Global Investment outlook 2015
GLOBAL INVESTMENT OUTLOOK 2015
1st February 2015
Our cover story looks back at last year’s investment trends and analyses the prospects for investors in global real estate markets in 2015. As emerging markets increasingly move onto investors’ radars, the last part of our report focuses specifically on opportunities in the MENA region.
What does 2015 hold for global real estate investors? This is the question we ask ourselves at the start of the year, while looking back at the trends that shaped real estate markets in 2014. Overall, despite geopolitical and economic uncertainty, the global real estate investment landscape remains very active.
Looking back at global investment trends that took shape over the course of last year, Bruno Berretta, Senior Research Analyst, EMEA, Colliers International said that the U.S. and Europe in particular have attracted a great deal of attention from global investors in 2014, which is expected to continue in 2015.
“Europe in particular remains the region with the highest penetration of global capital (31% vs. less than 10% in North America and Asia Pacific in Q1-Q3 2014 – Source: RCA). This is partly driven by the favourable property cycle in Europe. The safe haven markets of London, Paris and Germany have continued to capture a high proportion of that capital, but we have also seen more investors looking to capitalise on the recovery in Europe’s periphery,” Berretta commented.
Looking at North America, the Colliers analyst said that the U.S. has seen a rise in volumes and interest, driven by the strength of the economy and liquidity of the market, despite tax issues such as FIRPTA, which have deterred some overseas investors (an issue which the government is said to be looking at addressing).
Richard Barkham, Global Chief Economist at CBRE, pointed out that 2014 has seen an enormous interest in the U.S. commercial real estate market “as investors increasingly bought into the idea that the U.S. was the main growth story in the global economy.”
CBRE observed that overseas capital moved beyond the traditional gateway markets into the better second tier cities. “We expect interest in third tier markets in the U.S. to strengthen over 2015. There is a rumour in the market place that FIRPTA (the withholding tax) may be repealed for certain categories or real estate in the U.S. The legislative issues are complex and unpredictable, but alongside good growth and low interest rates it keeps investors focussed on U.S. real estate. It is possible that the rise in the value of the dollar will lead to a marginal re-pricing of trophy assets in U.S. gateway cities,” Barkham explained.
According to the CBRE expert, despite increasingly negative stories about the state of the economy, investors were also interested in EMEA real estate. “The gap between yields and bond rates in the region is an obvious incentive to investors. Going forward the decline in the value of the euro, an effective fall in the value of Eurozone real estate, should stimulate further investor interest.”
CBRE noticed that investor interest was concentrated in the robust economies of the UK and Germany with increasing focus on the recovery markets of Spain, Ireland, Netherlands and Portugal. “Europe, where government spending tends to be a higher share of GDP than in Asia or the U.S. and land use planning more restrictive, often provides attractive assets despite low overall growth in the economy,” Barkham said.
Asia Pacific has also seen an increase in capital invested in real estate, according to Barkham. According to CBRE, strong activity was recorded in Japan, stimulated by ‘Abenomics’ and the decline in the value of the yen; in South Korea due to the dynamism of its economy; and in Australia stimulated to a weaker currency and reviving growth.
Colliers’ Berretta added that in some Asian markets, volumes have suffered because of the impact of cooling-off measures and liquidity issues, but 2015 is expected to see an increase in activity.
Commercial sector favoured
In which asset classes are investors likely to place their money in 2015? On a global level, despite economic uncertainty, a large amount of capital has been chasing commercial real estate in 2014 – a trend which is likely to continue throughout 2015, experts say.
“In Europe, and globally, we’re seeing unprecedented levels of capital chasing real estate investments. In some markets this means that investment volumes have returned to, if not exceeded, pre-crisis levels,” commented Colliers’ Bruno Berretta.
For 2015, Colliers expect healthy levels of activity to continue, as a result of a “combination of ultra-low interest rates in the U.S. and Europe, record fundraising levels within the private equity industry, regulatory changes (e.g. relaxation of regulation in China allowing insurance companies to invest in real estate abroad) and the appeal of real estate as an alternative and higher-yielding asset class to diversify investment portfolios.”
For example, Berretta said the Japanese Government Pension Investment Fund is understood to be looking to invest in real estate for the first time in search for higher returns in response to ageing population and the growing burden of public sector pensions.
Barkham from CBRE also expects investment in real estate to continue to increase, as long as the major economic blocks avoid recession. “With interest rates likely to stay low, the search for yield is very definitely still on. If China and the Eurozone post weaker growth than expected, there could be a fall in sentiment that would damage investment volumes. This is possible, but we don’t at this stage expect it to happen. If only one region, say China or the Eurozone, posts weaker growth then, oddly, it is quite good for investment flows. Interest rates will not move up so sharply and investors will either shift their allocations to the growth regions or move into the recessionary in bargain hunting mode,” Barkham explained.
Mature vs. EMERGING MARKETS
When it comes to emerging markets, experts commonly say that a smart investment is a careful balancing act between risk and opportunity.
As economic growth in many mature markets is still slow, emerging markets are said to present some of the most significant opportunities for investors and occupiers. Does this mean more global investors will turn to emerging markets in 2015, and, are today’s investors willing to take on a higher risk?
Colliers’ Berretta thinks yes. “In 2014, we’ve clearly seen investors moving up the risk curve, and the international search for yields will continue to drive investors also in 2015.
“Globally, the lack of stock, weight of capital and pricing will continue to prompt many investors to consider assets/locations with higher risk profile, in developed but also emerging economies,” he said.
According to the Colliers International Global Investor Sentiment report 2015, emerging economies will continue to attract real estate investment – “28% and 24% of respondents from the U.S. and Western Europe (ex. UK) had plans to invest in Asia in the next 12 months at the time this survey was carried out,” Berretta said.
“In the occupier arena, there is continuing interest from multinationals looking to expand their operations, and new entrants. One of the external risks to emerging markets lies in the widely anticipated change in the U.S. monetary policy – with a first increase in U.S. base rates expected by the middle of 2015. As was the case in the past, this has the potential to divert some investment flows from riskier markets to more secure, liquid (and slightly better remunerated) assets in the U.S.,” Berretta explained.
CBRE’s Barkham added that while today’s investors are willing to look at emerging markets to gain out-performance, the entry price needs to be right. “One problem with emerging markets over the last seven years, China being a case in point, is that they have been very expensive,” he said. “However, emerging markets are now at a turning point. China’s growth, which had driven a good deal of emerging market activity, has slowed sharply and commodity prices have fallen. Simultaneously this creates some doubts about future economic growth but it also weakens pricing,” Barkham explained.
Emerging market opportunities
So, where do the opportunities in emerging markets lie?
Colliers’ Berretta tips China, Hong Kong, Singapore and Japan as the hottest emerging markets, even if Japan technically doesn’t qualify as emerging economy. “China presents more opportunities than challenges amid the current economic slowdown. Hong Kong continues to benefit from resilient private consumption levels and the increasing number of inbound visitors. In Singapore, we see growing demand from occupiers from professional services, information and communications sector. Japan is attracting interest also thanks to the recent depreciation of the Japanese Yen, effectively giving overseas buyers a discount. Real estate in India is also getting popular since there are a lot of pro-business initiatives by the new government such as the introduction of Real Estate Investment Trusts (REITs) by 2015,” Berretta said.
According to CBRE’s Barkham, now could be a smart time to place capital in emerging markets with maybe a five or seven year hold period. He advises to watch India for growth, China for pricing, and Africa for long term potential.
In light of rising opportunities in the Middle East and North Africa region, we have dedicated a separate analysis to the MENA markets.
Asset classes to watch
According to CBRE, there has been a lot of emphasis on the logistics sector in emerging markets over the last few years, as indeed there has been in developed markets. Barkham said that changes in the pattern of trade, the global pattern of consumption and consumer shopping habits, suggest that the logistics sector is likely to be an area of continued interest.
“Offices in China are interesting, perhaps not for 2015 only, but beyond. As the government reforms the economy away from investment and into consumption, demand for service sector products will expand substantially. In this respect China is a bit like the UK and the U.S. in the 1970s. Expect strong growth in the services sector,” Barkham commented.
Colliers’ Berretta advised to keep an eye on prime offices in tier-one cities and quality logistics facilities in tier-2 cities in China. In Hong Kong, the Colliers expert tips decentralised Grade-A offices and smaller in-town shopping centres as attractive while in Singapore, prime offices in CBD locations and decentralised shopping malls are assets to watch. Finally, in Japan, prime offices in Greater Tokyo and other metropolitan areas such as Osaka and Nagoya are promising this year, said Berretta.
In response to the question of what constitute the major challenges global real estate markets will face in 2015, CBRE’s Richard Barkham commented:
“There are three things that destabilise real estate markets, and send investors packing: falling GDP (recession), interest rates above their long run trend and too much construction. With a bit of luck and some more policy stimulus in China and the Eurozone, these are not issues for 2015. We think that interest rates in the U.S., which is ahead of the pack, will not peak until 2018. The fall in oil prices is a major boost to the economies of the OECD. In due course, say 2016, we will have to take a close look at the supply side in the U.S. as construction seems to be picking up there.”
Colliers’ Berretta added that although the state of the European economy – GDP growth and the threat of deflation – will be closely monitored, even another recession is unlikely to dent volumes and investor appetite significantly, and core markets with stronger fundamentals will be relatively insulated anyway.
“Global and regional investors will also keep an eye on economic developments in China, particularly the risks of a burst of the property bubble and the sharp rise of credit (and defaults) and the impact on the wider banking system and property.
“Investors will also remain mindful of geopolitical instability, particularly in Eastern Europe and the Middle East. This could lead to further displacement of capital. The Russia/Ukraine situation may induce growth in capital flows from these countries into other CEE and EMEA-wide locations.”
Berretta added that the lack of suitable product, particularly at the prime end of the market, is set to slow volumes growth in some markets, saying that investors with greater risk tolerance will have less difficulties getting around this problem and increasing their real estate exposure.
Lastly, Berretta pointed out that the normalisation of the monetary policy in the U.S., and later on in the UK, is likely to have some effect on investors’ behaviors and pricing. “There is a risk that the first interest rate rise for years may lead to overreaction from businesses and investors as they consider the broader implications of the removal of economic stimulus. While pricing of prime assets is likely to hold better due to the weight of capital, values for secondary properties could come under pressure, especially if the economy is not supportive enough. A faster than expected rise in bond yields could also reduce the attraction of risk-adjusted returns on real estate, but overall we believe that the more liquid commercial property markets should weather well a gradual increase in interest rates,” the Colliers expert concluded.