest of World

Source: CBRE Research, 2017

As a consequence of the rapid economic growth in Asian economies and especially

China, these regions have also grown as a source of capital for real estate investment.
For instance, in Canada, Chinese investors represent the largest foreign group,
purchasing $1.3 billion of real estate in the first half of 2016.36 In 2015, the Chinese
accounted for 26% of total investment in U.S. residential property.37 At present,
international markets are an attractive opportunity for Chinese investment given the
limited investment channels in China, abundant liquidity, local currency (RMB)
appreciation and the relatively lower valuation of overseas assets in the years following
the 2008 financial crisis.
Not only is this capital channelled into existing real estate, but also into funding
development of new buildings. Over the past five years, Real Capital Analytics has
recorded about $21 billion of Chinese investment in development sites. The purchases
are strongly weighted to other parts of the Asia Pacific region, particularly Australia. To
put this level of investment in context, buyers from Europe have spent just $14 billion
internationally on development sites and North American investors have spent only $16
billion.
City Consequences
Recent decades have seen the expansion of the “global city.” Characterized by
international connectivity, cosmopolitanism, density of financial and business services,

36. Real Capital Analytics (2016)

37. Rosen, K., Margon, A., Sakamoto, R. and Taylor, J. (2016) “Chinese investment in U.S. Real Estate,” http://asiasociety.org/files/uploads/66files/Asia%20Society%20
Breaking%20Ground%20Complete%20Final.pdf

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and cultural amenities, global cities can bear greater resemblance to one another than
to neighboring cities within the same country. Their growth is encouraged by the
dispersal of economic activity across countries and regions due to globalization,
which has necessitated increasing integration and complexity of central organizational
functions (Sassen, 2005). Global cities provide the ideal hub for such central functions
to locate, being highly accessible by air, providing easy access to world-class legal
and financial advice, and providing places and facilities that professionals in these
services enjoy.
The World Cities Network (WCN) has tracked the number of global or regional
headquarters of service firms in more than 300 cities since 2000. This provides a
quantitative indicator of cities’ global reach in terms of their “advanced producer
services” according to the number and decision-making importance of the firms
represented there. According to WCN’s measures, London is the most globally
connected city, followed by New York. WCN’s study concludes that the global footprint
of service firms has expanded considerably since 2000. For instance, McKinsey &
Company was present in 75 of the measured cities in 2000, but by 2016 had extended
its reach to more than 100. This trend creates a clear need for high-quality office space
in a growing number of locations.
Between 2000 and 2016, according to the WCN database, East Asian cities increased
considerably in connectivity. This is particularly the case for Chinese cities, including
Beijing, Shanghai, Guangzhou and Shenzhen. The implication of this trend is that
growing prosperity in this region has attracted service firms seeking global reach and
the opportunity for growth.
As well as commercial activities aggregating in globally connected cities, the growing
group of highly compensated workers has enlarged the market for luxury housing in
these destinations. Vancouver and London are two key examples of gateway cities that
have experienced a surge in demand for luxury housing, especially as second homes.
Mayors of both these cities are taking action to curb the trend. For instance, the mayor
of Vancouver introduced a 15% tax on purchasers who are not Canadian citizens or
permanent residents.38
The expansion of luxury retail has accompanied that of luxury housing. This applies not
only for the more-established retail destinations such as New York and London (prime
rents in the latter grew last year by 53%39), but also for a range of new cities that have
experienced rapid economic growth in recent years. For instance, Mumbai—India’s

38. Kassam, A. (2016) “Vancouver slaps 15% tax on foreign house buyers in effort to cool market,” https://www.theguardian.com/world/2016/aug/02/vancouver-real-
estate-foreign-house-buyers-tax
39. CBRE (2016) “Global Prime Retail Rents,” https://researchgateway.cbre.com/Layouts/GKCSearch/DownloadHelper.ashx

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largest financial center—is home to outlets of Louis Vuitton, Dior, Salvatore Ferragamo,
Versace, Jimmy Choo and Burberry.40 Approximately 13% of the total brands that entered
and expanded in Mumbai from 2012 to H2 2015 were in the luxury segment.
Sector Consequences
Higher volumes of goods manufactured in low-cost markets that are exported to
developed economies have created increased demand for industrial & logistics real
estate. In the U.S., this has meant the increased development of many of the West Coast
ports such as Los Angeles and Long Beach. This typically delivers lowest-cost
manufacturing options and provides relatively quick overseas transport times relative to
the alternative route through the Panama Canal and to the East or Gulf coasts.

The North American Free Trade Agreement precipitated the explosion of automobile
manufacturing in Mexico, which, coupled with a flurry of other trade agreements (44
between 1993 and 2012), contributed to an 80% increase in industrial property supply in
Mexico’s Bajio region since 2012. CBRE’s Global and Emerging Hubs report41 explores the
emergence of 20 additional logistics hubs in response to the growth in global trade. The
success of the manufacturing industry in Bajio has also supported growth in the retail
and office sectors, which have seen a 45% and 38% increase in supply, respectively,
since 2012.

In the more developed economies, high-value businesses—such as financial services—

can be exported to new markets, which support office demand in those markets.
According to the Global Financial Cities Index, some of the fastest-growing financial
cities include Beijing and Shanghai.42 Higher incomes and lower-cost goods then
support retail demand, and both Beijing and Shanghait rank among the top-20 cities for
development of new shopping center space, according to CBRE’s Global Shopping Centre
Development ViewPoint.43 But low-value services have also moved to emerging markets,
creating a huge boost to office demand in India and the Philippines for example.

The globalization of tastes and cultures has also facilitated retail expansion. CBRE’s
How Global is the Business of Retail? report finds that out of the 334 leading international
retailers surveyed, the number of countries that every region’s retailers are active in has
grown.44 Global gateway cities act as key conduits for foreign brands to enter a new
country, with London being home to the highest number of international retailers in
the world.45

40. CBRE (2015) “Global Luxury Retail; A Divergent Market,” http://www.cbre.com/research-and-reports/luxury-retail

41. CBRE (2015) “Global and Emerging Hubs”, https://www.cbre.com/research-and-reports/global-emerging-logistics-hubs-2015
42. GCFI (2017) “Global Financial Centres Index,” http://www.zyen.com/research/gfci.html
43. CBRE (2015) “Global Shopping Centre Development,” http://www.cbre.com/research-and-reports/global-shopping-centre-development
44. CBRE (2016) “How Global is the Business of Retail?,” https://www.cbre.com/research-and-reports/how-global-is-the-business-of-retail

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Figure 16: Activity of Retailers Internationally

Number of countries
25

20

15

10

0
2012 2013 2014 2015
AMERICAS EMEA APAC
Source: CBRE Research, 2016

With growing affluence in emerging economies, the pool of international travelers is

expanding to include visitors from a broader number of countries. The number of
Chinese outbound tourists rose by 10% year-over-year to 128 million in 2015, while their
spending grew by 26% over the same period.46 Increasing cross-cultural contacts and
greater access to information regarding tourism attractions in less well-known parts of
the world have also broadened the number of destinations in demand. The demand for
low-cost and “authentic” travel experiences, especially among the millennial generation,
has been partially fueled by a growing number of Airbnb providers. As of 2016, Airbnb
has grown to more than 2.5 million listings worldwide with properties in almost every
country.47

F U T U R E O F G LO B A L I Z AT I O N
The future of globalization seems uncertain at present. The potential long-term impacts
of recent political events, including the EU referendum in the U.K. and the election in
the U.S., are not clear. But there appears a general consensus about two possible
scenarios at either end of the range:

1. A
 temporary slowdown of the global integration process with modifications to
current trading patterns and migration.

45. CBRE (2014) “London Continues to Attract Most International Retail Brands,” http://www.cbre.co.uk/uk-en/news _ events/news _ detail?p _ id=16781
46. CBRE (2015) “The impact of Chinese outbound tourists and shared accommodation on the regional hospitality industry,” https://researchgateway.cbre.com/Layouts/
GKCSearch/DownloadHelper.ashx
47. AirBnB (2017), https://www.airbnb.co.uk/about/about-us

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2. A
 substantial reversal of integration, due to increased protectionism both in trade
and immigration.

Scenario 1 appears to be the most probable, whereby there is a slowdown of integration,

a mild rebalancing of the global economy and relatively little impact on real estate.
Specific possibilities under this scenario include:

a) Slowed growth of global trade. The ratio of global trade growth to global GDP growth
could fall below 1, having been higher than 2 since the 1990s.

b) A contraction in supply chains. There could be some transfer of manufacturing

activity to and between OECD nations as companies seek to protect themselves
from potential trade barriers. This may not bring much job growth due to the
trend towards automation, but it may stabilize levels of manufacturing employment.
A downside could be a rise in the cost of manufactured goods.

c) Reduced immigration. This points to potentially higher labor costs and labor
shortages in certain industries such as hospitality, health care and construction.
In due course, this could increase costs and prices in these industries and lessen
demand for industrial and logistics space as supply chains shorten.

d) Changing patterns of trade. These effects are not easy to predict, but they could have
an impact on ports and logistics infrastructure. Since the 1970s, for example, the
U.K.’s East Coast ports (such as Dover) have boomed as trade with Europe grew, while
its West Coast ports (such as Liverpool) have declined. These trends could be
reversed.

e) Moderate restrictions in capital flows. There is widespread concern about house

prices in most of the coastal cities that have thrived under globalization. This
concern has been exacerbated by the growth in foreign ownership. It is likely that
some controls on foreign ownership will emerge, as have already occurred in
Vancouver. There also may be further limitations on foreign ownership of
important national companies.

Under Scenario 2, which is less likely, the impacts on real estate would be much greater:

Capital Markets Consequences

To the extent that globalization has been somewhat responsible for persistently low
levels of inflation and interest rates, its reversal could lead to more rapid growth in
prices and the need for tighter monetary policy. Tariffs would raise the cost of imported
goods for some countries, such as the U.S., via currency effects or because production
has to relocate to higher-cost locations. These higher costs would most likely cause
workers to demand higher wages in order to maintain their standards of living. A classic
wage/price spiral could ensue.

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At the same time, countries that have grown wealthy from exports, such as Japan, China
and Germany, might lose export markets, so they would have to boost domestic demand
substantially to maintain growth and employment. Savings in these export-surplus
countries could fall, thus potentially lowering global supply relative to higher global
demand. Globally, labor could regain some of the bargaining power it has lost over the
past 20 years or so. Unit labor costs could rise and “offshoring” might no longer be the
solution. Real and nominal bond rates could rise, and so could real estate yields.

As an aside, the potential macro-economic upside of a retreat from globalization is clear.

One of the problems in the global economy over the past 15 years has been the
overreliance by some countries on growing levels of exports to drive economic growth.
This is certainly true of the Asian economies, but also Germany and other parts of
northern Europe. A retreat from globalization could cause these countries to rebalance
their economies in favor of domestic demand, potentially boosting overall global
demand, reducing global savings and driving up real wages.

Regional and National Consequences

Big export economies such as China and Germany could suffer a period of economic
disruption in order to adjust to altered trading conditions. The U.S. might fare
reasonably well, being a large economy that relies less on exports and more on domestic
demand. The EU has the potential to fare well, but would have to more adequately
coordinate fiscal policy and harmonize its banking system. Post-Brexit, which will
probably be after 2019, the U.K. could find itself in a difficult position, attempting to
forge a series of new bilateral trade deals in an environment of retreat from global trade.

City consequences
For the same reasons as export-oriented countries and regions, the most globally
integrated and outward-facing cities could face economic disruption. Financially-
oriented capitals could see a reduction in international investment inflows and in
external demand for internationally traded financial services.

For real estate, this means that some of the super-prime locations and developments
might see outward movement in cap rates. The boom in luxury retail spending by
tourists could fade, while some of the super-prime residential real estate developed over
the past 20 years might also see a reduction in demand.

However, there may be some benefits to a retreat from globalization, such as a reduction
in economic volatility caused by the high levels of interdependence and integration
between major financial centers. Out of the top 1,000 commercial real estate investment
deals by value in 2007 and 2008, 50.2% took place in just 10 cities and 30% of office

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investment was in just London and New York.48 Out of the same top 1,000 deals, 50% of
buyers were based in the top-10 international financial centers. There was also a 0.6
correlation between office investment value and the city’s score on the Global Financial
Connectivity Index. Financial markets and global cities are consequently highly
integrated, and the dynamics of financial markets will play out in the performance of
commercial real estate in global financial centers. It then follows that a decoupling of
the financial and commercial real estate markets of global cities will have a negative
impact on the degree of correlation between the two and reduce the volatility of office
investments in these cities in the long-term.

Sector consequences
It is probable that the logistics sector will see the most change, though not necessarily
for the worse. A greater focus on domestic and intra-regional flows of goods would
reduce the need for large ports bringing goods into the advanced economies from Asia,
and the infrastructure surrounding them to transport those goods to consumers. For the
U.S., this is especially relevant for West Coast ports such as Los Angeles and Long Beach.
In addition, facilities that service Mexican trade with the U.S. might have reduced
demand.

CONCLUSION
Despite some recent nationalist political sentiment, a complete reversal of global
integration appears unlikely. Simply put, it would be too costly in terms of reduced
standards of living, disruptions of business models and the potential for conflict.
Globalization is not a single process. It is the product of numerous bilateral and
multilateral trade agreements, a long-term increase in financial integration, cross-
border mergers and acquisitions, vastly improved communications technology and
information flows, lower travel costs and even social media. Even if trade agreements
are partially unwound, it is very hard to see the other aspects of globalization doing
anything other than continuing apace. Furthermore, many think that recently
dismantled trade deals, such as TPP and TTIP, could eventually re-emerge in slightly
different forms. Because of mutual self-interest, even Brexit likely will be less disruptive
to trade than is currently feared.

48. Lizieri, C. and Pain, K. (2014) International office investment in global cities: the production of financial space and systemic risk. Regional Studies, 48 (3). pp. 439-455.

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F O R M O R E I N F O R M AT I O N, P L E A S E C O N TAC T:

Nick Axford, Ph.D. Spencer Levy

Head of Research, Global Head of Research, Americas
+44 207 182 2876 +1 617 912 5236
Nick.Axford@cbre.com Spencer.Levy@cbre.com
@NickAxford1 @SpencerGLevy

Richard Barkham, Ph.D. Siena Carver

Chief Economist, Global Analyst, Global Research
+44 20 7182 2665 +44 20 7182 2608
Richard.Barkham@cbre.com Siena.Carver@cbre.com

Neil Blake, Ph.D. Darin Mellott

Head of Forecasting and Analytics, Global Director, Research and Analysis,
+44 207 182 2133 Southwest Region
Neil.Blake@cbre.com +1 801 869 8014
@NeilBlake123 Darin.Mellott@cbre.com

Jos Tromp Dennis Schoenmaker, Ph.D.

Head of Research, EMEA Economist, Global
+31 20 626 26 91 +44 20 7182 2457
Jos.Tromp@cbre.com Dennis.Schoenmaker@cbre.com

Henry Chin, Ph.D.

Head of Research, Asia Pacific
+852 2820 8160
Henry.Chin@cbre.com.hk
@HenryChinPhD

To learn more about CBRE Research, or to access additional research reports, please visit the Global
Research Gateway at www.cbre.com/researchgateway.
Additional U.S. Research from CBRE can be found here.

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