Cross-border deals are driving commercial real estate activity worldwide.
As investors continue their search for stability and yield, accelerated capital flows into global real estate are set to continue in 2015. Macro- and micro-economic, demographic, and global shifts - coupled with increasing allocations from sovereign wealth funds, pension funds, and foreign high net worth investors - continue to drive this growing momentum.
Within this context, global economic instability and geopolitical unease has led to a flight to quality, with investors favoring the top global markets. Pricing in gateway cities has surpassed previous peak levels, indicating that investors are willing to pay a premium for opportunities in secure core markets. Meanwhile, secondary markets, while recovering, remain below prior peak levels.
Even with compressed capitalization rates and the prospect of rising interest rates, real estate remains attractive to investors on a spread basis given the yield on bonds globally. In fact, some real estate investors suggest that some room remains in the spread to absorb additional compression should interest rates increase moderately in the next year. In primary markets with the lowest cap rates, investors are counting on stronger rent growth to boost property values and total returns, offsetting rising interest rates.
With increased competition and resulting higher pricing for core assets across the globe, however, investors are broadening their investment targets further out on the risk/reward spectrum in search of higher yields. This includes investing in secondary locations as well as value-add assets in primary locations.
Global investment volumes returned to 2007 peak levels by year-end 2013 with $1.3 trillion worth of real estate transactions, and 2014 is on pace to surpass that level. Through the end of November 2014, including major deals in contract, global investment volumes total approximately $1.1 trillion. While U.S. and European investment volumes have returned to approximately 65 percent of their previous peak levels as November 2014, including major deals in contract, Asia-Pacific volumes are nearly double 2007 levels, due in large part to land sales in China, which tapered off during the second half of 2014.
Sources of Capital
Wealth creation is a key driver of increased capital availability in emerging countries such as China, the Middle East, India, and Brazil. Industrialization and commodity based economies have created tremendous wealth at the country level as well as among a new generation of businesses and entrepreneurs. In turn, they are investing in diversified portfolios of assets that will provide an optimum mix of returns and capital preservation. With Asia and the Middle East's development cycle exceeding demand on the heels of the slowing economy, many emerging country investors are turning to offshore/cross-border opportunities in more-stabilized markets.
Cross-border investment is another major driver of the tremendous increase in investment activity worldwide. Given demographic shifts with the aging population in the Americas and Western Europe, investment professionals are seeking durable cash flows to meet their liabilities. While 77 percent of the $1.1 trillion that transacted as of November 2014 stayed within the same country as the investor, the remaining 23 percent, or $255 billion, came from offshore investors. This $255 billion is nearly three times the amount of cross-border investment just five years ago, with the largest regional exporter of capital being the Americas and the largest importer of cross-border capital being EMEA.
Nearly $431 billion capital in 2014 came from Americas investors with 4.0 percent, or $17 billion, going to other countries within the Americas, 17.4 percent ($75 billion) going overseas, and the remaining 79 percent remaining in the country of origin. Within the capital sourced from the Asia-Pacific, 82 percent stayed within its own country, nearly 10 percent went intraregionally and 8.2 percent, or $37 billion, went to either Europe, the Middle East, and Africa or the Americas. In EMEA, intraregional investment is much more common than the other two regions, accounting for nearly 30 percent of all capital. Another 10 percent went to acquiring oversees assets with 62 percent staying within the same country.
Top Markets and Property Types
Where have these cash-flush investors turned? Gateway markets throughout the U.S., Europe, and Asia are the main beneficiaries. In fact, the U.S. ranked as the top global investment region according to the Association of Foreign Investors in Real Estate's latest investor survey. While prices have returned to and even surpassed previous peak levels, the search for stability and yield has led investors within the U.S. to New York, Los Angeles, San Francisco, Boston, and Chicago.
CCIM's Global Footprint Expands
by Emiola Dosunmu
As commercial real estate evolves into an increasingly global industry, the CCIM Institute is expanding its international activities. At year-end 2014, the CCIM Institute had 540 designees and 175 candidates in more than 30 global markets.
Over the past year, approximately 555 international students took CCIM courses held in Canada, Japan, Poland, Russia, and Taiwan. In addition, the CCIM Comprehensive Exam was administered in Poland, South Korea, and Japan, adding a total of 94 new international designees in 2014.
The CCIM Institute is in a unique position to create and enhance a common level of knowledge and understanding of commercial real estate across many countries and cultures. As 2015 gets underway, CCIM will continue efforts to engage international members via the CCIM Connect member social network platform, through increased presence at global tradeshows, and during international networking events at the fall conference in Austin, Texas. In addition, the Institute has created an International Presidential Advisory Group to guide CCIM's global initiatives.
Of the top 20 markets ranked by sales volume, the U.S. captured eight spots with Manhattan as the top international and domestic market, attracting $47.3 billion through November 2014, including deals in contract. While secondary cities, including Dallas, Atlanta, Houston, and Seattle, pushed Washington, D.C., further down on the list, it is only a temporary drop as the current economic malaise has muted demand for D.C.'s real estate. Also of note, the New York City boroughs of Brooklyn and Queens have attracted an increased number of investors priced out of Manhattan. Office has been the favored asset class, attracting $119 billion, or 30 percent of all the capital invested in North America, followed closely by the multifamily sector with $92 billion, or nearly 24 percent. Of all of the cross-border capital, the Americas captured $52 billion or 20 percent.
In Asia, development sites have attracted a large share of capital but that appears to be waning given the concerns about the potential for oversupply. In particular, land sales in China, where investors have been lining up to develop new “cities,” have skewed the data up dramatically. Office is the second favored product in Asia, as investors look to take advantage of the expanding office sector. APAC countries attracted 26.1 percent of cross-border capital invested with nearly $67 billion.
Six of the top 20 markets for global sales volume were located in China. Tokyo made it to the third spot with $32 billion. With $29 billion invested year-to-date, Beijing ranked fourth behind Manhattan, London, and Tokyo. Shanghai came in fifth with $26 billion. Sydney, Australia, was in the eighth spot and Melbourne, Australia, came in in 18th. Nearly half of the capital invested in Australia as of November 2014 targeted office product followed by retail assets (18 percent) and development sites (14 percent).
While EMEA's economy is improving, the property market recovery has lagged other asset classes and other regions on a relative basis. London is the second-ranked target market globally, but it is one of only two European markets on the top 20 list (the other being Paris in the seventh spot with $22 billion). The European office market attracted nearly 43 percent, or $110 billion, of all the investment dollars that went to European assets. Retail attracted nearly 23 percent, or $59 billion, as the European debt crisis left consumers with much uncertainty. And multifamily is gaining traction as an institutional asset class among European Investors.
A Positive Outlook
Looking forward, real estate fundamentals support investor confidence in this asset class. Oxford Econometrics forecasts gross domestic product growth of 3.5 percent in 2015 and increasing thereafter. Demand for goods and services in an accelerating global economy will support a gradual ramping up of economic growth in the Americas, Asia-Pacific and, to a lesser extent, Europe. Key drivers of economic activity in 2015 will include:
- strengthening U.S. performance. The U.S. is expected to lead the expansion in the coming year with 2015 GDP growth projected at roughly 3.3 percent.
- continuing slowdown in China. The Asia-Pacific region will benefit from stronger U.S. demand, but this will be largely offset by slower growth in China. The Chinese economy is shifting slowly to a more internal demand driven model, but high debt burdens are likely to slow consumer spending and business investment growth in 2015. Overall, Asia-Pacific GDP growth is projected at 5.1 percent in 2015, roughly the same as in 2014.
- increasing economic stimulus in Europe. GDP growth in the eurozone is expected to accelerate from 0.8 percent in 2014 to 1.2 percent in 2015. In the U.K., tighter monetary policy will cause growth to slow to a still strong 2.6 percent in 2015, down slightly from 3.0 percent this year.
Looking ahead, investor appetite for real estate across all three regions remains hearty. According to the latest figures from Preqin, $220 billion of “dry powder” is waiting on the sidelines, targeted for real estate investment on a global basis, up 18.3 percent from December 2013.
Where Are the Opportunities?
Approximately $113 billion of funds are targeting North American opportunities. Core cap rates have compressed to such low levels that more investors in search of yield will look beyond gateway cities to secondary markets or repositioning plays in primary markets. As the U.S. debt market continues to offer favorable pricing, mezzanine debt vehicles are looking more attractive. With an accelerating economic recovery, rents are expected to increase, and the U.S. should continue to offer investors both stability and upside.
European investors are raising more funds targeting a broad range of investment strategies from core in Western Europe to value-add and opportunistic plays in Eastern Europe with select investors keeping a watchful eye on Russia. The renewed interest in European assets has resulted in $65 billion of funds looking to be invested, a 44 percent increase over 2013 levels. Europe is poised to benefit from a rebounding economy, which will translate into stronger demand, improving rent growth prospects, and higher net operating incomes.
Investors have scaled back their interest in Asia-targeted funds in the past year. Today, $32 billion is focused on this region. New office supply is concentrated in China, India, and also Australia, leading to slower rent growth and higher vacancies as economic growth is moderating. In Shanghai, companies upgrading to new, more efficient space has dampened demand for outdated buildings lacking adequate infrastructure.
Investor appetite for real estate is increasing across the globe, and barring a black swan event, we will continue to see downward pressure on cap rates. Favorable debt pricing will fuel the fire, as lenders have more confidence in the global market now than they did 12 to 24 months ago. While office product remains the favored investment target, the confluence of an improving global economy is spurring interest in build-to-core development, and technological advances in e-commerce is spurring greater investor interest in the industrial/distribution sector as well as in pockets of retail - a trend that will likely gain visibility in the coming year.
Janice Stanton is senior managing director in the capital markets group, Caroline Rooney is managing director of capital markets and Northern California research, Rob Miller is director of research, and Maria Sicola is executive managing director of research at Cushman & Wakefield. Contact them at www.cushmanwakefield.com.