Global Property Investment Market Recovery To Continue In 2011 But Occupier Markets Will Drive Performance
9 Mar, 2011, London
Global property investment markets are expected to continue recovering this year, according to Cushman & Wakefield’s International Investment Atlas 2011. A rising level of investment activity will include a broader focus on emerging and second tier markets not just the core gateway cities which were the winners in 2010. The report forecasts that an increasing focus on the occupier will characterise the market this year, with rent and income growth to take over from yield compression in driving performance.
The report, which monitors investment flows in commercial property in 56 countries, reveals that global investment volumes jumped 42% to US$564 bn (€430 bn) in 2010. Dealing volumes are still only around 50% of their peak but they are over 80% of their five year average and in some markets are setting fresh highs – notably emerging markets in Asia and Latin America. Yields fell in most areas last year, as higher demand and limited supply impacted. The global average fell 21bp to 7.6% and a further fall averaging 30bp is forecast for 2011.
Asia held the top spot as the leading region for investment – accounting for more than half of all global activity for the second year running - followed by the U.S. in second place and the UK in third. Volumes in the top 20 cities grew by 59% as investors focused on the most robust locations. London was the leading global city for investment, followed by Tokyo, New York and Paris.
Greg Vorwaller, Global Head, Capital Markets, Cushman & Wakefield, said, “2011 will present more challenges for the global real estate market. However, there are upside risks to consider, in the potential for economic recovery to be sustained and for increasing levels of business and financial confidence to translate into greater-than-expected levels of market activity. Countries will continue to develop at varying speeds though and investors need to keep their eyes open to the risks they are taking on. They should look to push diversification back up their agendas: by region, country, sector and currency.”
The global occupier market started to rally in 2010 and rents rose by 2%. The recovery has been polarised between prime and secondary and has also seen a new tier of ‘ultra prime’, reflecting the stronger demand for the very best core properties.
Leasing volumes are likely to increase further in 2011, with a focus on the most effective property and markets in all sectors. A shortage of new development and falling Grade A vacancy in Europe and North America will result in a return of rental growth. However, overall high vacancy and cost consciousness will keep rental growth down, with the report forecasting an average of around 3-5%. In Asia and parts of Latin America rents have started to gain some momentum and increases of 5-10% are anticipated this year, although the elasticity of the supply pipeline means growth will be volatile.
David Hutchings, Partner, Head of the European Research Group, Cushman & Wakefield, said, “The global market will remain polarized in 2011 but it is too simplistic to describe it as “two tiered” – it is becoming multi-tiered as the compromises of occupiers and investors drive different segments of the market. Our forecasts assume that events in North Africa and the Middle East stabilize in the near term and that the risk premium in oil prices does not derail growth. Even taking this into account however, investors and occupiers may need to revisit their assumptions on macro and geopolitical risk, not to mention giving greater weight to environmental and natural risks in many areas.”
Athough all regions are seeing improved performance and activity, the scale and timing of change varies. The Americas are ahead for investment growth, Asia for the occupational market recovery – followed by the Americas – and EMEA and the Americas are experiencing the most market yield changes.
The Asian recovery broadened in 2010, with most economies performing strongly and positive rental growth being seen in all sectors, with prime rents overall up by 5.9%. Investment volumes rose 27% to US$294 bn, 12 % higher than their previous peak in 2007, while yields compressed by 20 basis points in 2010, led by falls for prime retail.
John Stinson, Managing Director - Capital Markets, Asia Pacific, Cushman & Wakefield, said, “China has been pivotal to the economic recovery in Asia and after taking the crown last year, the Middle Kingdom remains the biggest global property investment market. There may be a cooling in the residential sector in some Asia Pacific markets, notably China, this year as governments become sophisticated at enacting policy aimed at reducing speculation in this sector rather than slowing the entire market. Nonetheless, China will remain the number one market globally and investment elsewhere in the region will continue to grow.”
He continued, “With eight of the world’s top 20 markets situated in Asia Pacific this region will continue to dominate as investors are attracted to other gateway cities including Singapore, Hong Kong, Shanghai, Tokyo and Sydney. We will start to see some of this activity spill over into some attractive emerging markets later this year including Malaysia , Indonesia , India and some 2nd and 3rd tier cities in China.”
The recovery in North America gained ground in 2010, with investment volumes up by 127% and yields now having recovered half of their losses from the recession. Whilst still dependent on a further improvement in the health of the economy, downside risks are now more balanced by upside potential.
Overall, rents increased by 1.3% last year, led by prime retail in Canada and the U.S., with office and industrial markets stable to improving by year-end. The Canadian market recovered strongly, with investment up nearly 150% and yields falling over 50bp. Rents stabilised and increased in some segments as occupier demand firmed and employment regained the ground lost in the recession.
Janice Stanton, Senior Managing Director - Capital Markets, U.S., Cushman & Wakefield, said, “The U.S. has abundant debt for prime markets and the CMBS market is reviving dramatically. We are beginning to see some construction lending, so debt constraints are less apparent in the U.S. other than for destabilized assets and in tertiary markets. Values have staged a dramatic recovery and more distressed assets have begun to come to market. Distressed assets accounted for around 20% of Cushman & Wakefield’s pipeline in 2010, and the velocity of transactions has picked up into 2011.”
Investment activity in Latin America rose 63% in 2010, to US$7.9 bn, with a particularly strong increase in the second half of the year taking volumes back to within 20% of their 2007 peaks. Recent economic performance, both in terms of growth and risk, has encouraged more occupier and investor interest in the market. Rental markets are tightening, with prime rents up 3.4%, led by offices. Yields edged down by 28bp though are still around 70bp higher than their levels at the peak of the market in 2007.
The greatest amount of activity was in Brazil which accounted for 77% of all investment in the region – an increase of 240% on 2009 – with São Paulo the most active city market. A number of smaller markets in Central and South America also recorded strong increases in activity, notably Peru and Argentina.
Mordejai Goldenberg, Executive Vice-President, South America, Cushman & Wakefield, said, “Solid economic growth should translate into a further improvement in real estate demand in Latin America, both from occupiers and investors. The region’s favourable demographic outlook and resource-backing will make this a medium-term, not just a short-term, trend. We are seeing North American investors frequently targeting industrial projects, notably in Mexico and Brazil, while European investors are focusing more on retail and hospitality and Asian investors, on the infrastructure market.”
EMEA investment rose nearly 50% in 2010 to US$155 (€120 bn) with Central & Eastern Europe up 60% and the West, by 56%. Investor demand picked up late last year after a slow summer period due to sovereign debt worries. Demand has focused on the most liquid markets, with the UK, Germany, France and Sweden seeing most activity and aggressive bidding on core assets. However, as yields in these markets have fallen, some investors have begun to look at other areas such as Poland, Russia and Turkey.
Michael Rhydderch, Head of EMEA Capital Markets, Cushman & Wakefield, said, “It is now clear that the volume of assets coming to the market is increasing substantially as a result of banks forcing or encouraging action. At the same time the volume of equity in the market is ever greater and debt is, selectively, becoming more affordable and available. We are expecting an active trading environment and continued pressure on prime yields during 2011.”