June 29, 2017

The Capital Continues to Flow

Posted in Integrale Advisors LLC, Keith Knutsson, Real Estate tagged , , at 1:42 am by Keith Knutsson

The world economy has been surprising many macro investors in the real estate market. First quarter reports begin to reveal political drama is impacting markets closely resembled in Q3 and Q4 of 2016. The outcomes of the Dutch and United States elections were surprises that have positively impacted global capital markets with renewed animal spirits to start of the fiscal year.

Real estate has continued to thrive with transactional volumes of $136 billion in the first quarter, 16% better than the Q1 2007 average. However, these numbers are slightly down from the performance of the Q1 of 2016. A decline in activity in the Americas has been offset by increases in Asia-Pacific and Europe, Middle-East, and Africa (EMEA).

Unpredictability still surrounds the long-term effects of BREXIT, nevertheless investors have been opportunistic enough bringing the United Kingdom’s transactional volumes to similar levels seen in 2015, in British Pounds. Despite early conclusions drawn about BREXIT, London has regained its rank as the most traded city, reclaiming its number one spot from two years ago. Foreign investors sought opportunity in British capital, recording the biggest cross-border transaction of the first quarter to date. The prominent ‘Cheesegrater’ building in London was a $1.3 billion office deal, ranking among the top ten transactions ever recorded. Steady demand for German portfolios also contributed to record high activity. Other notable performers in the European Union (EU) were the Czech Republic, Spain, Netherlands, and France all contributing to surpassing last year’s level. These countries contributed to a year-over-year (y-o-y) growth in volume at $53 billion. Keith Knutsson expounds upon this growth, claiming “the effects of the decade-old financial crises have finally settled and the European Central Bank’s loose monetary policy is taking effect, encouraging households and companies to borrow money and spend more.”

In the Asia-Pacific realm, Singapore and China proved to be superior in activity compared to the declines observed in Hong Kong, South Korea, and Australia. Japan, after being surpassed last year as the top market performer for its region, achieved its best quarter since 2015. Japan attained quarter-over-quarter 38% above its Q1 2016. This has been attributed to a large influx in its logistic and office sectors and is expected to continue into 2018, as the office sector continues to dominate for its 17th consecutive quarter.

The Americas suffered a 12% decline in transactional volumes, being the biggest shock to macro investors. Mexico’s volumes reached nearly $1 billion in volume while Brazil experienced its busiest quarter in two years. Vancouver, Canada set the pace in Canadian markets with major transactions doubling its national volume.

To help quantify the market share for transactional volumes of Q1 2017 locations, there are ten major players considered around the world:

USA – 46% UK – 14% Germany – 10% Japan – 10% Canada – 5%
China – 4% France – 3% Spain – 3% Sweden – 3% Hong Kong – 3%

Demand for real estate is set to stay strong throughout the rest of this fiscal year. According to Jones Lang LaSalle (JLL), an investment management company specializing in real estate, claims “sustained compression of prime yields may be coming to an end.” In most major markets these yields remain unchanged, despite double digit drops in Sydney, Milan, and Frankfurt. Their recommendation to investors is to stay focused on income growth over capital appreciation, rather than the anticipation of rising interest rates.

The largest portfolios to date are industrial and hotel, each with 11% growth. Industrial looks promising in growth with a large European portfolio planned to close in Q3 or Q4 of this year. Looking forward, political agendas that shape public policy will be more predictable as new-elects settle into their positions.

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