New research from JLL suggests there is cause for optimism in major real estate markets, despite the intrusion of political events such as the U.S. presidential election and the UK’s proposed exit from the European Union.
JLL’s latest Global Market Perspective report for Q3 2016 shows the results of the anticipated slowdown of investment volumes, but resilience in the most reliable measure of future demand – occupier sentiment.
The report shows global real estate investment volumes for H2 2016 were US$292 billion, 10 percent lower than the equivalent half in 2015.
“In this environment a more cautious investment strategy is to be expected, which is why we are seeing a slightly slower level of transactional activity so far this year,” says David Green-Morgan, JLL’s Global Capital Markets Research Director.
He points out subdued investor sentiment, and thus transactional activity, is likely to last for the rest of 2016, given the uncertain political environment.
“Economically, while global forecasts have been consistently trimmed, many of the fundamentals are still strong,” he says.
“Due to this change in sentiment we now believe that global volumes will be 10 percent to -15 percent lower than 2015, at around US$600 billion. However, we should remember that even at around US$600 billion, it would be the fifth most active year since JLL started recording transactional activity in 2003.”
‘Caution’ also appears to be the watchword among corporate occupiers, which are typically still focused on consolidation, rationalisation and/or cost-reduction.
China continues to dominate the Asia Pacific environment, and its economic slowdown is trickling through to other markets. International companies in Asia are maintaining their focus on cost efficiency, with the exception of Tokyo, Hong Kong and Manila.
Although ‘Brexit’ has had a significant impact on UK leasing activity, it is yet to make a significant impact on European occupier behaviour – leasing volumes across Europe are only down 3 percent in Q2 from the same time in 2015, and they remain 6 percent higher than the 10-year average. It would appear ‘business as usual’ rules until the UK’s exit agreement is better understood.
Q2 leasing activity in the United States rebounded from the slowdown of Q1 2016, rising above the eight-year average. Occupier sentiment remains positive, driven by a robust employment market and rising wages.
“Corporate occupiers do still seem to be fairly optimistic at this point in the cycle, even in the face of slightly weaker economic growth,” Green-Morgan says. “Compared to the investment cycle, occupier markets are at a much earlier stage and so this level of activity is not unexpected.”
“For investors it is important how this level of occupational activity translates into rental growth, and the lack of development in many markets is supporting quite strong rental growth assumptions for the rest of 2016.”
Green-Morgan says confidence in long-term employment growth may be buttressing sentiment towards global real estate markets, with the caveat that there are still concerns around slowing economic growth and its impact on employment.
“A stronger push factor is the problems institutional investors are facing in fixed income and the attractive returns – potentially 10 percent or more in 2016 – that real estate offers.”
“2016 appears as though it will be a year of slower global growth and 2017 may be something similar. After such a long run of expansionary activity, a couple of years of slightly slower growth are preferable to a more pronounced downturn.”