MIPIM, March, 15, 2016 – In a report released
today, global real estate advisor Colliers International explains why, despite
ongoing political, economic and financial headwinds, the commercial property
bull market rumbles on in search of a second peak.
In “A View from the Top”, Colliers International suggests that UK and
European property markets, especially the core sectors, appear to be walking a
tightrope, at a height in terms of pricing, but sentiment appearing to be neither
rising nor falling in any convincing trend.
“Since mid-2013 the property industry has enjoyed a bullish market,
however over the last six months since the Chinese share crisis, political,
economic and financial volatility has given investors a cause for a pause.
“There looks to be considerable life left in this bull. Many of the
property market drivers that helped to achieve record volumes and pricing in
the UK and Europe remain unchanged and will go some way to keep property on the
radar of international investors through 2016 and beyond,” said Walter
Boettcher, Chief Economist, Colliers International.
Colliers’ report shows that while there is evidence to suggest a transactional
peak in the UK in 2015, European volumes are yet to show any significant
decline. Low interest rate expectations, the sheer weight of capital targeting
property, high demographic pressure and the intensity of the international
search for yield remain unchanged and continue to position property as a
‘lift off’ in the US, base rates in five
years’ time are anticipated to be less than half the level they were in 2007
at the property market’s previous pricing peak. This will have a positive
impact on the weight of capital targeting property and the ability of investors
to use ‘cheap debt’. We are seeing this globally.” Said Richard Divall, Head of
Cross Border Capital Markets, Colliers International.
The global weight of capital targeting property remains substantial. Institutional investors have steadily increased their allocation to
property from 8.9 per cent in 2013, to 9.6 per cent in 2015 and are expected to
approach 10 per cent by end of 2016. Just a one per cent increased allocation
across the funds is equivalent to a $360 billion increase in funds targeting
“With debt availability and affordability improving,
far from the search for yield
moderating in the face of increased risk, there is evidence to suggest that as the
economic and financial volatility experienced in early 2016 passes, commercial
property may be faced with a new episode of ‘risk on’ investing,” said Divall.
The paper also highlights that one of the least
appreciated forces at work in commercial property is on-going demographic pressure. This is especially apparent for
pension funds that face increasing pressure on to find sufficient returns to
match the growing annuity liabilities of a rapidly growing, yet ageing
population in Europe and increasingly in Asia too.
Since the beginning of 2016, economic and financial markets have proven
to be very volatile, particularly in the equity and bond markets.
this environment, investment into direct property for steady returns continues
to make sense in comparison to other asset classes. For example; in December 2015
UK total returns on property exceeded equities by over 10 per cent. However the
property market is not immune to fiscal
market sentiment explains Damian Harrington, Head of EMEA Research,
Colliers International; “Core property looks expensive by historical standards
and with prime office yields in key European markets on average 75bps lower
than at the previous market peak in 2007, this suggests that a substantial
pricing correction could be in the offing. What is obviously different today is
the underlying yield pressure. In 2007, ten-year bonds were roughly equal to
prime office yields, but in early 2016 ten-year bonds are on average 2.75 per
cent lower. Clearly, there is scope for core assets to continue trading at
lower yields with little outward shift for some time - perhaps in perpetuity.”
The key impact of ‘full pricing’ of core assets is
that future performance will not be linked to further yield compression.
Instead, investors buying core assets will rely primarily on income and rental
growth to generate returns. Investors who already own core assets look unlikely
to sell as there is little chance to replace these assets with other core
“Low interest rates has led to an
unprecedented weight of capital looking towards real
estate which has caused a large disconnect between capital markets and
occupational markets. Although geo-political risks weigh heavily on investors’
minds, we at a stage in the cycle where the occupational markets need to catch
up with the capital markets and hence why we are seeing a pause in Tier 1 markets,”
Divall adds; “Brexit is causing more
uncertainty to investors in the UK than expected with many pausing and
watching. In addition to current high pricing levels in the UK, relative high
cost of finance compared to Tier 1 markets in Europe is helping to see a shift
of capital onto the continent as property fundamentals improve and investors
continue to expand their global and regional real estate portfolios.”
As more long-term investors (20-30 years) have
entered the market, the volume of available stock on rotation has diminished.
The main impact has been to drive investors to look at ‘alternative’ property
assets where competition for product is lower.
Boettcher said: “Direct investment into alternative
property assets reached a new high of £28 billion in the UK in 2015, or 40 per
cent of total direct property investment. This looks increasingly like a
substantial structural change in the UK investment market.”
Harrington adds: “Across Europe the story is
different, but perhaps surprisingly, not far off the shift to alternatives in
the UK. By the end of 2015, residential investment surpassed industrial and logistics
as the third most prominent form of investment after office and retail assets*.”