More Than Bricks and Mortar

One might have expected that, following several years of above-average global GDP growth, the world’s outstanding debt pile would have decreased. Well, think again.

At the end of the first quarter of 2018, worldwide debt – including corporate, government, financial and household debt – stood at a new all-time high of $247 trillion, representing nearly 320% of global GDP.

In the US, deficit spending by President Trump has sent government debt rapidly higher. In Europe too, governments have not taken advantage of stronger growth and low interest rates to diminish their debt burden. In emerging markets, debt in countries like China and Argentina remains a real worry for certain investors.

The fear that some governments may either default on their debt or try to erode it via higher inflation is not completely unfounded. That’s why today’s investors are especially attracted by tangible assets that offer predictable cash flows, preferably inflation-proof real assets. Real estate is one such asset class – though it comes in different shapes and sizes.

Investors can buy bricks and mortar or acquire “paper” property via so-called Real Estate Investment Trusts (REITs) – regulated companies that own, operate and/or finance income-producing real estate. Such property can range from residential homes to commercial property and from timberlands to toll roads.

Typical investors are most interested in residential property, particularly if they want to own the bricks themselves. However, as the world was reminded in the wake of the subprime crisis – when the global housing bubble burst in spectacular fashion – even such “traditional” real estate investors need to tread carefully. “Location, location, location” may be the mantra of property brokers everywhere, but the housing market is a lot more complicated than that. Broader supply-and-demand dynamics, interest rates, tax policies, domestic and local regulations, and a host of other criteria all shape a market that is inevitably cyclical.

A fate worse than debt
Global debt levels

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