According to Cushman & Wakefield’s International Investment Atlas, released today, the global property investment market will be more robust in 2013, with a 14% increase in activity and a modest boost to values from yield compression and rental growth for the best stock. However the report also cautions that the risks and opportunities facing investors will be far from uniform and the market harder than usual to generalize. According to David Hutchings, Head of EMEA Research at Cushman & Wakefield: “The Americas and Asia look set to lead in terms of activity and performance but any such averages hide a wide range of potential outcomes and even if the current improvement in macro sentiment sticks, investors will have to work hard to identify and create value with often second tier property. Having said that, we are at a point in the cycle where occupiers need to act and their decisions will be key to a more upbeat assessment of market prospects, but only for property that helps them push productivity or reach new markets. In other words the ultimate disparity in the market is built around what works for the occupier.”
Barriers to growth in Asia Pacific?
Asia is expected to once again help drive performance in the global market, with a 15-20% rise in activity forecast this year. However, while it remains the chief component of global economic expansion, it is facing a period of change as it adjusts to a new norm of slower growth. According to John Stinson, Head of Capital
Markets in Asia Pacific for Cushman & Wakefield, “The likelihood of slower growth in Asia has been underlined by the desire of the authorities to better control the property sector, with new measures recently announced in China and Hong Kong for example, aimed not just at the residential market but at the commercial sector as well. This could hit trading activity but could also push up property prices due to scarcity value and could also increase interest in other parts of the region such as India, Indonesia , Malaysia and Singapore.”
Office and logistics are likely to be a target in gateway/hub cities across the region, while retail will be boosted by domestic spending growth as well as tourism and international retailer demand. According to Stinson: “The hottest segments of the market this year in performance terms are likely to be offices and logistics but given the relatively small size of Asia’s logistics investment market, the most active in volume terms are likely to be office and retail. By geography , the resounding choice for core as we speak is Japan and Australia, but in the second half we'll see this broaden and Shanghai, Beijing, Singapore, Hong Kong and Seoul are all likely to perform strongly.”
America’s leading with a range of possible risk strategies to follow
Like most property markets, the US has some risks to worry about but it should still be a favoured market for investors domestically and internationally and offers core and non-core opportunities. According to Dave Karson, Executive Managing Director in the US Capital Markets team at Cushman &Wakefield, “We’re an advocate of taking risk in core markets, particularly in New York, one of the few major international cities where investment grade property is trading below replacement cost, and where becoming over supplied is a limited risk given the lack of development sites and the complicated, heavily regulated multi-year process to gain a building permit. Within the city we see there being some opportunities for investors to look away from corner blocks towards mid-block buildings with some vacancy and renovation potential and also to upgrade class B buildings in class A locations.”
Away from New York there are opportunities where equity investors have tended to differentiate more between geographic markets than lenders and there is a significant gap in cap rates between primary and secondary markets. According to Karson “It is possible to purchase high quality office assets in solid secondary markets at 300 or even 400 bp premiums to those in gateway cities. The improved flow of finance now that CMBS is picking up should bring down the gap between these prime and stable secondary markets. Cities like Houston, Seattle and Austin have already begun to experience a pricing lift and should see continued cap rate compression in 2013.”
Looking to Latin America, the region continues to prove its doubters wrong, coping with economic and political set backs in a far more robust way than in the past and with resource, demographic and policy backing for future growth and stability, international investment will steadily grow. According to Marcelo da Costa Santos, Vice-President, Capital Markets South America at Cushman & Wakefield, “Colombia is the next hot thing in the region and Peru is also an up and coming target for investment but with still relatively small and illiquid markets, the short term will continue to favour the regional giants of Brazil and Mexico. Mexico may again surprise on the upside and show stronger than anticipated numbers but Brazil will perform better than 2012 and should stand out over the year with secondary markets, industrial and event-driven infrastructure such as the port region in Rio, as well as Olympic and World Cup linked sites, providing most of the growth.”
Europe leads for diversity
With a growing awareness that Europe will survive the euro zone crisis in one form or another, investor interest is slowly starting to broaden from the core. Nevertheless, economically or in property market terms, trends will remain very diverse as local factors move up the agenda. According to Michael Rhydderch, Head of European Capital Markets at Cushman & Wakefield, “Opportunities in the EMEA region are clearly a function of who the investor is. The risk averse can still find long term value in the core but with the economy bottoming out and development pipelines down, those looking for growth are at last starting to see some encouragement. It may be boring to say perhaps but for risk-averse buyers, we still think London, Munich and Berlin followed by Paris and Stockholm offer good potential. More than most we favour prime retail not just offices in these cities. We also think logistics around most large cities east and west offers a robust market capable of good long term growth thanks to changes in manufacturing as well as the impact of e-commerce and historically low levels of new speculative supply.”
While core returns are attractive relative to bonds and historic norms, if the business cycle is stabilizing, C&W point to the opportunities which exist further up the risk curve, in development and asset repositioning for example. According to Rhydderch, “Risk takers have no shortage of options in EMEA, with stressed markets like Italy re-pricing for long term investors while emerging markets like Moscow and Istanbul offer real excitement. However for the immediate term, we’d also suggest looking closely at the Netherlands where stress is real but so too is re-pricing and in world class cities like Amsterdam or global trading hubs like Rotterdam, distress should bring opportunity.”
Debt provision is also one route to investment that more players should be looking at in Europe where trends are lagging other regions, but buying loans and assets from the banks as they deleverage should be a priority globally for those with the infrastructure to manage the job. According to Michael Lindsay, Head of EMEA Corporate Finance for Cushman & Wakefield: “With increasing supply, there is a real prospect that it will become a buyer’s market and while countries like the USA, UK, Spain and Germany will see most activity, the supply of loans and assets will be much broader than it has been.