Capital continues to flood real estate sector, says DTZ

With $4 of capital chasing every $1 of investment product, a total of $2.4 tln is currently looking to be invested in real estate worldwide, according to the latest edition of DTZ's annual Money into Property research report.

The real estate investment sector is still characterised by a massive surplus of capital even after the record global transaction volume of $600 bn (EUR 447 bn) in 2006. The proportion of investors below their target real estate allocation grew from around a third in 2005 to half in 2006. About 30% of capital raised over the last two years remains unspent, DTZ said.

While direct investments continued to show strong growth last year, the increase in net capital inflows into real estate slowed to 5% compared with 34% in the previous year, totalling around $860 bn in 2006. This suggests that more moderate growth in investment transactions during 2007-08 is likely. At the same time, the sector is continuing to become more global. Cross-border activity now makes up around 40% of investments compared with 30% in the previous year.

The surplus capital is leading to further yield compression in major markets. However, it is clear that the flow of capital in 2007-08 will increasingly be guided by the prospects for rental growth and health of local markets. The report suggests that investors are generally seeking to increase their exposure to real estate in 2007 while the recovering occupier markets, at least in Europe, indicates investment markets will remain buoyant in the short-term. However, the worldwide interest rate environment has become less benign, making the scope for further yield compression limited. With little room for yield compression, there is likely to be a shift towards return through rental growth where stock, location and demand will be fundamental, DTZ concluded.