Global investment in commercial real estate hits record $930BN

1 Feb, 2008, London

• 17 per cent fall predicted in 2008

Global investment in commercial real estate (excluding apartments) totalled a record $930bn (€665bn) in 2007, an increase of 29 per cent on 2006 according to the latest report from global real estate consultant Cushman & Wakefield – International Investment Atlas 2008. Trading volumes slowed by 12.5 per cent between the first and second halves of the year, however, and the global total for 2008 is now expected to reach around $770bn, a fall of 17 per cent.

Emerging markets were the strongest performers with China appearing in the top ten global destinations for investment by volume with around $15bn invested, and Brazil just behind in 11^th place with around $14bn invested. Ten of the top 15 fastest growing markets were emerging markets including European hotspots such as Ukraine, Turkey, Bulgaria and Hungary.

The strongest regional growth was in the Americas with investment in Latin America increasing 87 per cent and North America 49 per cent. Asia also enjoyed a strong year with investment increasing 27 per cent to reach $145bn. Investment in Europe also rose albeit by a more modest 10 per cent to stand at $349bn. The top five global investment targets remain the USA, UK, Germany, France and Japan.

Cushman & Wakefield’s predicted total of $770bn for 2008 would still represent nearly three times the level of trading seen only five years ago; evidence that commercial real estate should remain an established global asset class. This is reflected in the proportion of overseas investors who drove growth in 2007. Although domestic investors increased their stake by 19 per cent, foreign buying activity increased 54 per cent and now accounts for 34 per cent of global volumes, up from 29 per cent in 2006. The role of foreign buyers also increased in the second half of the year with market share rising from 31 per cent in the first half of the year to 38 per cent in the second.

David Hutchings, head of research, Cushman & Wakefield EMEA, said: “Foreign investors are expected to be increasingly important in all global markets in 2008 as they seek out higher returns and better diversification to reduce risk. The sovereign wealth funds look set to be particularly active as they take advantage of a change in pricing and a shift in buying power favouring well-financed, long term institutional players.

“Greater activity from German funds is also likely on a global scale and a growing dimension for cross border investment is likely to come from Asia. Not only can we expect to see more investment from China and India as they diversify and recycle the growing surpluses being created by their buoyant economies, but we may also see renewed Japanese buying, particularly if REIT regulations are relaxed to encourage off-shore investment.”

North America

North America’s 49 per cent increase in activity took trading volumes to $416bn with the 50 per cent increase in the USA driving the figure. Early trading benefited from the privatised REIT portfolios and subsequent flipping but, since the autumn, the impact of the credit crunch has destabilised the market with higher spreads on debt, tighter underwriting conditions and a stalling CMBS market.

Chris Lowery, global head of capital markets, Cushman & Wakefield Inc, said: “There remains no real shortage of equity capital and many overseas investors are coming into the market to take advantage of buying opportunities offering long term value. The fundamentals of the market for the most part remain sound, notably for the office sector where vacancies remain low and construction under control, and if the debt markets recover, we can expect to see prime real estate perform well, particularly in the second half of this year.”

Europe

After a 36 per cent increase in 2007, foreign investors are now the dominant player in Europe accounting for 55 per cent of the $349bn market. The major markets of Germany and France both posted gains of around 30 per cent although the UK, Europe’s biggest market, was the principal victim of the credit crunch in the region and saw a 13 per cent fall in activity. Many more investors began targeting Central & Eastern Europe where there was a 47 per cent increase in activity. Markets such as Turkey, Russia and Ukraine offer higher potential returns but with higher risk and all are expected to see a further marked increase in investment in 2008.

Michael Rhydderch, head of cross border investment, Cushman & Wakefield EMEA said: “There is now a more rigorous appraisal of risk across European markets especially for secondary assets. Some markets have been affected by the credit crunch less than others, however, with some of the Eastern European markets in particular remaining highly attractive. Investment volumes in these markets should actually increase in 2008. In some of the more established Western European markets prices are adjusting quickly to the new reality. We believe that capital is starting to flow back into those markets most affected by the credit crunch as prices begin to appear comparatively attractive. Countries like the UK, which have seen values fall significantly, could in fact start to stage a rally in the second half of the year. Secondary stock, however, will remain weak across most sectors and jurisdictions unless there is a significant improvement in debt markets.”

Asia

Trading volumes in Asia totalled $145bn, an increase of 27 per cent. Mature markets such as Japan and Australia dominated but 80 per cent growth in emerging markets (notably China and Korea) has been the most spectacular. Foreign investors are a key component of this growth with foreign investment rising 87 per cent in 2007 to nearly $73bn. Investment volumes are expected to increase further in 2008 aided by strong foreign demand and the ongoing growth of the REIT market across the region.

Michael Thompson, CEO Asia Pacific, Cushman & Wakefield, said: ““We anticipate further strong interest in Asia’s emerging markets and a spreading of interest to include new targets such as Vietnam. Whilst American and European funds will be a key part of this, we’re expecting much more inter-regional investment, with new players from Japan, China and India likely to join the already established Australian players, competing across Asia Pacific.”

Real estate globally can not be viewed in a single light: the credit crunch may be high in most people’s minds but an economic slowdown is a more important potential threat in many areas.

Emerging markets have been going from strength to strength as investors seek stronger returns and diversification – and this will continue in the face of current uncertainty in many mature economies.

New markets continue to be added to the target list of investors – be that new country targets in established regions such as Ukraine or Vietnam – or new regions, with South and Central American economies looking highly promising for near term gains and the more established markets in the Middle East and Africa also attracting more capital.

The main split in the market going forward is not, however, likely to be by geography, it will be by quality. Good assets offering security or added value potential are in demand and in those areas seeing a re-pricing of property – such as the UK and the USA – they will only look more attractive going forward as interest rates are cut.

Hence while trading volumes this year can not be expected to match those of the recent past due to the absence of those players reliant on abundant debt, strong demand is nonetheless likely. Equity is not in short supply and provided a greater sense of economic certainty returns over the coming months, we anticipate that for prime real estate, emerging markets will escape the current slowdown relatively unscathed while more affected mature markets will be in recovery mode by the second half of this year.

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