As we pass the end of the first quarter, there is a sense of cautious optimism in the global real estate market, driven by better-than-expected economic growth and robust occupier fundamentals.
However, we cannot ignore that we are in the winter of the cycle, and with prime yields at record low levels across Europe, investors are faced with a new set of challenges.
Having spoken or met with more than 85 international investors in seven countries so far this year, what has struck me is that regardless of investor type or global region, the same key themes are at the forefront of everyone’s minds. These concerns and trends were mirrored in the findings of CBRE’s recent EMEA Investor Intentions Survey.
Here are four insights that I believe will be fundamental while navigating the global investment market this year:
- Pricing of assets – investors are increasingly concerned about asset pricing. Prime yields across Europe have moved well below levels recorded at the previous market peak. Yet the sector remains favourably priced compared with other asset classes, especially when you consider the high-income returns property provides. In terms of relative global pricing, and on a like-for-like basis, prime Europe still displays value when compared with the largest Asian cities and markets.
- Are we moving up the risk curve? Keen pricing coupled with a shortage of stock in certain cities has resulted in the market becoming more asset-driven. Investors are willing to pay the right price for the right product but are becoming more discerning. It also raises the question of whether they will be willing to move higher up the risk curve in search of yield. Alternatives will be the ones to watch – 70% of European investors are actively pursuing investments in alternatives, with student housing and real estate debt becoming increasingly favourable.
- Economics over politics – while 2017 was a year of major political events, with Brexit and European elections, this year investors are far more preoccupied with monetary policy and economic fundamentals. Interest rate rises and the subsequent impact on values appear to be the primary focus of concern, and are likely to be another factor affecting investment decisions. However, the political sphere is still likely to get very noisy, particularly in the UK, in the second half of the year as Brexit negotiations reach crunch point.
- There is a flexible revolution – innovation is presenting the investor community with a different way of thinking. A new class of office occupier is using technology to provide a broader range of services, more flexibility and a greater sense of place.
These ‘co-working’ operators have yet to be fully ‘cycle-tested’ but they appear to understand how the service sector is evolving and investors are having to assess the value of co-working space as an integral component of traditional office buildings. In the short term at least, 30% of investors agree that co-working environments are the future of office work and should be embraced, while we expect 20% of future corporate occupier portfolios to be dedicated to flexible space.
Ultimately, the property market faces a complex mix of cyclical and structural forces. Sometimes those forces will compound each other; sometimes they will work in opposite directions. The sector has never before attracted as much international capital, but it remains to be seen whether it will all be placed effectively. Consequently, it is just as important to think about what type of cycle we are in as where we are within it.
Chris Brett is head of international capital markets at CBRE