Opportunity in Opacity

Our industry can only function with the careful balancing of the needs of both investors and occupiers, but one issue clearly separates them: market transparency.  Jones Lang LaSalle’s unique Global Real Estate Transparency Index was recently updated, bringing this investor-occupier gap into the post-global financial crisis world.  It proved that market data quality and availability continues to improve (kudos to us property researchers!) albeit slightly compromised by the real estate downturn of the last two years.

So where does this leave the two key constituents of the property industry?

Investors are retrenching from the world’s opaque markets as preference (and often demand) leans towards less risky investments.  While recognising that there will always be different types of investors, the majority of active market players are said to be considering only the so called “core” markets.  Higher yielding opportunities, however, lie in the less transparent risky markets but this has not proven attractive to those concerned about unstable income growth. Opaque markets are not good enough to be considered given their position on the risk curve. Nowadays, successful investment is rather about finding the right opportunity in the most transparent markets.

On the contrary occupiers are actively prioritising these same opaque markets as they represent untapped consumer markets and associated revenue opportunities. Their greatest risk is of NOT doing something in these markets.  As the shackles on capital expenditure give way to medium term strategic planning in corporate boardrooms, opaque emerging markets are front and centre.  Occupiers understand the challenges this presents but financial well-being dictates a need to overcome them.  As a result, occupiers are entering markets that do not provide high quality office product owned and managed by institutional investors.  The options open to them therefore are replete with risk. They will operate from low quality office space or even residential villas or hotels that are owned by private and relatively unsophisticated landlords prone to make and enforce decisions that can raise the occupational risk profile.  But the rewards outweigh the risks.  In adapting to and mitigating these risks, cash rich occupiers have often sought to develop and own their own buildings, thereby using property as both a factor of production and an investment product to be traded to institutional investors down the line.

And herein lies the issue: we worry that with a more cautious investor community, occupiers who choose a development route might have limited exit opportunities going forward.

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