The lion’s share of global real estate investment continues to target
direct commercial real estate with US$682 billion invested in 2006, a
surge of 38% over 2005, and nearly double 2003 volumes; according to
Jones Lang LaSalle’s latest global real estate capital report, “Moving
Further and Faster”.. New sources of capital are targeting the sector,
increasing competition for assets in almost all markets. Globalisation
of the asset class continues relentlessly, with cross border
transactions now representing 42% of total investment volumes (up from
34% in 2005), and inter-regional investment reaching 29% (up from 23%
in 2005) . In addition to direct commercial real estate investment
($682bn), investors privatised REITs and other listed real estate
owning entities valued for $48bn, and purchased multi-family
residential investments totaling $170bn (note: Multi-family rental properties priced at over $5m. Exclude assisted living facilities) , bringing global real estate investment to $900bn.
Tony Horrell, CEO of Jones Lang LaSalle’s International Capital Group,
commented: “There is currently a large overhang of investment targeting
the sector with $5 of money chasing every $1 of product. Global real
estate markets performed very strongly throughout 2006; it was the
first year that all major developed and emerging market returns were
both aligned and positive. Investment was driven by increased
allocations to the asset class, growth in investible stock and by the
increased attention of opportunistic private equity players who
identified relative value in the sector. These increased flows into
real estate gave rise to two notable phenomena in 2006 – an increasing
number of ‘mega-deals’, and continued globalisation of the asset
class.”
The largest increase in investment came from global co-mingled funds,
which are now involved in transactions representing 17% of direct real
estate investment globally. Global funds acquired US$83bn (up 240%,
principally in Germany, US, UK, Japan) and sold US$39bn (up 32%).
Global funds’ purchase activity was equivalent to the entire 2006 real
estate transaction volume in Japan and France combined, or almost 90%
of total Asia Pacific volume. Global funds dominated the German market,
purchasing 40 percent (by value) of all German commercial property
traded. Other significant cross border investors included US investors
($18bn, up 51%, principally invested in the UK, France and Germany), UK
investors ($18bn, up 200%, principally Germany), Middle Eastern
investors ($13bn, up 14%, principally the US, UK, Germany and South
Africa) and Australian investors ($12bn, principally Germany and the
UK). Horrell added: “Germany’s relative attractiveness has increased
significantly due to a unique combination of willing domestic sellers,
underweight cross-border investors, positive yield spreads and a
recovering economy. Japan offers investors exposure to a recovering
economy and yield spreads of almost 200bps”.
Padraig Brown, Global Strategy and Research Director, Jones Lang
LaSalle, went on to say: “A significant driver of transaction growth
has been an increase in corporate real estate disposals. Corporate
occupiers sold over $55bn of real estate assets during 2006 with the
large corporate disposals occurring in Japan ($14bn) and Germany
($12bn) and other significant sales recorded in the US, the UK,
Singapore, Finland and France. Whereas fewer than 25% of US corporates
own their real estate, the majority of continental European and Asian
companies retain significant real estate assets on their balance
sheets. The trend towards sale and leasebacks will continue to drive
improved real estate liquidity and investor interest in these markets.
“Emerging market growth was also strong. Brown continued “Emerging
markets had a strong year with over $40bn of transactions recorded (up
74%). Many of these markets have appeared on investor’s radars only
recently and are exhibiting exhilarating rates of growth, with the
Russian market expanding by over 700% during 2006 and strong deal flow
in China, Turkey, Mexico and Brazil.
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“Real estate fundamentals remain strong, with solid economic growth
projected, vacancy rates remaining low in most major markets, and
development pipelines remaining modest. Rental growth should help
support recent yield compression, however investors should note that
the pricing differential between prime and secondary product and
markets has been lowered and ensure that risks are sufficiently
factored into bid prices.”
Regional Highlights:
Europe: $305bn in 2006 44 % on 2005 (39% in constant currency terms. Note:
European currencies appreciated significantly against the USD
throughout 2006. We convert transaction values into USD at the average
daily rate for the quarter in which the transaction occurred.)
Europe became the world’s most active real estate investment market in
2006. Cross-border investment represented 61 % of total investment (up
from 53 % in 2005) and inter-regional investment reached 39 % of total
investment (34 % in 2005). There was a distinct shift in the UK’s long
term dominance of the European market in 2006 with investment volumes
increasing strongly in both Germany and France.
Total transactions in the UK were US$101bn, 4% below 2005 levels in
constant currency terms, however the market still accounted for 33% of
European volumes (down from 49%). Germany was the major global real
estate story of 2006. A combination of willing domestic sellers,
aggressive cross-border investors, positive yield spreads and a
recovering economy resulted in transactions totalling US$62bn - growth
of over 140% in constant currency terms. The German market now accounts
for 20% of European volumes (up from 12%). The French investment market
grew by 70% to $30bn or 10% of European volumes (up from 8%).
North and South America: US$283bn in 2006, up 31 %. Cross-border investment represented 25 % of total investment (up from
16 % in 2005) and inter-regional investment reached 22 % of total
investment (15 % in 2005). Investment markets in the Americas region
are overwhelmingly located in the U.S. (96% of the region’s
transactions by value, and 40% of global investment). Other investment
markets include Canada and the rapidly growing cross-border markets of
Latin America – dominated by Mexico and Brazil.
Asia: $94bn in 2006, up 41 %.
Cross-border investment represented 32 % of total investment (up from
29 % in 2005) and inter-regional investment was 22 % of total
investment (18 % in 2005). Asia Pacific markets were dominated by a
resurgent Japan where transaction volumes surged 128% to US$52bn – 55%
of total investment in the region. Investors were buoyed by an end to
deflation and a slow but steady growth rate in the world’s second
largest economy. Japanese interest rates remain the world’s lowest,
providing investors with a healthy yield spread. Competition for assets
remains intense in the market with revitalised domestic investors
dominating activity and cross-border investment relegated to 20% of
volume. Global, US and Australian funds are the major cross border
investors. Japanese investors and corporates were the dominant vendors;
however a number of Global funds are now selling assets purchased
during the recession.
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