New York Back on Top

• New York knocks London off the top spot as the city attracting the most commercial property investment in the world, the first time it has held this position since 2007
• The U.S. 'mega city' NYC saw a 165% increase in investment in the year to Q3 2011
• London is the second largest target, but the leader for overseas investors

Investors are flooding into commercial property markets in core global cities, with New York attracting the most investment during the last year, according to a report from global property consultant Cushman & Wakefield. With volatility returning to financial markets and uncertainty about the global economy widespread, investors are continuing their 'flight-to-quality' and are looking for safe opportunities in mature, regulated markets.

The 'Winning in Growth Cities' report identifies the largest and fastest-growing cities in terms of commercial real estate investment, the difference in pricing, as well as demand and activity within individual sectors. The report is based on estimates for the year to Q3 2011.

New York tops a list of U.S. cities which have enjoyed buoyant demand this year, catching up to some extent with earlier recoveries seen in Europe and Asia. London is the second largest target, but the leader for overseas investors. Tokyo saw activity ease as the disruption of the earthquake, tsunami and nuclear disaster disrupted the market. However, unsatisfied demand is strong and the city held on to third place.

Global economic uncertainty and a tightening in policy have led to a slowing in the worldwide recovery in the past few months and have driven investors to focus harder on the prime market. With investors likely to stay risk-averse, many are expected to remain focused on the top-ranked cities in the year ahead and pricing for the best space is likely to increase further in all regions, with investors and occupiers facing a shortage of quality space in the best locations.

The opportunities for the less risk-averse will therefore be split between creating modern space in top cities or finding the next tier of cities and city locations to benefit from supply shortages in the core. Indeed, the evolution of a new inter-dependent hierarchy of cities will create new areas of opportunity for investors of all levels of risk tolerance.

The top 25 cities overall saw investment volumes rise 48% in the year to Q3, marginally ahead of the wider market which saw a 41% gain. As a result, market concentration has increased, with the top 25 commanding a 54% market share compared with 52% in 2010. The office market was the dominant sector, taking a 40% share of the total volume, followed by retail (25%) and industrial (11%).

There was little change in the top 25 ranking with the top nine cities remaining the same as those in last year's ranking, although they have swapped places. 20 of the top 25 cities are the same as last year, with five newcomers: Boston, Atlanta, San Diego, Hamburg and Melbourne. The cities which dropped out of the top 25 are Sydney, Taipei, Kuala Lumpur, Amsterdam and Vancouver. U.S. cities saw the best growth amongst the top 25, with several close to New York in growth terms, notably Chicago, Boston, Atlanta and LA. Elsewhere, Seoul and Melbourne also made strong gains.

The fastest-growing cities
In terms of the fastest-growing cities for commercial real estate investment, the continent with the most locations within the top 25 is the USA. Chicago saw the highest percentage increase in the amount of capital invested. Growth was supported by a number of large CBD office transactions, with a couple surpassing the US$600m mark, as investors look for core opportunities in city centre locations.

Europe has the second largest number of cities in the top 25, with eight. The fastest-growing city in Europe was Frankfurt with the two top deals both in Frankfurt?s CBD totaling US$1.6bn (Deutsche Bank Twin Towers and OpernTurm). In Asia Pacific, Seoul was the best placed city, ranking ninth.

Overseas investors
Although New York is the top city for real estate investment globally across all investors, London remains the top choice for overseas investors, followed by Paris and then New York. Singapore and Beijing take fourth and fifth ranking. Of the top 25 cities for overseas investors, only 12 are shared with the overall top 25 ranking, with overseas investors much more likely to favour Asian or European cities rather than American ones. New York is the only U.S. city in the top 25 cities for overseas investors.

Sector trends
Across the top 25 cities as a whole, North America dominates in all sectors save for the purchase of development sites. The top 25 cities in this sector are all in Asia. 22 of which are within mainland China, underlying what has been a very hot investment market in recent years, albeit one that is now slowing.

Office investment
London is the top city for office property investment globally, despite a marginal fall of 1.9% last year. New York retained its second place but has significantly closed the gap following an increase of 189% to US$14.1 billion. As recovery re-emerges, more investors will seek out growth not just security, as evidenced by the steady rise of Asia as a target. Five years ago, three of the world?s top 20 markets were in Asia. This year, it rose to eight, compared with five in Europe and seven in North America.

Retail investment
Hong Kong attracted the most investment in the retail sector, boosted by the US$2.4bn sale of Festival Walk. The Rhine-Ruhr metropolitan area in Germany and New York follow in second and third position, with Manchester and London in fourth and fifth. Shopping centres were the best performing sub sector with investors eyeing asset management angles. Economic fundamentals in Asia Pacific and South America are expected to remain good. Coupled with the limited availability of quality retail space in many cities and strong demand at the luxury end of the market, this is likely to support further growth.

Industrial investment
In the industrial sector, Singapore experienced the greatest amount of investment volumes and rose six places in the global ranking to displace Los Angeles as the top destination. While the developed nations are losing ground to manufacturing locations in more emerging markets, this is yet to translate into real estate activity in Asia Pacific, with North American cities dominating activity. However, with more dynamic economic growth over the short/ medium term stemming from the Asia Pacific region, increased levels of activity are anticipated.

Market pricing
The ranking of cities for investment underscores the risk aversion of most investors at present and the flight to quality across all markets. 10 of the largest top 25 investment cities are also among the 25 lowest yielding cities globally. The average yield of the top 25 cities as at June was 6.3%, below the global average of 7.4% suggesting that investors are not ready to embrace markets solely because they offer a high yield.

Whilst increased global demand and improved market transparency are slowly leading to more uniform pricing of top prime markets globally, the pricing for riskier or second tier markets is more extreme and arguably more locally driven. The gap between top and second tier assets and locations has widened in most areas and the marked range in yields in most regions will not reduce until occupier markets are firmer and risk tolerances increase.

The Outlook for 2012
Economic and real estate trends will remain uncertain for some time and vary enormously market by market. While the medium-term story is still all about the growth of emerging markets, in the short term, a lack of growth drivers globally means investors are likely to remain keener to find stability and income than rather to pursue growth.

As a relatively high yielding asset, real estate will remain in demand and the pressure will be there for investment volumes to grow, if the supply and finance exist. In the main, banks appear likely to aid with the supply side of this equation, albeit the amount of prime property they control is often limited. However, this applies less on the demand side. Finance availability has improved for lending on quality assets but is still somewhat restricted and indeed uncertain, as banks await new rules and regulations in Europe or America amongst other locations, and as government policy on lending is tightened in China.

Demand for quality assets comes at a time when many owners are unwilling to sell as they see few reinvestment opportunities. This suggests further price increases for the best cities and also pressure for new development in some, which must be watched closely as an opportunity and a threat, particularly in Asia where supply can pick up quickly. In the USA, the increased price of prime property is resulting in a spreading of demand away from the gateway cities which have dominated the market recovery. A similar picture is seen in parts of Europe, although recent events have arrested the pace at which some investors will look beyond the core.

Greg Vorwaller, Global Head, Capital Markets, Cushman & Wakefield, said, "The global economic and geopolitical headwinds we face are resulting in investor behaviour that reinforces the apparent stability offered by core investments in the top five 'mega' cities. However, for those global asset allocators seeking greater geographic diversity and better risk-adjusted returns, other emerging centres for investment may deserve attention. These may include many developing business centres in Asia Pacific."

David Hutchings, Head of the European Research Group, Cushman & Wakefield, said, "A whole range of factors above and beyond size and wealth go to make cities a success, ranging from classic business location priorities through to softer factors such as image and 'liveability'.  Advancing technology may give us the freedom to work anywhere, but this is only serving to reshape and sharpen the role of cities as a melting pot of people and ideas, with the winners those that have the densest network of skills, knowledge and learning but also the richest backdrop of culture, innovation and quality of life.

"The research highlights the way the cityscape is evolving, with different centres competing with other but also co-operating and in many cases specialising to give themselves an edge. If investors only focus on the biggest cities therefore, they may actually be missing out on opportunities to get better diversification in their portfolio by targeting a range of markets, some world cities and some specialised hubs. In fact the increasing range of cities competing and cooperating on the world stage is an opportunity for investors to refine their thinking on what is a prime, and what is a second tier, city and expand their effective investment universe at the same time."

Michael Rhydderch, Head of EMEA Capital Markets, Cushman & Wakefield, said, "A risk-averse buyer can find a lot to be scared of in today's market but if an investor wants to invest, then it is relative rather than absolute risk they have to look at. With interest rates at the levels they are, property is going to remain attractive. On average, prime property globally is showing more than a 225 basis point premium to 10 year government bond yields. The days when a government bond could be considered 'risk free' may be long gone, but a premium of this size still deserves attention. 

"In the short term investors are likely to stay close to prime core assets, but with supply scarce and prices for the best stock high, we will see more adventurous buying plans emerging next year. However, even if the gap between prime and second tier cities does close next year, the gap between prime and secondary grade property will if anything move out further."

John Stinson, Head of Asia Pacific Capital Markets, Cushman & Wakefield, commented: "The overall drivers for property investment, particularly in uncertain times, is growth. The drivers of growth within cities are fundamentally changing. Traditionally, these drivers were polarized between economic size or wealth within developed economies and population, size or growth within emerging economies. This divide is rapidly changing and in no place more quickly than Asia, where either ranking places some of the large gateway cities in top global city tiers.

"In fact just five years ago only three of the world's top markets were in Asia, this year it rose to eight, one more than Europe and just short of North America with 10 cities in the Top 25. In fact by any benchmark the cities in Asia Pacific are beginning to dominate. Reviewing investment activity up to Q3 2011, Hong Kong was the no. 1 global retail investment market, Singapore was the no.1 global industrial investment market and the entire top 25 global destinations for development sites investment was held by cities in the Asia region. With continuing volatility in global markets the appetite for growth will continue to ensure the Asia Pacific region remains a pre-eminent market for global property investors throughout 2012 and beyond."