Superstars or pools of risk?

As ever, the recent UBS Global Real Estate Bubble Index makes for interesting reading – although why Reading isn’t there, I don’t know.  They point to the growing concentrations of wealthy individuals in a relatively small number of areas in a relatively small number of global cities.

The intuition is that the national and global growth of high-wealth households creates continued excess demand for the best locations. So, as long as supply cannot increase rapidly, prices in the so-called “Superstar cities” are supposed to decouple from rents, incomes and the respective countrywide price level. The superstar narrative has received additional impetus in the last couple of years from a surge in international demand, especially from China, which has crowded out local buyers. An average price growth of almost 20% in the last three years has confirmed the expectations of even the most optimistic investors.

Basically, the argument is that the 0.01% will pay huge premiums to be close to each other.  Sounds fairly plausible.  However, the main global financial centres can also be viewed as concentrated pools of risk.  As quantitative easing has fuelled rising asset prices, the global cities have large pools of interlinked and interdependent global real estate investors, lenders and intermediaries occupying, trading, owning, developing etc. They all look exposed to a global or national systematic shock.  Seeing an Indian company like Lodha secure over half a billion pounds for the re-development of 1 Grosvenor Square in London from M&G looks like a good example of this concentration.

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