Office investment has become far too centred on large cities around the world, and recent buyers in this type of deal risk weak returns, a Cambridge academic has warned.
Colin Lizieri, professor of real estate finance at the UK university鈥檚 department of land economy, said: 鈥淎n obvious risk is that more recent investments will deliver poor returns over time.鈥�
Many prime properties in big markets now look at the least overpriced, and, he said, with the prospect of rising interest rates, yields could well come under pressure.
Speaking at the annual conference of the Urban Land Institute (ULI), Lizieri presented analysis of the revival of global real estate investment volumes since the 2007 slump.
He focused on data on office property transactions, and the proportion that related to cities.
鈥淭he really remarkable thing is how unbelievably concentrated that transaction volume is,鈥� he said.
Data from Real Capital Analytics showed 42% of global investment volumes between 2007 and 2013 had been concentrated on just three cities 鈥� London, New York and Paris.
Some 80% of all international investment in the five-year period is in just 25 cities, he said.
鈥淭hat investment concentration is not explained by the size of cities,鈥� Lizieri told the conference.
City GDP explained only about half of aggregate investment, he said.
This concentration on cities showed no sign of changing, and had become more marked rather than less over the time period surveyed, he said.
The belief in the value of investing to such a degree in cities is based as much on myth as reality, Lizieri argued.
He said there was also a danger that investors were failing to diversify enough.
鈥淓vidence says that, in the long run, these cities do not deliver much real rental growth,鈥� he said, adding that whether there was short-run rental growth depended on the supply situation.
鈥淚f the majority of your international investment is focused on big-city prime office space, then you aren鈥檛 really getting global diversification,鈥� he said.
鈥淥ccupier and investment markets in those cities are being driven by the same global economic forces, so they鈥檒l tend to rise and fall together.鈥�
