Solid fundamentals are underpinning record levels of private buyer interest in commercial real estate as investors chase assets across the world’s super-cities. Anthony Duggan takes a detailed look at the trend
A robust global economy with synchronised regional growth continues to support the dynamics of the world’s commercial property markets. And investors, both private and institutional, continue to see real estate as an attractive part of their overall investment portfolios.
The benefits include a stable income return, the potential for capital value growth, diversification and, in particular, its status as a relatively high-yielding asset class in a world that is always on the hunt for returns.
A key pillar supporting investor sentiment is the healthy state of occupier markets. This drives demand for floor space, supporting rents and ensuring the security of the underlying income return. Structural shifts, many stimulated by technological change, are also behind trends such as the rapid expansion of logistics operators into distribution space to satisfy the shift to online retail.
Demand for flagship retail units on prime pitches is also strong as retailers look to provide a unique experience to promote their brands, while serviced office providers benefit from companies increasingly embracing new flexible, space-as-a-service offerings.
Moreover, evolving demographics underpin the ongoing institutionalisation of specialist real estate sectors, such as student housing, elderly accommodation and healthcare. In particular, technology firms are growing rapidly and are supporting leasing markets across property sectors.
Amazon, for example, added nearly a quarter of a million employees during 2017, primarily by creating new jobs in its fulfilment centres (driving logistics demand), call centres and in software development and engineering (driving office demand).
As part of this rapid growth, the business is currently finalising plans for a second headquarters location. It has received bids from 238 cities and regions across North America, eager to compete for the 50,000 or so jobs and significant investment the move will bring.
Commercial real estate remained a favoured asset class for global investors during 2017 with transaction volumes robust at US$840 billion and above-average returns recorded across many sectors and markets.
Transaction volumes were supported by a strong year for outbound capital flows. London was a focus for a large proportion of this capital and the city’s office market saw a record number of large deals transacted, driven by a huge wave of private money from overseas chasing big single-asset transactions.
London’s leading position as a global metropolis, its landlord-friendly lease structure, the ability for buyers to secure large lot sizes and the recent weakness of sterling have all outweighed any apprehensions investors may have over potential fallout from the UK’s decision to leave the EU.
Hong Kong also saw a surge in activity as domestic investors bought heavily into office and retail markets. While some investors are baulking at the pricing of Hong Kong assets and are looking to other global super cities, many look to Hong Kong’s tight supply, strong demand and high liquidity as justification for the prices that must be paid to secure exposure to the market.
Conversely, New York saw a fall in the volume of deals activity, with concerns about interest rate rises and changes to fiscal and regulatory policy causing both domestic and international investors to pause their buying strategies. With the underlying real estate and economic drivers in the US remaining positive, we expect this to be a short-term trend and for activity to pick up again in 2018.
Investment in the main European cities has also risen over the course of the past few quarters as clear signs of an economic recovery combine with improving occupier markets. Europe will continue to move up many global private investor’s target list as fundamentals go from strength to strength.
One clear trend over the last few years has been the increasing globalisation of many real estate investment portfolios. As private investors become progressively more exposed to their domestic market, through either business ownership or real estate investments, there is an increasing propensity to look to other core geographies to provide asset diversification.
The top markets targeted are primarily those locations that can provide deep, liquid and transparent real estate markets, so it is unsurprising that the top 10 global cities attract nearly 30% of total annual investment transactions each year.
These “super cities”, such as London and New York, are a compelling prospect for investors looking to invest outside their domestic markets for the first time. Transparency and liquidity, as well as language, law, best-in-class advisers and currency stability, all provide reassurance for those on a new journey.
Given the continued growth in global wealth and allocations to real estate highlighted in this report, it is perhaps unsurprising that private investors continue to be a significant buying force in commercial real estate. Indeed, during 2017, private investors accounted for a third of all purchases; the highest proportion for over 10 years.
Appetite for real estate continues to increase globally as investors grapple with the global low-yield, low-return environment as well as showing signs of shifting allocations away from some fund types such as hedge funds.
In addition, there are worries around perceptions of stretched valuations across many publicly traded bonds, while record-breaking equity markets are making some nervous. As a result, money is moving towards alternative investments, with real estate a prime target for a large proportion of this capital because of its relatively high yield.
Underlying all these drivers are commercial real estate’s fundamentally attractive attributes: a relatively stable return profile with opportunities for improvement; potential for capital-value growth; and the opportunity to diversify from existing assets or geographies.
In particular, real estate provides the ability to fine-tune and control an investment strategy – buyers can tailor purchases in terms of geography, sector and tenant type, as well as lot size, ownership structure, business plan and risk profile. We expect that strong global demand from private investors will continue to build.
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