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Sector Profiles

Real Estate Industry


This report covers real estate around the world, looking at the residential sector as well as the market for commercial property.

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Major Industry Trends

Outlook for Commercial Sector Improves

According to Jones Lang LaSalle (JLL), the world’s dominant commercial real estate markets moved into 2014 in better shape than at any time since the global financial crisis of 2008–2009. According to JLL’s “Global market perspective” for the first quarter of 2014, capital markets were “exhibiting remarkable strength and the disconnect that has emerged over the past two years with a more cautious occupational market is showing signs of narrowing.”

In its report the company said that the improvement in the market was being driven by a steady improvement in the global economy, with GDP growth accelerating. Higher business confidence and perceptions of fewer downside risks are spurring corporations to spend again. Crucially, the US economy and real estate market look finally to be gaining some traction.

Globally, the real estate investment market is displaying exceptional liquidity in both the equity and debt markets, according to JLL, with a huge weight of money chasing commercial property. In 2013 this was evidenced by:

  • full-year sales transactions up 21% to US$563 billion;

  • fourth-quarter volumes hitting nearly US$200 billion—a level not seen since mid-2007;

  • 24 countries achieving in excess of US$1 billion in transactions during the last quarter;

  • Several major markets registering record transaction levels, including China, Australia, Canada, and Singapore;

  • Further prime yield compression and an acceleration in capital value growth, increasing by an average of 7.5% year on year for prime office assets.

Very strong competition for a limited stock of core assets is forcing investors up the risk curve into “non-core assets in core markets” and “core assets in non-core markets,” notes JLL. For example:

  • global investment volumes in the hotel sector were up a massive 40% in 2013, while industrial transactions in Europe grew by 70%;

  • second-tier cities, such as Seattle, Atlanta, regional cities in the United Kingdom, and Osaka in Japan, are capturing a greater proportion of real estate capital;

  • investors are seeking out markets that until recently were considered “out of bounds,”—notably in Southern Europe, where there has been a rapid change of sentiment;

  • investors are also targeting value-added opportunities and moving into development in order to access product.

A buoyant investment market is being assisted by a robust recovery in the debt markets, JLL observes. It says that this is most evident in the United States, where debt capital providers are boosting funding levels to new post-recession highs. Commercial mortgage-backed security (CMBS) issuance was up a significant 78% in 2013 to US$86 billion, a level that could well exceed US$100 billion in 2014. The European debt markets are lagging, but are nonetheless also showing strong improvement.

Deals already in the pipeline point to further growth in global investment activity during 2014. JLL’s initial forecasts indicate volumes of US$650 billion, a 15% uplift on 2013 levels and representing the fifth consecutive year of growth.

The company said that several factors point to continued momentum in the investment market for stocks and property over the coming year:

  • a substantial weight of capital is sitting on the sidelines looking for product, and a broad range of investors have announced intentions to make fresh commitments in 2014;

  • new capital sources are constantly emerging, with a surge of new capital expected from Asia and specifically China, which is exporting capital on a large and increasing scale;

  • more product is expected to come on to the market as vendors take advantage of the current market cycle.

Further growth in activity in secondary markets and assets is anticipated, supported by better access to finance.

Occupational Market: Leasing and Renting

Meanwhile, the occupational markets are exhibiting early signs of a more sustainable recovery, according to Jones Lang LaSalle’s report. Improvements are uneven however—corporate occupiers are still exercising caution and remain firmly focused on value.

Office-leasing markets in the United States are now showing a much more cohesive recovery, with volumes up 7% year on year. Europe’s volumes bounced back by 18% during the fourth quarter, with London taking a clear lead. In Asia-Pacific, volumes rose by 6% in the fourth quarter, although leasing activity remains mixed across this diverse region.

The report adds that the technology and energy sectors continue to be the main drivers of corporate occupier activity, while improving prospects are also apparent in insurance and life sciences. Confidence is gradually spreading to other business sectors, and corporate demand in 2014 is likely to be more broadly based than in either of the last two years. Even the finance sector is showing “signs of life,” accounting for the largest deal in London during the last quarter of 2013.

During 2014, according to JLL, corporates will be less capital-constrained and, with the increased business confidence, there should be more willingness among senior business leaders to authorize capital expenditure, contributing to a 5–10% uplift in leasing volumes during the year. The company also predicts more expansion demand, with net absorption up by 20–25% globally, although the paucity of supply may constrain some expansion plans.

The development pipeline across all commercial sectors is largely under control, and shortages of high-quality space will intensify during the year. Construction levels are well below trend, but early evidence points to an uptick in development starts during 2014 and 2015. Even so, new deliveries will be below trend until 2016.

Residential Market Stabilizes

According to a number of analysts, the residential sector also showed signs of recovery in 2013 and early 2014. Scotiabank of Canada, for example, in its quarterly “Global real estate trends” released in December 2013, said that housing conditions globally are displaying increasing strength, underpinned by improving growth prospects and highly stimulative monetary policy. While a number of national markets in Europe remain weak, most major advanced nations are showing more positive signs, the bank added. Property markets in most emerging nations in Asia and Latin America remain relatively buoyant, with China in particular reporting accelerating price gains.

According to Scotiabank, the United States maintains its position on the top rung among advanced nations in its survey of international house prices, with average inflation-adjusted home prices up 8% year over year in the July to September 2013 period. Although higher mortgage rates have slowed the momentum in US home sales in recent months, low inventories and a shrinking pool of distressed properties continue to underpin prices. Strengthening job and income growth, pent-up demand, and still historically high housing affordability should sustain the recovery into 2014, the bank believes.

Scotiabank found that conditions in the European property markets were mixed. The housing recovery in the United Kingdom was gaining momentum, supported by the government’s “help to buy” home purchase program for low-deposit borrowers. With the rebound, the Bank of England has announced the phasing out of a mortgage lending incentive program in early 2014, which may restrain the pace of price appreciation going forward, according to Scotiabank. Meanwhile, it observes, Sweden and Switzerland continue to report steady real growth in house prices.

Home prices are also rising in Ireland and Germany, mirroring improving domestic activity according to the bank. However, depressed labor market conditions continue to hinder a recovery in Italy, Spain, and France. A gradual pickup in economic activity and consumer confidence should support housing demand in 2014, though high unemployment remains a significant hurdle to a stronger, more synchronized turnaround.

Meanwhile, Scotiabank finds that China’s property market continues to heat up, with the majority of major cities showing robust price growth through fall 2013. The reacceleration in prices has prompted further official cooling efforts, the latest aimed at increasing supply, the bank notes. Home prices are also reaccelerating in Australia, where low interest rates are stoking demand notwithstanding soft labor market conditions. Thailand and Indonesia are reporting steady price gains, while property markets remain soft in India and South Korea.

Housing activity remains relatively buoyant in most parts of Latin America, the bank reported. Brazil, Chile, Colombia, and Peru continue to see fairly robust price growth, underpinned by comparatively favorable domestic economic conditions, while property markets in Mexico are showing signs of steadying, although earlier overbuilding and sluggish economic growth will forestall a major upturn.

Scotiabank said that it expected the renewed momentum in global housing activity to be sustained in 2014, supported by gradually improving labor markets and strengthening consumer sentiment. Notwithstanding rising longer-term borrowing costs in many nations, short-term interest rates are expected to remain at historically low levels. From a regional perspective, underlying fundamentals—including affordability and supply—point to the US housing market as an outperformer in the year ahead, the bank concluded.

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Market Analysis

In the United States a total of 5.09 million previously owned houses were sold in 2013, compared with 4.66 million the previous year and the most since 2006, the National Association of Realtors reported in January 2014. The US real-estate agents group said that purchases reached an annualized rate of 5.39 million in July and August, a four-year high, before a jump in mortgage rates hurt demand. Improving confidence should support business and consumer spending, helping the jobless rate. Growth in employment and wages should help households to sustain demand for housing in 2014.

However, while the US market is well on the road to recovery, there are growing concerns about the market in China. Indeed, there are fears that China may be experiencing a build-up of problems similar to those seen in the United States in the lead-up to the global financial crisis

China’s housing prices have risen rapidly in recent years, growing by about 10% in 2013. According to official statistics, prices for homes in the largest cities have risen still more steeply. In December, home prices in Beijing, Shanghai, and Shenzhen increased by 16% to 20% above the previous year’s. In Nanjing, prices have increased by 15.6%. To cool the housing market, the government wants to build 36 million affordable homes by 2015 and has taken a number of steps to subdue demand.

For example, the Chinese government has made it difficult for investors to buy more than one apartment in major cities, leading to a plunge in prices. However, this drop in demand caused many developers to run out of cash and stop projects midway, leading to a slowdown in construction and economic growth. If growth stagnates, developers will not be able to repay loans, a debt crisis could ensue, and the economy could seize up. This would be similar to the financial crisis that followed the real estate collapse in the United States in 2008, and there are concerns that a crisis in China’s real estate sector could lead to social unrest.

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Further reading on the Real Estate industry



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