2016 has been a whirlwind year globally, with the United Kingdom’s (UK) vote in June to leave the European Union (EU), and the election of businessman Donald Trump as the President of the United States (U.S.) in November.
Initially, these events have caused concern among investors, extending to the real estate sector where the UK and the U.S. are home to prime commercial real estate assets. However, prime markets are expected to remain attractive and robust, while other markets will provide investors with more stable and profitable alternatives to bigger markets.
Adapting to investors’ needs
Two trends will continue to boost demand in office space: outsourcing and the startup culture. Outsourcing allows executives and core employees to keep their offices in highly sought-after addresses such as London and New York, remaining close to their top clients, and move the bulk of their operations to areas or countries where rental prices and wages are relatively lower. Outsourcing thus increases the demand for conference rooms in central locations, while expanding the space needed for desks elsewhere.
The startup culture is also considerably changing the face of commercial real estate. In London, for example, high-tech firms and companies involved in scientific research and development are returning to the city from business parks situated out of town with the aim of attracting more talented staff who prefer to live within city limits.
While the likes of tech giants, Uber and Snapchat, have received billions of dollars in funding that allow them to set up offices in major cities worldwide, smaller companies, on the other hand, will continue to look for offices that strike the balance between a central location and affordable rent.
Both outsourcing and the startup culture require investors and developers to be more flexible in meeting the needs of their clients by providing a space that can be used by any type of company regardless of its size and the industry to which it belongs.
What to expect in the U.S. real estate market
The American real estate market is expected to remain attractive among global investors because of its stability and transparency, two factors that investors will always consider when choosing a market. Chinese and Middle Eastern investors, therefore, will continue to look at the country’s property market for returns. Chinese investors, for example, spent US$28.6 billion on American homes during a 12 month-period ending in March 2016 based on data from the National Association of Realtors.
The country is experiencing a continued decline in its unemployment rate. In May 2016, it fell to 4.7 percent–the lowest since November 2007, while latest data from the United States Bureau of Labor Statistics reports an unemployment rate of 4.9 percent in October 2016. Overall, the positive employment figures in 2016 have helped increase demand for residential housing. In October, the U.S. Department of Housing and Urban Development reported an increase of 25.5 percent in housing starts at a seasonally adjusted annual rate of 1.323 million.
Office leasing continues to grow in the country as well. JLL’s latest data shows that, by the end of September 2016, leasing volumes in the United States totaled nearly 60 million square feet. Expansionary leasing led the charge, accounting for 47.1 percent of leases 20,000 square feet and larger. Technology jobs are the main driver for this growth, along with the coworking, incubator, and TAMI (technology, advertising, media, and information) segments. This includes the two million square feet technology campus in Roosevelt Island that will open in 2017. This is a collaboration between Cornell University and New York City, the latter of which invested US$7.2 billion on the project that will establish technology incubators in Grand Central and Brooklyn Navy Yard.
However, global economic uncertainty remains with the International Monetary Fund projecting a continued slowdown in global GDP growth in 2017, which could cause already weary investors from Europe, China, and Saudi Arabia to limit their investments in foreign markets.
JLL’s construction outlook published in Q3 2016 reports that the U.S. construction industry is expected to slow down by the end of 2017 as demand and market saturations begin to level out across different property types. The undersupply of skilled laborers, despite the high demand in construction jobs, will also contribute to the industry’s softening. Meanwhile construction clients may opt for adaptive reuse projects instead over new construction. Despite this, the industry is unlikely to see a significant decline, according to the report.
Brexit and the UK’s real estate market
The UK’s vote to leave the EU has the potential to have a significant impact on the country’s economy in 2017 and beyond, including its real estate market. According to Neil Chegwidden of JLL Residential Research: “the five year outlook for the UK is almost wholly dependent on the terms of the exit from the EU and the agreements we manage to put in place. The UK is entering uncharted territory.”
While Brexit may cause uncertainty in the horizon, Chegwidden said that the overall mood amongst the country’s citizens has been positive. “Much will depend on the trade agreements negotiated, but with greater certainty the economic outlook should brighten along with consumer and business confidence as we head into 2019,” he added.
The British Pound fell to a three-decade low against the U.S. Dollar after Brexit, spelling good news for foreign investors as properties become more affordable. In JLL’s survey of international investors in September 2016, 72 percent said that they see the fall of the sterling as an opportunity to invest in the UK. Investors from mainland China, Hong Kong, and Singapore have been especially active, helping boost the property market in Central London.
Since 2012, mainland Chinese and Hong Kong investors have invested an average of at least £1.5 billion annually, and have already spent over £2 billion as of October 2016. This includes Hong Kong investor Kingboard’s return to the London property market with its £237 million acquisition of WeWork’s European headquarters in the City of London.
Singaporean investors have been active too. In a span of two weeks, Singaporean firms GIC and UOL/UIC negotiated deals worth over £500 million for UK real estate assets.
This indicates that the attractiveness of the UK’s commercial real estate market—particularly London—is unlikely to wane. According to Julian Sandbach, Head of Central London Capital Markets at JLL, it also helps that, “UK regulations governing foreign asset ownership have relaxed, and the capital flowing into pension funds has increased as the Asian population ages, and many of these funds are looking to real estate as an investment class.”
“The appeal of commercial property as an asset class remains undimmed – hardly surprising when yields for prime property with strong tenant covenants still attract yields of at least four to five percent,” said JLL UK CEO Chris Ireland. “This compares to average corporate bond yields which are now at 2.19 percent and 10-year gilts at a little over 0.6 percent,” he added.
Overall, JLL projects a 13.1 percent growth in house prices in the UK from 2017 to 2021, while rental growth will be at 17.6 percent for the same period. All regions in the country will experience a bumpy transition from 2017 to 2019, before seeing growth in the early 2020s. House prices in Prime Central London, for example, are expected to go flat in 2017 before growing by three percent in 2019 and by five percent by 2021.
Investment opportunities in APAC for 2017
In APAC, Hong Kong will continue to be the most exclusive market globally, where top quality offices in the city cost an eye-watering US$262 per square foot per annum on average. It tops London’s average of US$240 per square foot per year, and Beijing’s US$199 per square foot per year. This means that Hong Kong remains a valuable territory when it comes to commercial real estate.
Australia also remains an attractive destination among foreign investors, particularly among the Chinese. The country’s real estate market is still fueled by the record-low interest rates, which contributed in the increase in the construction of new residential buildings. Data from the Australian Bureau of Statistics show that residential construction has risen by 10.7 percent in June 2016 over a 12-month period valued at AU$15.19 billion.
As for investments in residential properties in the region, Tokyo and Bangkok are two of the top contenders. In Tokyo, top investments are largely concentrated in the districts of Minato, Chuo, and Chiyoda. The city is also the most actively traded multifamily city in the world outside the U.S., according to Nicholas Wilson, JLL’s Associate Director in the Japan Capital Markets team.
“In fact multifamily real estate in Japan has been the third most-traded asset class over the past five years, with volumes higher than those in the industrial and hotel sectors,” he added.
In Bangkok, about 3,800 new prime segment condominium units in Central Bangkok and the Central East are expected to complete by end-2017, based on data from JLL’s Asia Pacific Property Digest for Q3 2016. The same report states that demand for higher end condo products is expected to remain strong, “as most buyers and investors in the prime segments are highly liquid and do not face the same debt servicing requirements as mass-market buyers.