Key trends in global real estate

Global trading conditions have been subdued in recent years and are forecast to remain that way. China appears to be emerging from its recent downturn, while developed economies in the Americas and Europe face a host of geopolitical and economic uncertainties.

The real-estate market recovery peaked in 2015, driven by strong demand in major cities in the Asia Pacific region, western Europe and the United States. In 2016, activity slowed and global trading (excluding China land deals and joint ventures) was down 12% overall.

Many global gateway cities now look fully valued and the increasing uncertainty in Europe around Brexit, Italian banking and Greek debt default appears to have subdued interest in parts of that region.

European real-estate trading was down 21% overall, despite the strong performance of some European cities, and was down 38% in the UK.

The improvement in the Chinese economy bodes well for the future of Asian investment and one sign that activity is beginning to pick up again is the substantial rise in big Chinese land deals, up 32% on 2015. However, this is a domestic finance play rather than indicative of future cross-border trading which has been curtailed recently by increasing curbs on capital movements out of China.

Historically low global interest rates have inflated world asset prices, including real estate, since the central banks started quantitative easing after 2008. Now this is coming to an end in most jurisdictions (though it may yet have a way to run in Europe), the expectation, certainly in the US, is that interest rates will start to rise. This spells an end to the downward yield shift in real-estate markets which was driving capital values upward.

We expect that future capital value growth will be driven by rental growth, coupled with stable, low property yields which will trade at a lower margin over bonds as interest rates rise.

This means that the bull market in prime real estate in gateway cities is probably over, but there is no reason to expect price falls if rental growth remains steady.

In these times of geopolitical and economic uncertainty, real estate appears to have taken on a new role as a different and stable, real-world asset with income-producing characteristics. Private wealth and institutions are seeking real-estate investments and are increasingly looking at sectors previously considered ‘fringe’ or ‘alternative’, but recognising their ‘safe haven’, income-producing attributes.

Asia Pacific

• Hong Kong and Singapore markets have seen government cooling measures and high supply

• Appreciation of the yen since mid-2016 makes Japan a powerful force for cross-border acquisitions

• Asian investors continue to favour US city real estate, but are widening their reach

Some property markets in major cities such as Hong Kong and Singapore have seen a combination of government cooling measures and high supply. This may have suppressed rental growth in the short term, but has not always curbed investment activity among those who are positioning themselves strategically with an eye on longer-term growth potential.

Chinese cities, including Shanghai and particularly Shenzhen, have seen high recent demand in all sectors which is likely to result in further cooling measures in 2017 to suppress excess growth resulting from high domestic demand.

With fewer opportunities in major Asian cities, investors have been moving up the risk curve to include redevelopment and refurbishment and to new sectors such as logistics, elderly care and hospitality.

The strong dollar, higher US Fed base rates, and a recovering Chinese economy will likely buoy activity in the region during 2017 and we expect more cross-border activity into Asia Pacific.

We also expect India to become a more important player in the region as its economy is forecast to grow significantly, potentially impacting Singapore and the east of the region most.

The significant appreciation of the yen since mid-2016 makes Japan a more powerful force for cross-border acquisitions in the region, perhaps with the potential to replace some of the capital outflows being restricted from China.

The emphasis here will be on high-quality, long-term income flows rather than fast capital growth. This has the potential to change the nature of investment demand significantly but may help to increase volumes in Australia and emerging, high-yielding markets in the region.

Asian property investors continue to favour real estate in US cities, but are increasingly widening their reach away from fully valued first-tier cities and towards high-performing smaller cities.

Europe

• Demand and rents are up in many centres

• There are opportunities for income plays as well as currency and yield plays in many cities

• High-quality office space and housing remains under-supplied relative to demand

The European markets probably have the greatest potential of most developed world real-estate markets for further growth. Many European cities have seen good economic growth even if the countries in which they sit have not. Demand and rents are consequently up in many centres. Europe still looks good value due to the exchange rate against the US dollar and the fact that yields have generally not moved in so far, or fast, as in many other world centres.

There are still opportunities for income plays as well as currency and yield plays in many European cities. However, a proportion of world investors, especially those who do not value a euro-denominated asset or income, will continue to be discouraged by the economic and political uncertainty in the region.

With strengthening office demand, fuelled by business expansion, development activity has picked up – most notably in Amsterdam, Frankfurt, Berlin, Warsaw and Dublin. Although, currently, in many locations, high-quality office space and housing remains under-supplied relative to demand, and has led to increased rents. This is encouraging both occupiers and investors to look at more peripheral urban areas and alternative types of property.

New industries, particularly in the tech and creative sectors, have fuelled demand for alternative types and locations of workspace. In London, for example, rental levels have, in some cases, equalised between traditional banking and finance space in the City, and alternative workspace on the City fringe. High demand from lots of small businesses on short leases in these locations is proving as reliable as single covenants, and investor demand has meant yields are beginning to equalise, too.

North America

• First-tier urban markets have rebounded but are now slowing

• Second-tier US cities shine as economic growth has buoyed

• North American trading levels remain high

First-tier urban markets in North America, including New York and San Francisco, have rebounded from their 2008 nadir and are now slowing as occupiers are fully accommodated, sub-leasing is a feature of some tech markets and the development pipeline is more fully supplied.

It has been the turn of the second-tier US cities to shine as economic growth has buoyed new industries in cities such as Nashville, Portland, Austin, Raleigh and Durham. High demand from domestic institutions as well as overseas investors has kept North American trading levels high. In 2016, real-estate trading volumes in North America were 5% up on 2015 levels, bucking the trend of other global regions.

A year of further yield shift, rental growth and new development means that more US cities look fully valued and opportunities are more limited. Investors are moving up the risk curve towards ‘alternative’ asset classes. Redevelopment, regeneration, healthcare, elderly care and new logistics operations continue to present opportunities here.