Q1 volumes highest for five years

Commercial real estate investment reached a milestone in the first quarter, breaking $100 billion for the first time in five years. Actual volumes came in at $105 billion (Figure 2), with all three regions seeing growth on this time last year as the weight of money chasing real estate has increased significantly.

Europe and Asia Pacific have seen volumes increase almost 30% each since Q1 2012, but for differing reasons. The European market continues to adjust and offers opportunities, especially in fringe or secondary locations. That said, the extremely competitive bidding environment for core assets in Europe highlights investors strong focus on prime. In Asia Pacific continued quantitative easing around the world is increasing liquidity and reducing the cost of debt, this is all before the change in monetary policy in Japan which has provided a boost to transactional volumes for the last two quarters. Asia Pacific was the only region not to see a decline on Q4.

In the Americas, growth has been more muted year on year, up 9%, with the two biggest markets of the United States and Canada driving much of this increase, helped by improving access to finance. The investment markets in Central and South America continue to see-saw as investor appeal waxes and wanes and they record consistently weak first quarters. Total transactions were only $700 million, 30% up on Q1 2012 but almost 90% down on the final quarter of 2012.

US purchasing continues to grow despite fiscal discussions

The US continues to grow its purchasing activity despite the on-going discussions and deadlines over its long term fiscal position (Figure 3). Their seemingly expansionary investment strategy of 2012 (with 25% of all capital deployed offshore) was less evident in Q1 with over 90% of acquisitions taken place domestically. Nonetheless, they still remain one of the most active cross-border purchasers in the first quarter. Canadian activity was more subdued than recent quarters. But, overall we have seen a slight uptick in cross border activity over the last few quarters mirroring the general improvement in investor appetite across all asset classes (Figure 4).

When will the tide turn?

It seems no amount of disappointing economic data, Euro Zone bailouts, failed elections and deteriorating property fundamentals will stem the flow of money from all over the world into Europe. We have tried to identify what may be the catalyst for a slowdown in this trend but at present there seems to be no slowdown on the horizon, if anything the flow of capital is increasing and arguably the weight of money has never been higher (Figures 5 and 6). The net investment this quarter was $6.7 billion, with over $12 billion of purchases, double this time last year. Despite quarter on quarter investment volumes being 30% lower, net investment was 18% higher than Q4 2012, demonstrating the desirability of assets in the region. The United Kingdom took over half of the $12 billion in purchasing activity, although France, Germany and Russia saw over $1.5 billion apiece. Figure 7 shows the Middle East continues to provide the most consistent source of investment, more than doubling its net investment y-o-y, contributing nearly $3 billion on a net basis into Europe this quarter. Reduced net selling activity by European, Asian and Global investors may suggest a move to more positive sentiment and we could expect them to become net purchasers.

Turnaround by global funds

After 2012 in which fund raising for real estate topped $40 billion but transactional activity by global funds dropped 30% from 2011, the first quarter has seen their return as aquisitors (Figure 8). Many of the purchases were focused on the US ($7.4 billion) and Europe ($3.5 billion). Interestingly they sold almost similar amounts in both regions but Asia Pacific saw only a moderate amount of sell side activity by these funds ($1 billion).

Major institutional investors from Norway, Hong Kong, Qatar and the United Arab Emirates all increased their offshore activity y-o-y, while Canadians and Singaporeans were more subdued. We believe this to be a one off, as institutional investors have on-going spending requirements and have increased their allocation to real estate so we expect them to become yet more active through 2013.

Japanese & US REITs are back in the market

There was a substantial increase in REIT purchasing activity as we see the impact of looser monetary policies in Japan coming into effect. This combined with the REIT sector in the US continuing to acquire assets and confidence slowly returning to the smaller European REIT sector pushed them to be the most active investor group this quarter (Figure 9).

Despite being very active in the hotel market and Google’s purchase of a new headquarters in London, corporates were major net sellers. Several sale and leaseback deals in Japan demonstrate corporates re-deploying their capital and the large number of disposals can be explained by corporates cost-saving strategies.

Large assets attract institutional investors

This quarter sovereign and pension funds, with access to massive amounts of capital, have been joining up with JV partners to transact large deals. Transactions by NBIM and St. Martins (Figure 10) demonstrate how these investors are arguably taking a more active role in their investments. They are acquiring assets directly and structuring JV agreements with local asset managers but maintain a high degree of control. We expect that this is only set to increase, with groups such as CPPIB and NPS increasing their target allocations to property.