CBRE's global chief economist, Richard Barkham, shares his insights on global economic trends and their impact on commercial real estate markets worldwide.
In this edition of Ahead of the Curve, we consider the latest survey evidence: positives on the economy but nervousness in real estate.
One of the quiet revolutions in economics over the last 20 years has been the growing use of surveys.
For timely data on everything from consumer sentiment to investment plans and export volumes, survey data are more easily compared across countries than actual economic data, because the method of collection is consistent.
I pay particular attention to the PMITM (Purchasing Managers’ IndexTM) surveys of manufacturing and service sector activity, published by IHS Markit. The top table below shows the results of the latest manufacturing survey compared to one year ago, while the second table shows the service sector. A score of over 50 means that output is growing.
This time last year, manufacturing output was stagnant in the developed economies and falling in the emerging markets, and corporate sentiment was weak.
Over the last 12 months there has been a pronounced bounce-back in activity, particularly in the large developed economies.
The resurgence is less strong in the key emerging markets, but Russia and China have moved out of manufacturing recession and Brazil is heading in the right direction.
There has also been a notable pick up in the service sector, particularly in the U.S. and Euro Area.
Activity is a little weaker in India and China, with the former adjusting to the impact of demonetisation. Russia however, has surged and Brazil looks like it will exit recession in 2017.
On balance, the global economy is expanding nicely.
Conditions are as healthy as they have been since the end of the financial crisis, but real estate investors are uneasy.
CBRE also uses surveys to assess real estate market conditions. Our Global Investor Intentions Survey, released last week, is rich in detail on investors’ changing sector and region preferences, and it also covers sentiment.
Investors remain positive towards real estate, but seem decidedly cautious on the global economy.
Investors are no longer looking for capital growth: Yield, or income return, is the main motivation for investing in 2017. Their main concern is that a global economic shock will undermine occupier demand, and their second main concern is that interest rates will rise more quickly than expected!
Investor caution at this stage of the cycle is understandable, with the events of 2008 still fresh in the mind. This caution will prevent excesses—of leverage, for instance—which is not necessarily a negative outcome. My view is that real estate values only decline in periods of recession, and the global economy is well capable of absorbing shocks in 2017 and 2018.
For the time being, investors should take comfort in improved economic news as revealed by surveys.