Global Market Perspective Q1 2017
2016 investment transaction volumes have come in ahead of our initial expectations at US$661 billion, 6% below 2015 which was the third most active year on record. The final quarter of the year was highlighted by additional political turbulence in the U.S. on the heels of the Brexit vote in the UK. However, despite these distractions, transactional volumes of US$206 billion are only 2% below the final quarter of 2015.
Despite 10-year bond yield increase, investors continue to value real estate
The most noticeable impact on the real estate investment environment of Donald Trump’s election has been the significant rise in the U.S. 10-year bond yield. Given the yield compression we have witnessed across core real estate markets in the U.S. in recent years, this rapid adjustment could well have seen a pullback by investors. However, in the final quarter of the year real estate transactional volumes of US$78 billion were only 8% below the same quarter of 2015, while the full-year activity of US$285 billion was down 9% on 2015. All markets in the Americas were behind 2015’s pace in 2016 with Canada the best performer, showing just a 5% decline.
Brexit already a reality as Germany takes top spot for second half of 2016
The European investment landscape has seen many seismic shifts over the last few years, with ever increasing flows of global capital and a transformation in debt markets. However, 2016 may well be remembered as providing one of the most notable changes with Germany surpassing the UK as the region’s largest investment market for the second half of the year. Regionally the final quarter of 2016 saw US$85 billion of activity, 5% below Q4 2015 which brought full-year volumes to US$246 billion, an 8% annual decline. While Germany saw a 10% rise in full-year activity, the UK dropped by 36% and France by 8%. While Germany closed in on the UK for top spot in the final quarter it is now double the size of the French market. Elsewhere it was Central and Eastern Europe that experienced the biggest increase in the region with a 70% uplift on a year ago.
Record quarter for China keeps Asia Pacific volumes moving forward
Asia Pacific was the only region to see an increase in activity compared to a year ago, with the US$43 billion recorded in 2016’s final quarter 21% higher than the same quarter of 2015. This means full-year activity is 5% higher than 2015 at US$130 billion. Compared to a year ago the biggest markets of Australia (-13%) and Japan (-3%) are lower while China (+24%) is significantly higher on the back of a record final quarter. The real outperformance in the region in 2016 came from Singapore (+35%) and South Korea, where volumes were almost double that of the previous year.
Politics set to Trump economics in 2017
The final quarter of the year marked the height of the political volatility for 2016 and, as with Brexit, many commentators’ forecasts of market activity post the U.S. election were completely wrong. Despite the shock outcome, markets have rallied and this has fed through into commercial property investment activity. The year ended at the top of our latest forecast range and the market seems to be maintaining this positive momentum into the first quarter of 2017. The political environment is no less challenging in 2017 with President Trump taking office, on-going Brexit negotiations, and Dutch, French and German elections all due before October. What remains constant is the amount of capital targeting real estate although the relative value with other asset classes is narrowing and the on-going supply of investment grade product could be an issue. However, at this stage we see a substantial pipeline of real estate opportunities and for 2017 we are forecasting volumes will slightly exceed the US$660 billion of 2016 with the possibility of a return towards US$700 billion on the back of stronger global growth.
Yield compression stabilising
Despite a slowdown in investment sales growth over 2016, the weight of capital is still putting downward pressure on yields for prime offices in select markets including Frankfurt (-35 bps), Madrid (-25 bps) and Toronto (-20 bps). However, Q4 2016 saw aggregate yield compression continue to stabilise with the mean prime office yield (across 21 major markets) remaining at 4.7% for a third consecutive quarter.
Further deceleration in capital value growth expected
Capital values for prime assets in 26 major office markets rose by 4.3% over the full-year 2016, marking a continued slowing over 2016 from the stable 8% to 9% annual growth seen in the previous two years. Core European markets are currently registering particularly strong capital appreciation, with annual growth over 2016 led by Stockholm (+27.2%), Madrid (+20.6%) and Frankfurt (+19.3%). Annual capital appreciation is expected to decelerate further to around 2% by year-end 2017, with Moscow and Sydney likely to top the global rankings for capital value growth.