JLL, RICS Reports Note Decline in Global Investment Volumes, Tenant Demand
- May 30, 2008
After a record 2007, global investment market volumes are expected to be down more than 30 percent over this year, while tenant demand for global property has turned negative for the first time in four years and interest in emerging markets is beginning to decline, Jones Lang LaSalle Inc. and Royal Institute of Chartered Surveyors reports have found. Jones Lang LaSalle has forecast that The Americas and European investment markets will see a material decline in full-year transaction volumes, and although Asia may be more resilient, volumes will not achieve last year’s height, according to a report released today. Reduced debt availability and the debt squeeze will continue to ripple through the markets, especially in major economies. The RICS Global Commercial Property Survey Q1 2008 report also noted that investors are now less sure of the potential higher returns in emerging markets, with transaction activity falling in emerging areas of Europe and Latin America. But Africa and the Middle East bucked the trend, with demand for commercial space in places such as Dubai and Doha remaining robust. In The U.S., cross-border transactions covered all sectors in 2007, with office space rising 51 percent to $30.6 billion and industrial rising 34 percent to $4.5 billion. Retail was down by 4 percent to $5.8 billion, but foreign investors still bough more retail product than they sold, Jones Lang LaSalle’s report said. New York City remained the largest cross border market by volume, with $19 billion worth of transactions, followed by San Francisco, Chicago, Los Angeles and Washington, D.C. All of the major markets had increased cross-border activity, with the exception of Boston, which saw 68 percent less that year. Although the report predicted that global investment market volumes are expected to be down, the numbers take into account both sellers and buyers, and the U.S. should see an increase in cross-border purchases this year, noted Steve Collins (pictured), managing director of Jones Lang LaSalle’s International Capital Group. “Last year, everyone was flocking to India,” he told CPN, echoing RICS’ observations on emerging markets. “But now some realize that the U.S. is still a great place to invest and are flocking back to safety.” The Irish still have a great interest in the East Coast to Chicago, while Scandinavian investors are increasingly looking at the West Coast. German funds that have been investing here are still active, while new ones are beginning to look for opportunities. U.K. funds have also been active. However, he noted that many foreign investors have not discerned between events in residential and office. They are expecting distressed property discounts in major markets, only to find out that these discounts are mostly available in third-tier and second-tier cities. In the Americas, direct commercial real estate investment totaled $304 billion in 2007, up 6 percent over 2006. However, transactions in the second half of the year were down 23 percent from the first half, due to the significant fall-off in transaction volume in the fourth quarter, according to Jones Lang LaSalle. The U.S., which accounted for 93 percent of the Americas’ transaction volume, only saw transaction growth of just 4 percent over the year.In Canada, volumes approximately doubled to $16 billion, while Brazil and Mexico expanded by a combined 80 percent to approximately $7 billion. However, cross-border transactions in the Americas increased to $91 billion, or 30 percent of overall activity, with office leading the pack, followed by retail and industrial, the report said. And cross-border investors were narrow net sellers in the Americas last year, with $56 billion sold and $52 billion purchased. In Europe, direct commercial real estate investment totaled $333 billion in 2007, a 3.5 percent rise over 2006, Jones Lang LaSalle’s report said. The region’s second half of the year was 5 percent lower than the first half, but the impact on annual volumes was minimal due to a strong first half. The U.K., Germany and France continued to dominate the market, with cross-border investors dominating the activity. Germany had the largest percentage of cross-border activity at 70 percent, followed by the U.K., France, Sweden and Spain. Norway, Ireland and Portugal also saw higher levels of domestic investment.Jones Lang LaSalle discovered that Asia Pacific, on the other hand, saw remarkable growth in both halves of 2007. Despite downturns in some of the major real estate markets and the effects of the weakening U.S. dollar, direct commercial real estate investment reached a record $121 billion in 2007, up 27 percent from 2007. Japan led the market, accounting for 50 percent of the total transaction, followed by Australia, Hong Kong, China and Singapore. Cross-border transactions also increased to $57 billion, accounting for 47 percent of total transaction, except in the Philippines and Thailand, which were constrained by rigid foreign ownership legislation and a lack of investment-grade assets offered for sale. Overall, Jones Lang LaSalle expects that number of factors will constrain volumes this year: “wait and see” strategies adopted by buyers and sellers; prices having peaked in 2007 in many major markets; a misalignment between buyers’ and sellers’ price expectations; reduced availability of debt; tougher lending criteria and increased debt cost; reduced willingness and capacity to transact large lot sizes; a narrower investor spectrum; and more due diligence, which leads to longer transaction volumes. But Collins noted that he is starting to see sellers pitch their properties now, which means that sales may start to pick up in the fourth quarter or the first quarter of 2009. “It has already started to level out and money is starting to loosen up a bit,” he said. And on the tenant side, RICS’ latest global commercial property survey has shown that growth in tenant demand turned negative in the first quarter of 2008, the first time in over four years, because of weaker activity across much of the developed world. The report noted that credit market uncertainty has muted expansion planes across many economies, while emerging markets have also felt a moderation in tenant activity. The negative net balance for tenant demand was felt across all property sectors in the developed world, while emerging markets experienced the biggest slowdown in industrial property, where the pace of tenant activity and expansion halved, RICS reported. Overall, this has led to modest rises in available space globally for the first time in the survey’s history, with only Australasia and Latin America reporting available space declines.