Key findings:
- Business property demand and rents rising across all key global regions, with emerging markets, mainly Asia and Middle East, leading the way, despite the US economic slowdown.
- Investment demand for real estate remains stable regardless of the rising global interest rate.
- Investors focusing on rental growth as availability declines sharply.
- Rebalancing of global economy away from the US raised optimism over the investment landscape. Globally, yield declines are expected to slow whilst stabilizing in the US.
Occupier Market:
Emerging Asia took the lead as the strongest growth region for tenant demand activity. Economic expansion at a breakneck pace has continued in China and India, despite policy measures aiming at cooling the economy to curtail fixed investment and domestic consumption respectively.
Across developed Asia, Australia, South Korea and Japan all saw some moderation in GDP in the second half of 2006. Consumer spending has remained weak in Japan, due to muted income growth and dampening activity in the retail market.
GDP growth has moderated sharply in the US as the impact of the previous rate rises has fed through into the real economy. The slowdown has been most acute in the residential housing and automotive sectors, with little effect on wider market demand for business space.
In Europe, economic growth in the second half of 2006 accelerated to highs not seen since the dot com boom, with little sign of the European economy tracking developments across the Atlantic. Robust growth has led to falls in the unemployment rate, now approaching 7%, the lowest since records began in 1990.
Investment Market:
Investment demand for global real estate market continued to rise despite narrower margins between borrowing costs and property yields in the second half of 2006.
In emerging Asia, investment market purchasing activity moderated across many cities in India and China as tighter monetary conditions took hold. In China, administrative measures to curb fixed investment reduced demand for commercial property assets across all sectors.
The European recovery however has bolstered investor sentiment with Western Europe, in particular, seeing the strongest gains in purchasing activity in any world region. Positive yield gap and low long term interest rates have encouraged further acceleration in activity.
Despite slowing US economy, investor demand for US commercial property picked up at a faster pace as stronger rental growth has attracted investors. Declining available space and still rising demand should support rents going forward, adding weight to commercial property investment.
In Japan, GDP growth slowed down in the third quarter, although rebounded somewhat by year-end to 2.2%, the strongest annual pace since 2004. Limited supply of stock and a heavy reliance on the external sector may be weighing on the minds of investors who tempered purchasing activity in the second half of 2006.
Forecasts For Occupier Market:
Global business demand for real estate is expected to expand at a faster pace in the emerging markets. Emerging Asian demand should continue rising at the strongest pace of all regions, closely followed by emerging Europe, following the continued recovery with the Eurozone. Across all world regions, the slowdown in the US is not expected to dampen the occupier demand conditions while tenant demand is expected to strengthen further.
Forecasts For Investor Market:
Limited supply of available stock has lowered yields at a faster pace in emerging markets as cross-border investors continues to dominate purchasing activity. Interest rates in Japan are likely to remain stable in 2007 and liquidity conditions will tighten only gradually which should support a measured slowdown in global property markets. Downside risks come from renewed inflationary pressure. Such scenario would result in higher interest rates, which will narrow yield attraction of more risky investments, a key driver of cross-border activity in recent years.
