Slowdown induced by fewer ultra-large transactions, Brexit and trade policy concerns
According to new data from CBRE, worldwide commercial real estate investment volume, including entity-level agreements, climbed by 7 percent quarter-over-quarter but declined by 2 percent year-over-year in Q3 2019.
Year-to-date volume was down by 5 percent from the same period last year. On a regional basis, APAC reported an exceptional 49 percent year-over-year improvement in Q3 that offset the sluggishness in H1 and raised year-to-date growth to 6 percent . The Americas and EMEA reported a somewhat soft third quarter due to political uncertainties, low yields and some recession fears. zig zag tower
Richard Barkham, CBRE's Global Chief Economist & Head of Americas Research comments, "CBRE's full-year estimate for global commercial real estate investment is for a single-digit percentage point decrease from 2018's record level. Despite uncertainty about Brexit and multiple trade wars, a significant downturn has been kept at away by lower interest rates, tight labor markets and confident consumers. The trend of fewer mega-deals will likely continue into 2020 until business sentiment rebounds back."
Key report highlights include:
Global commercial real estate (CRE) investment, including entity-level purchases, was US$260 billion in Q3 2019, increasing by 7 percent over the previous quarter but down by 2 percent from Q3 2018.
Seasonally adjusted Q3 investment volume mirrored that of the previous quarter but was down by 8 percent year-over-year.
U.S. investment volume was marginally down year-over-year in Q3 but is up marginally year-to-date after factoring for seasonality, entity-level transactions and Blackstone's acquisition of GLP's U.S. logistics portfolio.
APAC witnessed a solid resurgence in investment activity, while worries over Brexit continued to affect investor mood in EMEA. Nevertheless, investment volume increased from the sluggish first half of 2019 in EMEA, highlighted by significant activity in France, Sweden and Germany.
Recent interest rate reduction have expanded yield spreads, which has renewed investor interest.
Paris replaced London as the No.1 destination for foreign capital worldwide for the first time on record. The percentage of cross-border investment touched a six-year low globally in Q3.
Seasonal adjustment shows a significantly poorer picture as third quarters have usually been robust. Seasonally adjusted global volume equal that of the previous quarter but declined by 8 percent year-over-year in Q3 2019. The restricted supply of high-quality assets for sale continued to impede capital deployment, while fewer ultra-large deals increased the year-over-year reductions.
Seasonally adjusted Americas investment volume declined by 17 percent year-over-year and 3 percent year-to-date, principally driven by lower volumes in Canada and the U.S. Accounting for more than half of worldwide activity, U.S. investment volume (seasonally adjusted) declined by 7 percent year-over-year and 1 percent year-to-date. But if only a single transaction were excluded—Blackstone's $18.7 billion acquisition of GLP's U.S. industrial portfolio—the U.S. would have reported only a 2 percent decline year-over-year and a 3 percent increase year-to-date (seasonally adjusted). Decreased U.S. investment volume was nearly entirely due to fewer entity-level transactions in Q3 2019. Excluding entity-level deals, U.S. investment volume climbed by 14 percent year-over-year and 8 percent year-to-date after seasonal adjustment.
The percentage of cross-border investment touched a six-year low globally in Q3. This was a result of fewer ultra-large transactions and an absence of big-ticket retail REIT acquisitions. While the value of retail REITs has largely recovered and made them more expensive, Asian investors who have been large cross-border players switched to more domestic and intra-regional investment, in addition to capital controls in China.
The decline was notably noticeable in the U.S., where cross-border investment has plummeted by 57 percent year-to-date compared with the same period last year (Figure 3). The substantial fall in entity-level transactions accounted to 75 percent of the decline, while less inward investment from Singapore, Japan, China and Hong Kong contributed another 15 percent .
EMEA investment volume declined by 6 percent year-over-year in Q3 (seasonally adjusted). Investment activity stopped in the U.K. (-28 percent ) and Spain (-44 percent ), while France (44 percent ) and Sweden (307 percent ) recorded considerable year-over-year increases. Notably, Paris replaced London as the No.1 destination for foreign capital for the first time on record. Germany's Q3 investment returned sharply and leveled with the same period last year. Year-to-date, EMEA investment volume declined by 14 percent (seasonally adjusted), of which the U.K. and Germany accounted for 61 percent and 20 percent , respectively. As in the Americas, the reduction in investment was a result of low supply of quality product and fewer mega-deals, particularly in the top five European markets.
Office and residential properties remained the most appealing investment assets in EMEA. Investors concentrated on income growth, capitalizing on strong leasing activity and rent increase, although uncertainty over the EU's rent control polices weighed on the residential sector. In the U.K., anxiety about Brexit has kept investors cautious despite sufficient liquidity and relatively high rates. We are optimistic for a smooth Brexit, which should reinvigorate the market.
Investment volume in APAC grew 49 percent year-over-year, or 42 percent after seasonal adjustment. The increase is partially related to a low base effect, since 2018 saw the lowest Q3 investment volume since 2013 due to intensification of the U.S.-China trade war. This applies notably to China, where year-over-year growth reached 68 percent in Q3 (seasonally adjusted). Investor mood in Australia (42 percent ), Japan (31 percent ) and Singapore (62 percent ) improved from lower interest rates leading to more attractive yield spreads and an overall upswing in big-ticket purchases. Australia had the largest quarterly office investment volume since 2005. Hong Kong (-9 percent ) continued to suffer losses in investment volume due to societal instability. APAC's year-to-date total of US$92 billion was up by 6 percent (seasonally adjusted) from the same period previous year.
Overall, Asia continues to deliver comparatively strong yields and income growth opportunities for global investors. In the first three quarters of 2018, barely 8 percent of Asia's investment originated cross-border funds. In the first three quarters of 2019, this has climbed to 13 percent , mostly from U.S., Canadian and German capital.