Towers of Capital: Office Markets & International Financial Services (Real Estate Issues)

By merging research aimed at understanding the operation of real estate markets and property finance and investment with a broader urban social science perspective, this book will attract interest from both real estate and urban programmes. It will have an international flavour and a strong policy component. The book starts with an examination of the development of a global system of cities, the urban hierarchy and the development of international financial cities and the global financial system. The role of technology (particularly relating to information exchange and digital capital flows) is considered: what does this do to spatial patterns and the “need for cities”? It draws on the global cities literature - but in a critical way - and on the regional and urban literature of the “new economic geography. This creates the arena for the office markets under consideration and establishes the principal sources of demand for space. The second part of the book turns to consideration of the mechanics of the office market – keeping the focus on prime (class A) office space found in the IFCs. The boundaries between the chapters is somewhat fuzzy (because of the dynamics and feedback effects that exist). The relationship between demand, supply and rents is considered, using the modelling literature to examine rent setting and rental adjustment processes: these reactions mediated by the institutional structure of the market. Next, the supply side is considered explicitly, looking at the developer’s decision and the role of urban land use planning. Finally, capital flows into and out of the real estate market are considered. The contribution of this part of the book is largely synthesis – but it follows from the urban context introduced in Part 1, rather than being simply an abstract modelling exercise. The emphasis on price formation and investment flows as driving factors distinguish it from the critical urban social science literature on the development process. The book then ‘drills down’ into the structure of the market by examining the processes of change – in ownership structures and in financial vehicles. This is the key to understanding the dynamics of office markets in major cities. The fragmentation of ownership and the different, monetised, vehicles for channelling capital into real estate, the partitioning and sale of different components of cashflow and the rise of new debt vehicles and debt recycling opportunities will be considered. These innovations have implications for the risk, return and liquidity characteristics of real estate which, in turn, have implications for portfolio strategies and capital flows – which now need to be considered in international, rather than purely domestic context. Those capital flows have real spatial impacts in enabling (or constraining) supply of space for occupation. The final part of the book synthesises the findings of the first three sections by looking at cyclical behaviour in the office markets of major cities. The conventional literature on office cycles is considered critically; then the impact of the innovations discussed in Part 3 are considered. In international financial centres, the splintering of ownership and cashflow is allied to a locking in of investment, ownership, financing, funding and occupation that creates potential issues of systemic risk. At the same time, there are efficiency gains and, in principle, improved transparency. The balance between these additional risks and gains can shape the trajectory of major office markets going forward. Towers of Capital 3 About the Author 12 Introduction 13 Part I Systems of Cities and Cities of Finance 19 Introduction 20 Chapter 1 The Urban Hierarchy and Global Cities 23 1.1 Introduction 23 1.2 Cities and the urban hierarchy 24 1.3 World cities, global cities 36 1.4 Cities, space and finance 49 Chapter 2 International Financial Centres and Global Cities 51 2.1 Introduction 51 2.2 Concentration in financial centres 52 2.3 Information technology and cities 62 2.4 Agglomeration and concentration 70 2.5 IFCs, concentration and office markets 78 Chapter 3 A Sense of History: Development and Inertia in the International Financial Hierarchy 83 3.1 Introduction 83 3.2 A sense of history 85 3.3 ‘The age of catastrophe’ 92 3.4 Asian and Middle Eastern markets 94 3.5 Lessons of history: a tentative conclusion 99 Part II Inside the Office Market 105 Introduction 106 Chapter 4 Occupational Demand, Office Space and Rents 109 4.1 Introduction 109 4.2 Land value, land rent and financial services 112 4.3 Rent models and rental adjustment 112 4.4 Empirical evidence of rental adjustment processes in major office markets 123 4.5 Changing business practices and the demand for office space 127 4.6 Employment, volatility and the use of space 135 Chapter 5 The Supply of Space 143 5.1 Developers, development cycles and research 143 5.2 Development, building costs and property value 147 5.3 Economic models and developer behaviour 153 5.4 Real options and developer strategies 162 Chapter 6 Investment, Capital Flows and the Office Market 167 6.1 Introduction 167 6.2 Real estate in the portfolio 168 6.3 Investment patterns and investor behaviour 179 6.4 Real estate vehicles and the portfolio 181 6.5 International real estate investment 183 6.6 Real estate capital flows 188 6.7 Investment, capital flows and IFC office markets 198 Part III International Finance, Global Office Markets and Systemic Risk 201 Introduction 202 Chapter 7 Booms, Bubbles, Crises and Contagion 205 7.1 Introduction 202 7.2 Financial markets, co-movement and crises 207 7.3 Booms and bubbles 219 7.4 Real estate in booms and bubbles 224 7.5 Bubbles, crashes and IFC office markets 232 Chapter 8 Globalisation, Ownership and Innovation in Real Estate Markets 235 8.1 Introduction: innovation in real estate investment and ownership 235 8.2 Innovation in property investment vehicles 237 8.3 Global real estate investment 264 8.4 Ownership patterns 269 8.5 Conclusions: innovation, ownership and real estate risk in IFCs 273 Chapter 9 Global Financial Centres, Real Estate and Risk 276 9.1 Introduction 276 9.2 Retracing the threads 277 9.3 Market integration, globalisation and systemic risk 288 9.4 Some preliminary evidence 295 9.5 Global financial centres and office market risk: some policy implications 305 Epilogue 315 Bibliography 321 Index 339 Are global city office markets inherently unstable? This examination of office markets in major world cities analyses the flows of capital that create urban form, the nature of ownership, investment and occupation and the impact of office markets on economic stability. "Towers of Capital - Office Markets & International Financial Services" explores the relationship between the evolution of major international financial centres as part of the global capital market system, the development of office markets in those cities, real estate investment in those office markets and the patterns of risk and return that result from the interactions between financial flows and office markets. Rather than focusing on just one single aspect of the relationship, Colin Lizieri sets out the interconnections between the location of financial activity, the processes operating in office markets and the volatility of real estate returns. The resulting schematic model of IFC office markets provides insights into risk and will act as a springboard for subsequent empirical work. "Towers of Capital" develops a framework for understanding real estate and the transformation of the built environment in financial centres, based both on the development of global capital markets and on micro-level research into the functioning of office markets. By drawing together the insights, models and ideas that address global capital flows, the evolution of city systems, office market processes and real estate finance, the book will help students and researchers in property and urban planning, investors and policy advisors to understand the linkages between the evolution of financial markets, innovation in commercial real estate markets and the dynamics of the office markets in global cities The urban hierarchy and global cities International financial centres technology, space and agglomeration A sense of history : global finance and historic cities Inside the office market Occupational demand, office space and rents The supply of space Investment, capital flows and the office market International finance, global office markets and systemic risk Booms, bubbles, crises and contagion Globalisation, ownership and innovation in real estate markets All fall down : global financial centres, real estate and risk. An examination of the operation of office markets in major global cities - specifically international financial centers. In particular, the book analyses the flows of capital that create urban form, the nature of ownership, investment and occupation and the impact of office markets on economic stability.