Global propety investment: debt, inflation and political uncertainty fail to stop the market's rise

• Global activity rose 14% in 2011 to US$727bn or US$808bn including multifamily property.
• Commercial property volumes are now 83% up on their 2009 lows.
• North America was the star performer over the last year, with commercial property investment volumes rising 52% versus a 17% increase in EMEA, 9% in Latin America and just 0.5% in Asia Pacific.
• Asia nonetheless remains the largest commercial investment region overall, with a 50% share of global trading last year, again dominated by land sales which accounted for 74% of the total.
• China was the largest commercial market for the third year running but its lead over the USA has fallen.
• New York (US$28.2bn) overtook London (US$27.1bn) and Tokyo (US$18.6bn) to be the largest target for commercial property investment at a city level. Including multifamily property, New York's lead is more notable, with US$35.7bn traded compared to London US$29.2bn in London and US$22.6bn in Tokyo.
• Cross-border investors were more active in all regions, taking an 18% share of the commercial market, up from16% in 2010.
• The Americas saw the biggest growth with a 94% increase in cross-border investor activity versus a 48% increase in domestic activity.

27 February 2012, London: Global property investment markets enjoyed a stronger than expected end to last year according to Cushman & Wakefield's latest research. All regions saw robust demand for core well-let assets and activity was also boosted by investors' search for inflation-proofed incomes. At the same time however, higher 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. As a result of this uncertainty, investors' risk aversion escalated once more and commercial trading volumes slipped by 7% 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 this, seeing just a 3% increase in activity. Mature markets by contrast saw commercial volumes rise by 21% and took a 60% global market share, up from 56% last year.

This however is likely to prove a temporary setback for emerging markets. Indeed, while globally commercial trading volumes are still barely two thirds of pre-crisis levels, many emerging markets have already set new highs, with Asian volumes 39% up on their 2007 peak and Latin American volumes just surpassing that mark (by 0.5%).

Prime yields fell further in most areas last year meanwhile, as strong demand and limited supply impacted. The global commercial property average fell by 20bp to 7.35%, with the Americas seeing the greatest compression at 31bp, led by the USA, followed by Asia at 19bp and EMEA at 8bp - although emerging Europe did perform better, with an average fall of 40bp in Central & Eastern European versus just 2bp in the West.

Glenn Rufrano, President & CEO of Cushman & Wakefield said, "The global investment market has been very polarized over the past year, with the best stock seeing demand and price pressures but second tier property 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 assets from financial institutions at last starting to pick-up."

"In most major global markets, despite a mixed economic outlook, the supply of new space remains in check, with development generally limited outside a few Asian cities. In fact, buyers should see their window of opportunity remaining open for longer due to the stalling in economic growth. Investors should also benefit from a global increase in opportunities to provide debt or equity as recapitalizations pick-up," noted Greg Vorwaller, Global Head of Capital Markets for Cushman & Wakefield.

David Hutchings, Head of European Research, Cushman & Wakefield, said, "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 about the sustainability of rental incomes. Leading indicators now suggest the global industrial picture is stabilising however and while Europe is still hesitant, the Americas are growing and Asia never stopped. What's more while 2012 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 should see inflation as more a hero rather than a villain, with lower price growth raising spending power and allowing monetary policy to stay easy. This will help provide the lift in confidence the market needs."

Regional performance

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 commercial property investment market, its lead over the USA has fallen from 153% to 57%.

Asia Pacific

John Stinson, Head of Asia Pacific Capital Markets, Cushman & Wakefield, said, "2012 will bring a new set of dynamics to the region. In the first half trading volumes will continue to stagnate as cooling measures in the residential market in China dampen land sales. However we do see this balanced by increasing transactions in the commercial sectors in the gateway cities. We also anticipate land sales to pick up in the second half in China if provincial governments accelerate land disposal programmes and reduce debt on construction projects. We continue to see demand increasing from institutional investors from North America and the Netherlands looking to buy in Asia whilst some other Europeans are taking advantage of strong Asian currencies by profit taking and selling. These factors combined with the strong long term fundamentals of much of Asia will fuel increasing transactional activity from Quarter 2. We also continue to see increasingly positive sentiment for investment in India following easing government regulations on FDI and overall strong macro fundamentals. Additionally, with very strong cash balances in the region we will continue to see major Asian pension funds looking to invest in EMEA and accelerate their plans to enter the US market."

The Americas

The Americas gained ground in the global commercial marketplace last year, with its investment market share rising from 19% to 25%. Commercial property volumes hit US$182.1bn (US$235.7bn including multifamily), up 49% on 2010, driven by the USA, 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% across the sectors, the fastest annual rate in the region since 2008, with Latin America the key driver of this.

Greg Vorwaller, Global Head, Capital Markets, Cushman & Wakefield, said "Consistent with what we saw globally, there was a flight to quality in the Americas with investors focusing on best-in-class assets in flagship markets (New York, Washington DC, San Francisco, Boston, Los Angeles, and Chicago). Investor sentiment was mixed for much of 2011 as concern about the Eurozone crisis offset emerging positive news about firming US fundamentals. Ultimately, investors began a modest move up the risk reward spectrum in the latter portion of the year, as evidenced by an uptick in retail activity and increased suburban office activity (in the top metro areas). This cautious optimism is expected to carry into 2012 and will bode well for better quality assets in second market locations, in particular as the CMBS debt markets are revived."

EMEA

EMEA investment rose 17% in 2011 to US$180.1bn (US$198.5bn including multifamily) with Central & Eastern Europe up 76% and the West up by 8%. However while investors were more optimistic and ready to take some risks earlier in the year, a strong focus on core, stable markets returned by the year-end as the sovereign debt crisis escalated. The indebted fringe of the Eurozone (Portugal, Ireland, Italy, Spain and Greece) saw a 26% fall in commercial investment activity over the year while the rest of the Eurozone saw volumes rise by 17%.

Michael Rhydderch, Head of EMEA Capital Markets, Cushman & Wakefield, said, "With much of Europe being perceived as high risk, interest in core markets will remain strong this year. However, while we hear a lot of opinion on the subject of the Eurozone debt crisis, in truth no one yet knows how it will play out and what's more, if 2011 taught us anything it is that some of the biggest challenges of the year may not yet even be known about. As a result, the more successful investors will recognize that risk management requires diversification beyond just core holdings in a small number of low risk markets. A rising tide of investment could therefore steadily spread to new markets later in 2012 - with assets being released by deleveraging banks and businesses a key battle ground for opportunities."