Global real estate investment softens

Global Market Perspective, August 2019

The second quarter of 2019 saw investment in global real estate continue to cool as year-on-year transaction activity dipped by 9% to US$174 billion. This brings H1 2019 investment volumes to US$341 billion, 9% lower than the same period in 2018 but in line with expectations for the year.

Despite slowing economic momentum and geopolitical tensions, the consequent monetary loosening policies by several central banks are flowing through to commercial real estate markets. Risk-free rates continue to plummet, lowering financing costs and widening spreads to property at a time when investors are hungrier than ever for yield. Although prices are elevated across many markets, fundamentals remain sound, underwriting is disciplined, and debt levels are generally modest. Nevertheless, investors are still cautious and selective and we expect global investment in commercial real estate to soften by about 5%-10% to roughly US$730 billion for the full year. With Asia Pacific continuing to outperform, the global decline will be driven by weakness in EMEA and the Americas, particularly in the office and retail sectors.

Markets performing as anticipated in the Americas

Investment activity in the Americas sustained its relatively muted start to the year as second quarter volumes edged down by 3% to US$76 billion. Volumes for the first half stand at US$145 billion, 8% lower than the total from the same period in 2018. This decline is due mainly to a deceleration in the region's biggest market, the U.S., where transaction activity over the first six months of the year is 9% down on last year. First-half investment levels were also weaker in Brazil and Mexico.

EMEA continues to show signs of fatigue

The sluggish performance seen in the first quarter carried over into the second quarter as investment in EMEA fell by 20% year-on-year to US$57 billion. This brings first-half activity to US$109 billion, 19% lower than the total from the same period last year. Brexit uncertainty in the region's largest investment market and ongoing structural change in the retail sector are major factors behind the slowdown in activity. Once again, core markets are driving the decline with first-half transactions contracting by double digits in the UK (-36%), Germany (-22%) and France (-12%).

Asia Pacific sees its best first-half performance ever

The second quarter saw investment volumes in Asia Pacific dip by 2% to US$41 billion. Combined with the robust activity seen at the beginning of the year, this has boosted volumes for the first six months of the year to US$86 billion, the best first-half performance on record. This growth has been largely underpinned by vigorous activity in China (up 97% year-on-year). Similarly, Singapore has rebounded from a relatively weak 2018 as it posted its best-ever half-year volume.

Office capital values still outperforming rents

Prime office capital value growth accelerated slightly during the second quarter to an annualised rate of 6.4% (across 30 major office markets), compared to 5.4% for the full-year 2018. Even so, the underlying trend is still downwards, with capital growth forecast to slow to around 4% by the end of the year.

Amsterdam (+28% year-on-year) and Boston (+23.5%) have been the stand-out global performers over the past year, but Paris (+16.1%) is catching up having recorded the strongest quarterly performance in capital values of the major global office markets during the second quarter.