Following the recent fall in oil prices, global real estate markets are most vulnerable in economies with not just a greater dependency on oil but also in those with a high cost of oil production – according to new research from global real estate adviser Cushman & Wakefield.
Combined, the above factors will squeeze profit margins in these markets, leading to staff reductions and ultimately forcing companies to reorganise, downsize and consolidate their real estate footprint.
Released today, Cushman & Wakefield’s ‘Do Oil Prices Hold Real Estate Over a Barrel?’ publication explores the interdependency between oil prices and real estate values, while looking back at historical oil prices to fully understand how oil-producing locations have been affected in the past and the implications for recovery.
As with any commodity, oil has periods of volatility. At this point in the cycle, world oil prices are recovering but still operating in a landscape characterised by excess supply. OPEC’s strategy of keeping output steady rather than slimming production to underpin pricing has forced high-cost producers to rethink in the short-term. Oil prices are notoriously difficult to predict, with prices typically moving sharply and significantly once they start to recover – and commentators are currently divided on the future of oil prices. Whilst the bottom has been called, some think sustained growth has returned, while others expect a few years around the US$50 per barrel mark due to Saudi Arabia’s continued strategy to suffocate high-cost rivals, says the report.
As consumer spending is such an important and malleable channel for oil price fluctuations to affect, the publication states an anticipated 1.5% boost to consumption from the lower oil price will equate to an additional 1-2% rental growth over 2015-16 in the UK retail sector. A good short-term boost to retail rents and returns is expected but unlikely to be a sustainable driver of returns for the medium to long-term.
Locations with a high proportion of oil and gas related output will be the most vulnerable to the oil price decline. However, Aberdeen will continue to show less market sensitivity than Houston, for example. The low oil price is creating an opportunity for business in Aberdeen to draw breath, reorganise and restructure on a more sustainable basis. Historically, given its size, Aberdeen’s rent has remained resilient irrespective of oil price corrections. The recent, unprecedented, period of expansion has stretched the city and created huge supply and demand imbalances, where residential rents and congestion pose barriers to attracting a stable long-term labour force. Despite incentives starting to soften – but still low in comparison to UK national averages – and prime rents under pressure, the long-term fundamentals remain strong with speculative development remaining on track.
For the UK, the benefits of a broad increase in consumption and the potential for this to positively impact rental growth in the retail sector, plus the boost to the non-oil producing corporate sector via reduced costs are, on balance, likely to outweigh the negative impact on key oil-producing locations.
Cushman & Wakefield’s head of EMEA Research & Insight, Polly Plunket-Checkemian, said: “Oil markets move quickly and unpredictably. When we first began looking into the impact of lower oil prices on real estate, the cost of a barrel of oil was around US$45 per barrel. In the intervening weeks we have seen those prices increase to around US$60 – and prices will no doubt again change in the weeks to come. Nevertheless, the big picture remains that oil prices are still 40% below their mid-2014 price – above US$100 – and production continues to be elevated with no clear downward trend visible as yet.
“Therefore, the impact of lower oil prices on economies and real estate markets remains of key importance to the prospects of occupier markets around the world, none more so than in those economies with high output and high cost of production.”