The global volume of real estate investment transactions rose in Q2 by 4.5%, reversing five quarters of year-over-year decline, as reported in our most recent global MarketFlash
Chinese domestic buyers and rebound in Britain drive increases in APAC and EMEA; U.S. down from past two years.
There was a marked upturn in trading activity in the U.K., up 68.6% on Q2 2016.1
The U.K. tends to be a bellwether of global investment sentiment. So, the uptick in activity is a positive signal for global volumes for the rest of the year. Hong Kong investors were particularly active in the U.K. market, as were German funds. While the opportunity for yield and the weakness of sterling are motivating factors, this is a vote of confidence for Britain, following last year’s EU referendum.
The U.S. posted a decline in volumes of 7.7% relative to Q2 in 2016. It was still the third best Q2 since the Great Financial Crisis, but weaker than 2015 and 2016. Volumes increased in the Southwest and Southeast regions by 7.3% and 1.5%, respectively—possibly due to the higher yields that are on offer in cities such as Orlando, Charlotte, Atlanta, Houston, Dallas and Denver.
Investment volumes were up by 16.8% in Asia Pacific, largely driven by domestic buyers in China and Hong Kong. Tightened controls on capital outflow in China may have strengthened local capital deployment, but the recent improvement in China’s GDP growth is also a factor.
What’s in store for the rest of the year?
The expected modest pick-up in world economic growth will be a positive factor. GDP is not the only factor that drives global investment volume, but it is the main one. We estimate that variations in the rate of GDP growth account for around half the variation in transactions volume change (see Figure 1).
As well as supporting higher rents, GDP growth generates positive sentiment, increased occupier demand and easier lending conditions. Five quarters of sub-par growth in the U.S., up until Q2, had been quite negative for sentiment in what remains the world’s deepest pool of real estate capital.
There are, of course, some negatives. Shortly, the U.S Federal Reserve will begin to reduce the size of its balance sheet. It will begin to reverse the quantitative easing program it put in place during and after the Great Financial Crisis. This will be a slow and careful process which will happen over the next 10 years, but it is likely to put upward pressure on bond rates. Low inflation and the fact that central banks elsewhere continue to use QE will be powerful countervailing factors, so we do not expect a major bond market movement. Investors, however, may remain wary, until they see how the Fed’s balance sheet management plays out.
The positives and negatives are evenly balanced, which suggests that the level of real estate transactions will be broadly similar in 2017, to what it was in 2016. In other words, the headwinds of the last five quarters have eased slightly and we have reached a plateau.
Are we seeing a more sustainable cycle?
One thing we can say is that the slowdown in volume growth that has taken place in the last couple of years has probably made this cycle a bit more sustainable. Figure 2 shows the total level of investment volumes as a percentage of nominal global GDP.
Despite the attraction of real estate as an investment, the annual volume of transactions is now at a much lower level relative to global GDP than in the peak of the last cycle. The level of transactions growth may be constrained by the increase in the marketplace of capital which has an ultra-long hold period. In any case, the recent cooling of the market is a very healthy thing.
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Measured with fixed exchange rates.