Following solid year-over-year growth in Q1 2018, global investment volume in commercial real estate (CRE) fell 3.2% year-over-year in Q2, ending H1 2018 with the same total volume as in H1 2017. Both EMEA and APAC volumes weakened year-over-year in H1. The Americas region showed considerable strength, thanks to a 76% year-over-year increase in entity deals and the outperforming industrial sector. The calculation is made on fixed-exchange rates for a fair comparison.i
In floating-exchange rates, investment volume grew by 3.7% year-over-year globally (Table 1), which partially reflects the weakening of the U.S. dollar.
"Our full-year forecast stays with a mild drop in total investment volume by up to 5%, as forward IRRs dropped below cost of capital in some cases. Rising bond rates in a number of economies pose some downside risks, but dry powder targeting real estate is at an all-time high."
The Americas region reported 2.2% growth in H1 2018, with Q1 and Q2 each recording US$116 billion in volume—95% of which was transacted in the U.S. The region’s industrial and hotel sectors registered 29% and 25% year-over-year growth, respectively, setting the Americas apart in an upward trend. The increased hotel investment was mainly due to Chinese investors selling off trophy assets in secondary markets. This is likely to continue, as Chinese investors deleverage and refashion their foreign investment strategy.
Meanwhile, cross-border investors are holding trophy offices and reducing new acquisitions due to cap rate compression, leading to a 13% year-over-year decline in H1 office investment in the Americas. While the retail sector continued to cool in H1, except for Unibail-Rodamco’s acquisition of Westfield, value-add and opportunistic investors showed greater appetite for malls and shopping centers in growing Americas secondary markets, with cap rates ranging from 7% to 10%. This trend reflects the bolder search for higher yields in a late-cycle position, as the average cap-rate spread over the 10-year Treasury fell by 42 bps in H1.
EMEA investment volume in H1 was down 1.9% from last year, but the fall was more than accounted for by the €12.25 billion Logicor entity transaction in 2017, which included extensive industrial real estate holdings across Europe. Excluding the Logicor deal from our analysis, EMEA saw a long-awaited bounce back in France, substantial growth in the Netherlands and Norway, and better volume in the U.K. driven by urban office purchases by Asian investors. Uncertainty remains in the U.K. due to ongoing Brexit negotiations, but the surprise on the upside demonstrated the resilience of core London assets. In key German cities and Paris, the supply shortage and record-low yields pose some downside risk, but supportive economic growth and relatively less upward pressure on European interest rates have kept investors motivated.
Investment in APAC dropped 3.2% year-over-year in H1. Southeast Asia and Australia experienced slower growth, while activity surged in Hong Kong and South Korea driven by intra-regional capital. Specifically, capital flow from Mainland China to Hong Kong and from Singapore to Korea soared for an increased supply of trophy assets, particularly office buildings and hotels. However, the overall investment momentum is likely to soften further in the coming months due to a range of factors, including the unfavorable lending environment in Singapore, Korea and Australia and higher mortgage rates, which are widening the price gap between buyers and sellers. A potential escalation of the U.S.-China trade conflict may also hinder deal flows.
iFor the calculation of fixed exchange rate totals all local currency values are converted to USD using the average daily FX spot rate in Q2 2018.
iiValues include entity-level transactions and exclude development sites.
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