Middle Eastern investors broaden global search JEDDAH – In Q1 2010, direct commercial real estate volumes stood at $63 billion, representing a 57 percent increase on the same period in 2009, Jones Lang LaSalle said in its latest report on Global Market Perspective. Volumes were down marginally on Q4 2009, reflecting a combination of seasonality and currency movement, but the underlying trend remains upwards. Among the world's major real estate investment markets, Japan and Germany have seen the largest rises during Q1 2010, while the US, UK and Australia have each paused for breath. The Asia Pacific region has shown the largest increases in Q1, underpinned by strong growth in Japan, South Korea and Hong Kong. China continues to rise up the investment rank, and is now the world's fifth most active market. Capital targeting the real estate sector is on the increase. The sector's performance is appealing to a broad range of investors as the world's economies emerge from recession. This is driving a weight of money in search of secure income today and upside potential as the leasing markets start to recover. This trend is evident worldwide and real estate investor confidence has returned. A wide range of investors are now active, with a notable return of the recapitalized REIT sector and resurgent interest from fund managers. The latest Global Real Estate Health Monitor (GREHM) shows that most major economies are growing, although recovery in Europe remains patchy and fragile. In the United States, the first substantial evidence of job creation has emerged and employment is also growing across the Asia Pacific region. China's annual economic growth has surged to nearly 12 percent in Q1. The world's main stock markets are at an 18-month high and the REIT sector has also seen a revival in tandem with the rally in the equity market. The global economy has now been in recovery since Q2 2009 and a year on there is increasing evidence that the recovery in the business environment is filtering through to real estate. Improving fundamentals and credit conditions are boosting real estate investor activity, encouraging more cross-border deals and driving up capital values in some core markets. Even leasing volumes, which have lagged the real economy, are beginning to recover. A feature of Q1 2010 was the return of the cross-border investor, although they never entirely left in Europe. Globally, cross-border deals accounted for almost half of all investment activity in Q1 2010, compared to just a quarter in Q1 2009. In Asia Pacific, cross-border activity rose by 35 percent in Q1, and while most cross-border deals are from Asian-based investors (e.g. Korean, Malaysian, Singaporean and Japanese), Middle Eastern and German investors are also returning. Middle Eastern investors (notably capital from Qatar) are also active in the US and UK, and are broadening their global search into selected markets in Latin America and Southeast Asia. Some Australian investors are withdrawing from the direct overseas markets as they rebalance their portfolios in favor of domestic markets. Encouragingly, cross-border activity in the US has risen from 26 percent of overall investment in Q3 2009 to 44 percent in Q1 2010, and in fact most major US transactions have had some level of cross-border involvement. Interest in US real estate from Asian investors (Chinese, Japanese and Korean groups) has intensified in recent months, with the focus on top-tier coastal markets. In Europe, global capital is taking a broader look across the continent, and while the focus continues to be on the UK, funds are moving into Paris and Germany as the first targets in continental Europe. All capital-raising is evident across all three regions, boosting the volume of funds targeting real estate. Strong investor competition and a shortage of prime product in all core markets are pushing up capital values and encouraging some investors to move up the risk curve into second tier markets and value-added opportunities. Capital placement is now becoming the biggest challenge. Debt is gradually freeing up, although both debt and equity are chasing the same narrow band of top tier product. So banks are very focused on prime real estate, while lending for secondary properties is thin, and is restricted to good quality real estate in secondary markets (rather than poor quality real estate in core markets) with higher margins and lower LTVs. Overall, the capital markets are discounting the immediate macro-economic challenges in order to capture future growth in leasing markets as it becomes more established. This will happen at different speeds since the major economies are at different stages of recovery; economic growth is still fragile in Europe and the United States but resurgent in Asia Pacific. Investor interest is already beginning to reflect these fundamentals. In the EMEA region, sovereign debt issues continue to weigh on the market. Despite Eurozone leaders agreeing to a support plan of coordinated bilateral loans for Greece, concerns remain that sovereign debt default could threaten economic recovery. In the Gulf region, the Dubai government has unveiled a long-anticipated debt restructuring plan, pledging to inject $9.5 billion into Dubai World, a commitment welcomed by the business community. In the Asia Pacific region, economic forecasts are upbeat. However, there are concerns about inflationary pressures particularly in the residential market, which has prompted anti-speculative measures from governments. These include the introduction of stamp duty for sellers in Singapore and regulation by the Chinese government to discourage development by state-owned enterprises whose core businesses are not real estate. More government measures are likely to be implemented during 2010 if asset prices further inflate. Across the globe, but particularly in Asia Pacific, investors are reminded that an improving economic environment will be accompanied by tighter monetary policy over the next 12 to 24 months. Yields on government debt are being pushed higher and the Reserve Bank of Australia continues to lead the way by raising interest rates by another 25 basis points to 4.25 percent. Investors should recognize that the withdrawal of extraordinary monetary and fiscal policy stimuli could restrain growth and have a negative impact on the real estate sector over the medium term.
