19 Oct 2016
Q1 2016: Global Cities Commercial Monitor European real estate continues to attract investors
- Cities across Germany display firmest investment market momentum
- Dublin respondents most confident in seeing further capital value and rental growth worldwide
- Feedback points to values being stretched in Doha, New York and Zurich
The Q1 2016 RICS Global Cities Commercial Property Monitor shows a marked divergence in current sentiment towards investment opportunities in key cities around the world as well as in expectations regarding the medium term outlook. German cities continue to feature strongly as attractive centres for funds despite the strong gains recorded in recent years which have pushed up valuations; as a result, around three quarters of respondents in Munich and Berlin (and a little less in Frankfurt) now view their local market as expensive to some extent. The latest data is consistent with increasing interest in some secondary locations as robust confidence in rental growth prospects help support more positive views on pricing.
Other European cities reporting particularly firm Q1 results include Budapest, Dublin and Lisbon. In all three cases, the RICS Investment Sentiment Index (ISI) moved further into positive territory compared with the final three months of last year, and is being underpinned by increasingly attractive occupier markets. The appeal of these cities is supported by the perception that they continue to offer relatively attractive valuations which is also reflected in the assessment that the respective markets are still some way between the early and mid-upturn phase of the real estate cycles.
Moving away from Europe, the latest survey suggests the mood music remains upbeat in the Auckland commercial market with Sydney and Melbourne also reporting firm results. Prime office remains the most robust segment of the market with investor enquiries, including foreign interest, continuing to grow strongly; alongside this, there is more evidence that the tenant market is improving which is being reflected in upward revisions (compared with previous surveys) to rental projections for the next year and beyond.
At the other end of the spectrum, the results from Singapore were particularly weak for the first quarter, extending a deteriorating trend that goes back to early part of 2015. Significantly, the worsening picture for the occupier sector is taking its toll in a more pronounced way in terms of investment activity. Projections for rental declines are visible across the sector with prime space also forecast to suffer, albeit to a lesser degree than secondary property. On the back of this, it is noteworthy that there is still little belief that the market as yet offers any real value with few respondents describing local real estate as cheap. Other cities which fare badly in the survey include Jakarta, Moscow, Johannesburg, Hong Kong, Athens, Zurich, Dubai and Abu Dhabi. There is a familiar ring to these names which reflects at least in part ongoing macroeconomic challenges. However while a few of these markets are now beginning to offer some level of value for investors, according to respondents, others continue to look dear despite their lacklustre recent performance. In the former category are Moscow and Athens while in the latter, more than four fifths of contributors now view the Zurich market as either expensive or very expensive.
Measures taken by the Chinese government to support the economy in the wake of growing concerns over the risk of a severe slowdown have filtered through into the Q1 results with the RICS Occupier Sentiment Index (OSI) turning positive in Shanghai and reporting a less negative reading in Beijing. This has helped to fuel renewed interest from investors with the RICS ISI for both cities moving higher over the quarter. Significantly, this has also been reflected in a renewed appetite from foreign investors to seek out opportunities in the market. The forward looking numbers still show a marked divergence between expectations for prime and secondary real estate although the better tone is beginning to translate into a broader range of office developments.
In India, further policy easing from the Reserve Bank has provided timely support for the economy and been reflected in modest improvements in the RICS OSI readings for Mumbai, NCR and Bangalore. Sentiment regarding the prospects for offices remains most favourable but there have also been modest gains in the retail sector’s readings in all three cities. On the investment side, the numbers continue to increase in a modest way with capital gains expected to be strongest in prime offices. NCR has the highest proportion of respondents indicating some concern over pricing but almost two thirds view the market as being around fair value nonetheless.
Turning back to the more mature real estate markets, key occupier indicators as measured by the RICS OSI show more modest improvements in New York, and to an extent in London, over the quarter (compared with the preceding three months) after a strong couple of years. By way of contrast, the index in Paris moved back into positive territory reflecting the gradual improvement in the French economy (and further policy action from the ECB).
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