New York, San Francisco and Washington, D.C. Remain Attractive for Foreign Commercial Real Estate Investors

Real assets with predictable income streams gaining popularity with investors, according to Jones Lang LaSalle capital markets research

London, Chicago, Singapore, August 9, 2012 – Global investor purchasing activity picked up in Q2 2012 with total market volumes increasing 24 percent over Q1 2012 to $108 billion, according to data collected from more than 60 countries by Jones Lang LaSalle Capital Markets Research for the firm’s 2Q 2012 Global Capital Flows Report. This reverses the slight dip in activity recorded in Q1 2012 where volumes reached $87 billion.  Other highlights include:

  • London remains the world’s most sought after location.
  • The United States moved back towards the $40 billion transactions mark in Q2, with around 35 percent of deals involving cross-border parties.
  • REITs and unlisted funds were Q2’s biggest net buyers of property.
  • Full year 2012 global forecast remains at US$400 billion and €108bn for Europe.

Asia Pacific, Europe, Middle East & Africa, and the Americas all recorded an increase in activity in Q2 compared to Q1. The Americas posted the most significant increase in quarterly volumes, with a 33 percent increase to $47 billion.

While New York, San Francisco and Washington, D.C. have long topped the target list for foreign investors, a number of secondary cities have now entered the Top Ten list for cross-border purchases into the United States, including Miami, Minneapolis and Phoenix.

“Core U.S. real estate throughout primary and many secondary cities remained very attractive to both domestic and foreign investors, based on absolute initial yields on offer, and their spread over record-low Treasury rates,” said Josh Gelormini, Vice President, Americas Research, Jones Lang LaSalle.  “The U.S. is also benefitting from a safe haven strategy, as other global markets appear on shakier ground, particularly given the ongoing Eurozone crisis.”

Although U.S. growth appears relatively weak, compared with most other fully mature economies, growth is stronger, and investment into real, tangible assets in the country is attractive as a defensive strategy in volatile, challenging economic and market conditions in developed and emerging countries alike.

While Europe remains at the centre of the present financial crisis, the major markets of the UK and France saw an increase in buyer activity in Q2, with cross-border investors continuing to complete transactions. The share of Europe’s three largest markets – the UK, Germany and France – increased to 70 percent of total European volumes in Q2 2012 compared to just under 65 percent on average in 2011. This is due to the strong performance of the UK and France which saw significant increases due to investors’ continued preference for premium, long term assets in key, core markets. This contrasts with declining transaction volumes in growth markets such as Poland, where despite improving transparency, suitable product is in scarce supply.

Asia Pacific was the only region to record year on year growth, with $26 billion compared to $20 billion in Q2 2011 as China, Australia, Hong Kong and Singapore all recorded increased trading activity.

Arthur de Haast, Head of the International Capital Group at Jones Lang LaSalle said:

“Investment volumes continue to be resilient. Demand for the best income generating real estate is strong across the world as sovereign wealth, pension funds and private wealth continues to diversify across investment classes.”

“Despite European economic headwinds, appetite for real estate continues to be strong. This is due to improving real estate market transparency and falling government bond yields.”

London world’s hottest market

At the city level, London retains the top spot for most active city in Q2 2012, with $8.7 billion of total volumes, nearly twice that of Paris and New York with $4.7 billion and $4.3 billion respectively.

Retail sector gaining ground, but slowed in Europe after stellar 2011

Globally, in Q2 2012, the retail sector increased its investment volumes by 66 percent to $31 billion compared to Q1 2012. This is still behind offices at $50 billion, but recognizes the demand for prime assets.

The hotels sector is predicted to have a busy second half as global deals progress and close, while niche assets like data centres will attract more attention as corporates focus on core business activities and look to offload non-core real estate assets.

Global fund purchasers more measured due to falling yields

Despite being the second most active purchasers behind U.S. capital, global fund activity has fallen by 50 percent compared to 2011. Having been at the forefront of purchaser activity over the last two years, funds are now consolidating and examining other opportunities.

Cross-border transactions are robust and steady, accounting for 40 percent of volumes. However, these deals are focused on a narrow range of geographies and assets and deals are taking longer as due diligence increases transaction times. Europe continues to attract the lion’s share of inter-regional investment, with U.S. buyers coming to the fore. The UK and France saw 75 percent of total deals involving a cross-border party, 70 percent in Russia and 50 percent in Germany. Three of the largest cross-border deals were in London.

Brazil also emerges in the top 10 sources of cross border capital for the first time, demonstrating the importance of emerging capital

David Green-Morgan, Global Capital Markets Research Director at Jones Lang LaSalle commented:

“We predict increased activity in the second half of the year as investors continue to move towards real assets as yields from other asset classes remain low. We have seen increased activity from Canadian, U.S. and Middle Eastern money. We can also expect increased activity from capital from Asian countries such as China, Indonesia and Thailand”.

Although half year volumes are slightly below the level of 2011, there has not been a dramatic decline in investor activity or capital raising, although transactions are taking longer to close and debt financing remains an issue.

Given this background Jones Lang LaSalle expects full year volumes to be broadly consistent with 2011 at US$400 billion. If pricing in core locations continues to rise, the many opportunities available in secondary will attract increased attention and this may provide an additional boost to what is usually the more active second half of the year.

West Coast Commercial Real Estate News