Debt, inflation and political uncertainty fail to stop markets’ rise
By Shawna Yang
Global property investment markets enjoyed a stronger than expected end last year according to our latest global research. All regions saw robust demand for core well-let assets and investment activity was boosted by investors’ search for inflation-proof incomes. At the same time, however, high inflation hit occupiers’ business margins throughout the year while political uncertainty and turbulence in global finance and debt markets grew in significance as the year went by.
Amid this uncertainty, investors’ risk aversion escalated once more and trading volumes slipped by 7 percent between the first and second halves of the year. There was also a renewed flight towards safety and liquidity. After opening the year strongly, emerging markets were the main victim of the situation, seeing just a 3 percent increase in activity. Mature markets by contrast saw volumes rise by 21 percent and accounted for a 60 percent global market share, up from 56 percent last year.
The setback of emerging markets is likely to prove temporary. While global trading volumes still remain barely two thirds of pre-crisis levels, many emerging markets have already set new highs, with Asian volumes 39 percent up on their 2007 peak and Latin American volumes just surpassing that mark by 0.5 percent.
Prime yields fell further in most areas last year meanwhile, as strong demand and limited supply impacted. The global average fell by 20 basis points to 7.35 percent, with the Americas seeing the greatest compression at 31 basis points, led by the U.S., followed by Asia at 19 basis points and Europe, Middle East and Africa (EMEA) at 8 basis points ― although emerging Europe did perform better with an average fall of 40 basis points in Central and Eastern European versus just 2 basis points in the West.
The market has been very polarized over the past year, with the best stocks seeing demand and price pressures but second tier properties failing to gain traction with buyers or occupiers. That looks likely to continue this year but we do expect higher risk strategies to grow in popularity as the year goes by, helped by the promised flow of distressed assets at last starting to pick-up.
In most major global markets, the fundamentals look robust with development generally limited outside a few Asian cities and good labor market conditions particularly in parts of the Americas and Asia. In fact, buyers should be pretty pleased with what they see because their window of opportunity is actually been stretched open for longer by the stalling economic growth. This, in particular, is happening just at the time that supply levels are increasing globally as banks, corporations and the public sector look ready to increase recapitalisations and distressed asset sales.
Repeated turbulence and volatility in the macro picture dominated sentiment in the global property market last year ― both encouraging investment as people sought stability but also delaying activity as buyers worried over the sustainability of rental incomes. Leading indicators now suggest the global industrial picture is stabilising while Europe is still hesitant, the Americas are growing and Asia never stopped.
This year will again be volatile as politics dominate ― whether that’s the politics of austerity, of the transition to democracy or of elections and leadership change. We are also likely to see inflation as a hero rather than a villain, with lower price growth in most areas raising spending power and allowing monetary policies to stay easy. This will help provide the lift in confidence the market urgently needs.
At the headline level, all regions are following a similar path of improving performance and activity but the scale and timing of changes varies notably, with the Americas ahead for investment growth as well as for rental growth and yield compression. Asia has out-performed Europe in terms of value growth but saw very little increase in investment for the year overall. Indeed, while China is again the largest global investment market, its lead over the U.S. has fallen from 153 percent to 57 percent.
The Asian recovery was maintained in 2011 with good rental growth and further yield compression adding to capital performance. However total investment volumes at $364.4 billion were barely changed on 2010 due to a range of factors including general global uncertainty at the year-end but also a mismatch between buyers and sellers on pricing, natural disasters, particularly those in Japan and Thailand, and measures in some countries to slow the market which have started to impact on land sales.
The Americas gained ground in the global marketplace last year, with its investment market share rising from 19 percent to 25 percent. Volumes hit $182.1 billion ― up by 49 percent on 2010 ― driven by the U.S., Mexico and Chile in particular. The region also out-performed in value terms with yields compressing faster than other regions and higher prime rental growth being recorded at an average of 6.6 percent across the sectors. That’s the fastest annual rate in the region since 2008 and Latin America is the key driver of this.
Investment in EMEA rose 14 percent in 2011 to $180.1 billion ― up 76 percent in Central and Eastern Europe and 8 percent in the West.
While investors were less risk averse earlier in the year, a strong focus on core, stable markets returned by the year-end as the sovereign debt crisis blew up. The indebted fringe of the eurozone saw a 26 percent fall in investment activity over the year while the rest of the eurozone saw volumes rise by 17 percent. It also suffered in pricing terms, with prime yields moving out by an average of 37 basis points while the rest of the eurozone saw a 14 basis point fall.
For Korea, transaction volume slightly increased in 2011 compared to 2010 despite increased economic headwinds. Most of foreign real estate funds were sellers as they needed to divest their investment to realize the investment return in a market where ample domestic demand for offices exist.
For the past decade, prime office buildings were the most preferred asset class due to its stable yield. However, investors are now cautious to buy prime office buildings due to the unprecedented large supply of planned development projects concentrated in the business districts in central Seoul and Yeouido.
Moderate-priced hotels targeting Chinese and Japanese tourists will be an interesting market to explore. Investment opportunities will be available mainly in development projects. Retail real estate is a new type of asset class for domestic investors, but it has been more actively explored by foreign investors who have relevant experiences in their home countries. As Western-style malls have recently been supplied in the market, the success of these malls will also turn more domestic investment interest to the retail sector.
Shawna Yang is the associate director of the capital markets department of Cushman & Wakefield Korea.