It is now largely agreed that levels of global real estate investment will be higher this year and prices will firm up, at least for prime stock. The latest Cushman & Wakefield forecast points to a 30% leap in global trading to $478bn (€362bn) – not far off 2005 levels – and this could be bettered if the economic recovery remains on track.
There are plenty of hurdles to overcome to hit these figures, of course. Economic uncertainty persists and while risk appetite is returning for real estate, it has become more volatile lately in other investment markets. Global liquidity could also fall and availability of affordable debt is still a problem in Europe and North America.
The case for buying core assets in key markets is easily made and competition to buy and lend in such markets is now high. Feeding off this market segment may help fill hotels in Paris, London, New York and Sydney, but with available stock scarce, this won’t drive the expected leap in activity. So where else should investors that are willing to compromise look? For the opportunistic, the answer is virtually anywhere. If the price is right, any market offers opportunities and could contain a rising number of motivated sellers.
But for core players and the small, but perhaps growing, number of value-added investors, greater selectivity is needed as performance polarises. In Europe, they will be slow to leave the larger, more liquid UK, French and German markets. But Nordic markets should pick up this year and Italy, Dutch retail and Swiss offices offer potential. Core, modern retail should be preferred, while new, leased distribution property looks good value.
Supply-constrained office markets may perform well, with a cyclical recovery driven by falling yields in the short term and rental growth in 2011/12. North America is also getting more attention. Canada has emerged from the downturn as a good target for global diversification, but competition for core assets will be strong and the US offers a bigger opportunity. The second half of the year may be a better time to target the US, but bearing in mind how quickly the UK adjusted, investors should not leave it too late; with many US investors sitting on cash, a strong revival is possible.
Yield compression now extends from trophy assets to core, well-let properties such as grocery-anchored malls. Industrial and apartment markets are expected to lead the US recovery, helped by improving demand, limited construction and below-replacement- cost prices. Space-constrained gateway office markets should stabilise this year, but out-of-town offices, and most retail, may take longer to recover.
Even for core investors, there are now opportunities in all regions, not just mature ones. Brazil, for example, now looks like a strong candidate for investors, with Class A offices (particularly in Rio), hospitality, residential and retail markets offering potential. Mexico may also attract more interest as it recovers from recession and the peso falls. More activity can be expected across Central and Eastern Europe, especially in Poland and Turkey, as owners recycle stock and corporations seek lower-cost production and service hubs.
In South Africa, meanwhile, conservative lending policies have made the market resilient, while this year’s football World Cup will boost the country’s profile. Asia offers a range of mature and emerging possibilities, such as Australian and Singapore offices or Chinese retail. Risks remain, of course, but expanding businesses and growing confidence should boost property demand in New Delhi, Mumbai and Bangalore; Beijing, Shanghai and Hong Kong; as well as Sydney and Seoul.
Japan is also looking compelling, with a fairly high spread between yield and finance costs, and huge investment-grade opportunities, particularly distressed assets selling at below-replacement cost. Overall, with more forced and opportunistic sellers, public-sector sales and potential for debt as well as equity instruments, investors’ global range of options is growing. But they may have to cast off old ideas of what constitutes mature or emerging markets, and focus on today’s fundamentals.
David Hutchings is head of European research at Cushman & Wakeﬁeld