19 Oct 2016
Q1 2016: Global Commercial Property Monitor Commodity exporters continue to struggle despite more stable tone to sentiment in China
- Germany continues to post strongest overall investment market momentum
- Twelve month rental outlook firmest in Ireland, Portugal and Hungary
- Sentiment stabilises in China but remains weak across many commodity producing nations
The Q1 2016 RICS Global Commercial Property Monitor shows sentiment across developed economies in general remains solid, with occupier and investment demand for commercial real estate increasing. Meanwhile, the softness in commodity prices continues to place financial pressure on many emerging markets heavily reliant on exports and this is being reflected in a rather downbeat near term outlook for the commercial property sector.
The latest results confirm Germany continues to exhibit the strongest current momentum on the investment side of the market, retaining the top ranking for a second consecutive quarter. Indeed, on a global comparison, the RICS Investment Sentiment Index (a composite gauge covering developments in the investment market) points to Germany, along with New Zealand, posting the most significant improvement in investment fundamentals over the quarter. In both cases, buyer enquiries continue to build at a sharp rate, across all sectors, while the supply of property for investment purposes is in decline. These dynamics continue to exert upward pressure on prices, with both prime and secondary assets expected to increase in value over the year ahead. On a more cautious note, with yields near record lows, 55% of respondents in Germany sense market conditions are close to peaking, although investor appetite shows no sign of waning for the time being.
Elsewhere, twelve month capital value projections sit most firmly in positive territory across Ireland, Hungary and Portugal (in net balance terms). What’s more, robust investment market trends are being underpinned by favourable occupier conditions. In each of these markets, strong job creation is driving demand for leasable space, causing availability to fall and squeezing rents higher as a result. In fact, respondents in these three EU countries were the most unanimous in expecting rental increases over the next twelve months relative to all nations covered.
As has been the case in recent quarters, commercial property continues to perform well in Spain and the UK, with both capital values and rents expected to rise further over the next year. That said, feedback to the survey suggests near term political uncertainty is now beginning to weigh on investment decisions, with an inconclusive Spanish general election and the upcoming EU referendum in the UK mentioned as factors hampering activity somewhat.
In total, 22 of the 34 countries covered in the Monitor recorded positive capital value and rental projections for the coming twelve months. With regards to some of the weaker markets, the steep fall in oil and commodity prices since 2014 has clouded the economic outlook in producer countries. Indeed, respondents in nations such as Russia, UAE and Qatar continue to report rising availability across both the investment and occupier markets as demand is hit by deteriorating employment trends and subdued investor confidence.
In keeping with tentative signs of improvement visible recently across economic data, conditions in China’s commercial property market appear to have stabilised. As such, overall occupier and investment sentiment indicators moved into broadly neutral territory during Q1. Nevertheless, the outlook across many Asian markets remains cautious. Malaysia, Indonesia and Singapore (all large exporters to China) are seeing demand from occupiers and investors fall further, with this weak backdrop leading contributors to anticipate capital values and rents will fall over the coming year. Twelve month projections are also negative in Hong Kong, although this weakness is largely concentrated in the retail area of the market. Meanwhile, India remains a relative outperformer across major emerging markets, supported by stronger economic growth and looser RBI monetary policy.
As a result of the challenging macro environment in Qatar, 90% of respondents currently perceive commercial real estate to be overpriced to some extent. Alongside this, a majority of respondents in Switzerland (87%), Germany (73%) and Japan (70%) were of the opinion that commercial property prices were stretched relative to fundamentals. However, only Switzerland (of the four) has seen the share of respondents taking this view increase materially over the past quarter.
The majority of contributors in Japan (61%) now sense conditions are close to peaking in the current cycle and survey comments suggest buyers are just starting to balk at high asking prices. In the US, a significant 30% of respondents view the market as nearing the peak. Nevertheless, for now, expectations point to growth easing in the near term but do not suggest a correction is imminent. By way of contrast, 64% of respondents from Brazil report the market is stuck in the middle of a prolonged downturn as political turmoil, structural imbalances and low commodity prices continue to keep the economy firmly in recession.
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