The global economy has entered another period of uncertainty, with the Greek elections threatening to reignite the eurozone crisis and the dramatic fall in the oil price spooking markets. However, key fundamentals such as strong growth forecasts in major markets such as India, the UK and US, a rising and more mobile world population, combined with rapid urbanisation suggest the long-term outlook for the real estate & construction sector in 2015 is positive.
Business leaders in the sector remain optimistic, as shown by our International Business Report. Expectations for revenue growth have risen, averaging 51% over the past 12 months, compared to 48% in 2013 and 38% in 2012. Hiring and investment plans have also increased. The percentage of businesses reporting a shortage of orders has dropped to 34%, down from 35% in 2013 and 40% in 2012. While the financial crisis hit the sector hard, our indicators show a renewed vigor over the past 24 months, signaling a steady recovery.
Real estate and construction businesses are not expecting price declines, with 25% planning to increase selling prices in 2015, slightly above the sector average. However, profitability expectations have declined, dropping to 36% from 41% in 2013, marking the lowest since 2010. This decline may be due to slowing house prices in major markets like the eurozone (0.5% increase in 2014), the US (4.3%), and China (a 3.6% decrease). On a positive note, markets like the UK and Ireland have seen double-digit price increases following sharp downturns.
A highly leveraged sector means demand will be sensitive to monetary policy, however low inflation across much of the globe (driven in part by declining oil prices) means there is no upward pressure on interest rates in the key markets of China, Europe, the UK and US, indicating mortgage rates will stay lower for longer. The cloud on the horizon being if any of these markets slip into deflation (inflation in the eurozone stands at 0.6% excluding energy), then the long term real value of debt will rise, increasing repayment pressures on homeowners and developers.
The real estate sector faces challenges in 2015, including political uncertainty, weakness in the eurozone and Japanese markets. However, capital inflows into prime residential and commercial properties (e.g., from Russia to Europe, China to Asia Pacific) are expected to remain strong. This creates opportunities, especially in cities like New York, Paris, and Hong Kong, where urban renewal is driving desirable investments. Dynamic businesses should focus on tapping into these opportunities, as the risk-reward trade-off for property investment could reach new heights this year.