|
Global investment volumes steady,
but regional differences emerge
The momentum that has been building in the global real estate markets appears to have entered a holding phase over the past few weeks. Investor sentiment is moderating in markets, like China and the UK, which have seen the strongest rebound in prices over the past year. The magnitude of yield compression is slowing in many markets, but nonetheless there are pockets of strong demand for core product. A number of global office hubs, such as Shanghai, Hong Kong, London, Paris, Moscow, New York and Washington DC have continued to show solid capital value appreciation on prime assets during the quarter.
Please use tabs below to view supporting charts.
Preliminary figures indicate that direct commercial real estate investment volumes across the globe stood at US$66 billion in Q2 2010. While this level is similar to the first quarter, it nearly doubles the level of the market bottom one year ago. Volumes are still well below pre-credit crisis levels, and since Q3 2009 the incremental growth has been relatively modest. Significant regional differences have emerged in Q2:
Asia Pacific has seen a 34% decline on Q1 investment volumes, with notable falls registered in Japan, China and Australia, yet increases in both Hong Kong and Taiwan. Nonetheless, compared to the same quarter last year, volumes are up by around 21% and, with a number of large transactions pending and market fundamentals improving, a renewed uptick in investor activity is expected in during H2.
Europe has seen a modest 15% increase in volumes on Q1, and is 80% up on a year ago (in euro terms). In US dollar terms, volumes are up 5% and 70% respectively. The UK has continued to dominate activity, accounting for over 40% of European investment volumes, and central London retains its position as the world’s most active market, with volumes exceeding US$5 billion in Q2.
The Americas have seen a sharp uplift in volumes in Q2, but from a low base. Transactions have risen by 54% on Q1 and are more than four-times higher than in Q2 2009, and, in contrast to other regions, yield compression in Q2 accelerated over the pace in Q1. Globally, the strongest growth has been recorded in Brazil, where volumes in Q2 have tripled from the previous quarter, and are now at record levels. Canada has seen volumes more than double on the quarter.
Volumes down in China, Japan and Australia
Within Asia Pacific, China has recorded the sharpest falls in transactions during the quarter, mainly due to the withdrawal of private investors and the absence of portfolio deals that were a feature of Q1. However, cross-border interest remains strong for quality assets, and in Shanghai and Beijing there have been acquisitions by Hong Kong-listed Hang Seng Bank and Beijing Huarong Investment Company respectively. Although investment transactions in Japan are down on the previous quarter, there have still been some notable deals in Q2 by Mori Trust Sogo REIT Inc and CLSA. Investment volumes in Australia are also down, but the market remains buoyant, with office assets at the top end of the price spectrum remaining an attractive proposition for international investors. Private companies are still active for assets below A$50 million (US$43 million). Q2 has also seen robust demand for shopping centres, with acquisitions by a Lend Lease-led joint venture in both Perth and Melbourne.
Further capital appreciation in Asia Pacific
Despite falling volumes, continued economic expansion and the bottoming out of rents have supported capital values across the Asia Pacific region in Q2, resulting in stabilised or compressing yields in most markets (by up to 40 basis points). Fuelled mainly by domestic investor demand, most of the leading markets have seen a further increase in capital values in Q2, with Guangzhou posting the largest quarterly increase (+9.6%), followed by Shanghai (+7.9%) and Hong Kong (+7.4%). However the scale of compression has reduced as rental growth catches up with that of capital values. Similarly, yield spreads above the cost of debt have continued to narrow since Q4 2009 as countries such as India, Australia, Malaysia and Taiwan have hiked their benchmark interest rates.
Deal velocity up 15% in Europe
Direct commercial real estate investment in Europe in Q2 totalled €23 billion (US$29 billion), representing a 15% increase on Q1 and 80% up on the corresponding period in 2009 (in euro terms). Aside from the UK, we have seen an increasing focus on the main continental European markets – France, Germany and the Nordics. Poland is also receiving significant investor attention, due to its relatively robust economy and lightly discounted prices, although there are very few deals at present. One of the major trends emerging in Europe, particularly for prime end product, is for equity players to team up with REITs; a recent example is Allianz acquiring a 75% stake in a Hammerson shopping centre in Paris.
French retail grabbing attention
Transaction volumes in the retail sector at €10.6 billion (US$13.5 billion) for H1 2010, are more than double the volume recorded in the same period in 2009. Investors remain focused on the three largest European markets - the UK, France and Germany. The French market has seen significant retail investment activity in Q2, recording the second largest volume with over €800 million (US$1 billion) traded. Investors are capitalising on recent rare opportunities to secure well-leased, high-quality product in one of Europe’s most sought-after retail markets with, in particular, a number of the major property owners in France looking to expand their operations domestically as well as across Europe. As a result, vendors have capitalised on the strength of investor demand to achieve strong pricing levels.
European investor sentiment moderates
Investor sentiment in Europe remains positive although it has tailed off slightly in the last few weeks (particularly in the UK). This is due to perceptions that prices have increased too sharply against a backdrop of a weak economic outlook, sovereign risk contagion, spending cuts and lack of jobs growth. Investors are certainly more selective and the consequent thinning out of bidders is providing some stability to pricing levels. Furthermore, there is growing concern about where performance will come from in the absence of further inward yield shift and weak occupational markets.
The breadth of prime yield compression has slowed significantly in Q2 with compression registered in Moscow, Paris, and the main Spanish and German office markets. Prime yields in London are now stabilising – the first market to show stable yields in this cycle. Nonetheless London prime offices still recorded a 13.3% capital value growth in Q2 on the back of prime rental growth, along with Paris (+12.2%) and Moscow (+5%).
Brazil leads the 54% volume uplift in the Americas
During Q2, transaction volumes in the Americas region (excluding apartment and land/development deals), reached US$21.4 billion, an increase of 54% on the quarter, and more than quadruple the total volume in Q2 2009, when the investment market was at its nadir. For H1 2010, overall transaction volumes in the Americas totalled US$35 billion, compared to just US$15 billion during the same period in 2009. Transaction activity in Canada has more than doubled from Q1 to reach US$3.5 billion, while in Brazil, volumes nearly tripled to approximately US$1.6 billion. Domestic investors were overwhelmingly the dominant buyers in Brazil, with Brazilian developer BR Properties acquiring properties in Sao Paulo and Rio de Janeiro totalling nearly US$400 million.
Yield compression for prime assets in the US
The second quarter has witnessed acceleration in yield compression in the primary North American office markets, where investor appetite is strong for the highly-constrained supply of high-quality, well-occupied office product in top-tier markets. Investor demand also continues to be strong for distressed assets in the US, although a lack of product supply is very evident in this segment. By contrast, demand remains substantially weaker for properties of average or lesser quality in the vast majority of US markets, where pricing has yet to stabilise.
|
|