Real Estate Resilience  

The world’s major real estate markets entered 2011 on a positive note.  ‘Resurgence’ was the key theme of our First Quarter 2011 edition of Global Market Perspective, in which we predicted that this year will be the strongest in terms of real estate trading and performance since 2007. As we enter the second quarter, the world’s major commercial real estate markets have continued on a recovery path. Markets are showing remarkable resilience, despite the shocks of the disaster in Japan, the turmoil in the Middle East and a slightly less optimistic outlook for the global economy. In this Second Quarter edition we describe the ongoing global real estate recovery, characterised by strengthening investment markets, increasing corporate optimism and robust price growth for prime assets across multiple markets. 

The key highlights are:

• Global commercial real estate investment volumes are up 44% year-on-year. Based on current momentum and transactions in the pipeline, we believe that full-year volumes are now on track to exceed US$440 billion, which would represent 35-40% growth on 2010 levels and the highest volume since 2007
  
• Capital values for prime office assets in major cities rose by 22% over the past year. In several markets, prime yields are approaching the levels reached during the previous cycle’s peak in 2007. Nevertheless, prime yields are now stabilising after the steep re-pricing trend of the past 18 months. Future capital appreciation will be largely driven by rental growth.
  
• We continue to see the rise of the BRICS group of emerging markets, which accounted for 13% of global investment volumes in Q1 2011, compared to approximately 2% in 2007. Their contribution to overall investment volumes is likely to rise further as transparency and the quality of their real estate stock improve.
  
• Brazil is the main growth story over the last quarter.  The country became the fifth most active investment market in Q1, overtaking China. Sao Paulo has one of the world’s most dynamic office markets, characterised by rapid rental growth, strong corporate occupier demand, low vacancy and a development boom. 
  
• Investors continue to focus on core assets in main gateway cities but, with insufficient supply, they are selectively moving up the risk curve in terms of geography and type of investment.   However, most investors are not prepared to compromise on quality and continue to show caution towards secondary assets.
  
• In the US we are seeing a significant easing of the debt situation, a building of liquidity and a returning CMBS market. In Europe, debt still remains difficult though, especially for non-prime assets.
  
• The global office vacancy rate stands at 14.2% and is gradually falling. A supply gap for prime assets is emerging in many CBD markets in major cities. As landlords become more confident, we are witnessing rising volumes of speculative construction in Europe, led by Moscow, Paris and London.
  
• Rental growth on prime assets is accelerating, at close to 8% year-on-year across 22 major office markets.  More markets will turn in favour of landlords during the remainder of 2011.
  
• Corporate occupier confidence is on the up across the globe and we are seeing more expansion demand. Corporations are focusing on ‘smart growth’ however, looking to minimise exposure to rising costs by continually stress-testing the need to take new space.