ULI Paris: US emerges as ‘winner’ in presentations from three continents

The US will continue to show strong growth relative to the rest of the world for the next two years, according to Lynn Thurber, chairman of La Salle Investment Management and ULI US.

Speaking at a session entitled ‘A view from three continents’ at the ULI Europe annual conference in Paris on Wednesday, Thurber said the outlook for real estate fundamentals was ‘promising’.

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'Construction remains below average in all sectors except for residential. And strong capital flows will support pricing.' But, she added, ‘we will have to search harder to find opportunities.’

The economic fundamentals remain positive, Thurber said, pointing to moderate economic growth and employment. Job growth was the strongest for 15 years in 2014, pushing unemployment down to 5.6%. ‘We will see wage increases starting now,’ she predicted. ‘That will support the consumer, which makes up 70% of GDP numbers.’

Thurber also predicted that interest rates would remain lower for a longer period. ‘The Fed (US Federal Reserve Bank ed.) is sticking to its story that it will raise interest rates, but I don’t see it happening quickly.’

Real estate transaction volumes in the US are very strong, Thurber noted, pointing to a 12% increase in 2014. ‘This year the same level is expected as in 2007.’ And there are no clouds ahead, she added: ‘I can’t see any indicators pointing to a downturn or a pause. All of the things from the past are not on our horizon.’

Thanks to the strong fundamentals in the US, vacancy levels are currently trending below the long-term average, Thurber said. A notable exception is new apartments, but there is strong demand in this segment, she added. ‘We see rental increases in all sectors.’ In terms of opportunities, Thurber signalled medical facilities, parking garages and storage as ‘hot picks’. ‘They should all weather another downturn.’

THERE'S A SILVER LINING IN RUSSIA
The outlook for Russian real estate is not quite as rosy, Sergey Riabokobylko, CEO and managing partner at Cushman & Wakefield Russia, wryly conceded during his presentation.

‘It’s hard to believe that 12 months ago the major conversations in this same room amid an oil price of $115 centred on the budget of the Olympic Games and whether or not there would be snow at the Olympic Games. It’s hard to believe how circumstances of the last months have thrust the country and its real estate market into a perfect storm.’

Setting the systemic issues aside, Riabokobylko said the consensus was that 60% of Russia’s problems today stem from the drop in the oil price and about 40% from sanctions. But, he added, several economic indicators like investment and fixed assets have suggested that broad sectors of the economy have been in decline and recession already in 2013. ‘But the high oil price was like the proverbial high tide masking those swimming naked.’

At the same time, there are some silver linings, Riabokobylko maintained. ‘There’s an old Chinese proverb that says you can see challenges as opportunities. This captures perfectly our view of the market at the moment. You may feel that investment in windmills at this moment sounds reckless, but flying a kite in the middle of a storm may just lead to significant discoveries…If there’s one word why investors still believe in Russia it’s potential.’

Russia may have seen its wealth diminish in the last 12 months, but the country still remains ‘a middle class brick’, Riabokobylko said. ‘Russia still compares favourably to the developed world, especially Europe, in terms of ratios of its government, household and corporate debt.’ And while the western investors have retreated, new money continues to pour in from China, Korea and the Middle East. ‘They’re starting to replace the western capital which was competing for deals in 2012-13.’

The corporate sector also has some stars, he added. ‘Several multinationals in Russia still come out in 2014 as world leaders in their companies in terms of revenue, profit or both. Currently the Russian market is only equal to the French market, and is not bad. Many global firms operating in Russia use it as a testing market for new concepts before rolling them out to the rest of the world. There are also many examples of solid joint venture partnerships which have endured and prospered even in the boom and bust times,’ he added.

But a key reason for many Russian investors to remain optimistic is the abundance of legacy soviet infrastructure, Riabokobylko said. ‘This means a requirement for the country to literally rebuild itself to be fit for modern economic purpose.’

Moreover, the pale performance of the GDP of Russia as a whole masks extreme outperformance of certain regions, he added, pointing to Moscow, Kazan and Vladivlostok. ‘These are just three of 85 regions which make up the federal country of Russia.’

Another reason for optimism, Riabokobylko said, was the rise of a new class of technocrats – well-educated 35-to-45 year-olds, who are successful and wealthy as former entrepreneurs and who are being actively recruited into government today. ‘They’re helping to create a new dynamic - a different dynamic – a technocratic administration that we have never seen before.’

The story of Moscow’s own urban transformation is also a positive signal, Riabokobylko said. The story is only four years old, and started in 2011 with a ULI advisory panel which was assembled at the request of the new Moscow government at the time, to tackle urban challenges. The outcome of that panel became the basis for a 2025 strategy which was adopted in 2013. ‘Now Moscow has a budget that is five times that of Paris.’

Finally, although western investors have retreated, local investors still make up 90% of volume and activity and they view the property market in Russia as one of the few truly independent sectors which is free of government interference, Riabokobylko said. ‘Even in tough times, real estate sector enjoys disproportionate attention and liquidity.’

CHINA COMES TO GRIPS WITH THE 'NEW NORMAL'
After more than two decades of sustained growth, China is coming to terms with the ‘new normal’, Henry Cheng, CEO of retail developer Chongbang Group, told the ULI Europe conference.

Economic growth may be slowing, but China itself is not so concerned about whether growth is fast or slow, or high or low, he told the audience. ‘That’s western terminology. In China, the terminology we use is the quality of growth. That’s what we’ve been talking about. In Shanghai the government plan does not even have a GDP target this year. We talk about the quality, not the quantum of growth.’

Two decades after China opened up and reformed its policies, Cheng sees quality growth as the key challenge for his country. ‘My personal view is that understanding and coping with this new normal is vital.’

Part of the new normal in China is that it is now seeing capital inflows and outflows for the first time. As a result, production capacity and organizations will be streamlined, he predicted. ‘Consolidation, mergers and acquisitions will be inevitable. That’s creating a huge business for the legal professions,’ Cheng said.

As consumers become more discrim√inating and demanding, resource allocation will also play a far bigger role going forward, he continued. ‘Supply and demand must be analysed. Ten years ago we wouldn’t build shopping malls that were less than 100,000 m2, because there weren’t any there in those days. But now they are everywhere. We will need to develop new models to cope with new challenges and opportunities. And the design and execution of these new models must take into account market timing and business capabilities.’

Cheng conceded that overbuilding was a problem in some parts of China. ‘In absolute terms it’s not huge, but the problem is there all the same.’ Going forward, production capability will need to adapt, he added. ‘Quality and differentiation will become key competitive advantages. The president is talking about - and people are demanding - a better living environment. That includes a clean political environment, and a sign is the anti-corruption campaign that is going on.’

With economic bubbles and gearing becoming increasingly dangerous, businesses must develop systems to control and manage risks, Cheng warned. At the same time, there are enormous opportunities to integrate new technologies with traditional business and create new products, new services and new modes of operation. ‘Real estate is one of those traditional businesses.’

But China needs to forge its own models, Cheng said. ‘We can’t just borrow successful stories from the US and Europe. If we do it right, under the new normal business will either flourish or perish.’ In any case, that is true for retail-anchored mixed use projects, he added. ‘But if we do it right, we will be like the dragon in the sky. And the sky has no limit.’

Click here to watch a video of the session

The February edition of PropertyEU Magazine features a special section with highlights from the ULI/PwC Emerging Trends reports for Europe, US & Canada, and the Asia-Pacific region.