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Global Market Perspective – Fourth Quarter 2011

AUSTRALIA, 23 NOVEMBER 2011 – According to Jones Lang LaSalle’s Fourth Quarter Global Market Perspective, while the world’s real estate markets have been unsettled by economic uncertainties in Europe and the US, so far investment volumes, tenant absorption rates, prime rents and capital values have held up remarkably well.
The Global Report states that most key markets are in better shape than they have been for several years and are making steady progress through this period of heightened economic volatility.
Nevertheless, weaker sentiment has caused investors to pause and appetite for risk has diminished as refuge is taken in core well-let product.
In Australia, commercial property remains well positioned for growth with occupier and investor fundamentals improving in Q3 2011. There was strong absorption in most office and industrial markets in Q3, with no direct evidence of a slowdown as a result of global financial market volatility. In fact, most leasing transactions include elements of genuine expansion.

Positives for Australia this quarter were the strong GDP print for Q2, while the low inflation figure for the September-quarter resulted in the RBA cutting rates and removing the mildly restrictive monetary policy setting at their November meeting. On the other hand, the manufacturing and retail sectors remain under pressure given the high AUD and global competition in value-add exports.

Head of Office Investments, Australia at Jones Lang LaSalle, Simon Storry said, “Investment sales volumes remain high overall, but lower than last quarter. There are a number of transactions in the advanced stage of due diligence that are expected to complete in Q4, taking transaction volumes above the long-term average.
“Investor appetite for Australian commercial property remains solid overall. Offshore investors targeting Australian assets continue to be price setters; generally supported by a lower cost of capital than many domestic institutional investors and depending on their origin they may be supported by a strengthening currency.
“Offshore investors so far account for 30% of all direct commercial property transactions (excluding hotels) in the first nine months of 2011. If this holds up it will be a record proportion of net investment into Australia by offshore groups in 2011,” said Mr Storry.
Looking ahead to 2012, Jeremy Kelly, Director in Jones Lang LaSalle’s Global Research team and author of the firm’s Global Market Perspective, commented: “We continue to expect positive rental growth in major prime office markets during 2012.  Most major markets are expected to see at least single-digit growth, with some markets such as Beijing, Tokyo, San Francisco and Toronto having the potential to outperform in 2012.”
He added: “Despite signs of a deceleration in office leasing activity across the major international business hubs, the average global office vacancy rate of 13.8 percent is now the lowest in two years.
“The prime leasing markets in advanced economies are fairly tight and the supply pipeline remains very low. In this context, we believe that markets are well placed to resume their growth pattern once a degree of confidence resumes,” said Mr Kelly.
The key highlights from the Fourth Quarter 2011 Global Market Perspective are:
  • Economic volatility and uncertainty are negatively affecting sentiment.
  • Real estate markets are diverging.  While the major emerging markets remain resilient, by contrast, leasing activity in the main financial hubs – notably London, New York, Hong Kong and Singapore - has weakened.
  • Global commercial investment volumes have held firm in Q3, but there is a possible downside of 10% on our projected outcome for full-year 2011 of US$440 billion.  Debt is harder to come by; the CMBS market has slowed and growth in the trading of secondary property has softened.
  • Prime rents continue to grow, albeit at a reduced pace.  Our Global Office Index, which tracks the rental performance of prime office space across 81 major markets, increased by 1.1% in Q3, compared to 1.6% in Q2.
  • Rental expectations for 2012 have been lowered, but they are still in positive territory, with most major office markets expected to register at least single-digit growth next year.  Hong Kong and Singapore, however, may see rents soften.
  • Prime yields are stable, underpinned by on-going investor demand for core assets.  Capital values for prime offices have increased by 14% year-on-year (across 23 major markets).  Spreads on bond yields have widened, which has further increased the attraction of real estate.
  • Strong demand from the technology sector is boosting the performance in some tech hubs.   Silicon Valley’s prime market has recorded the world’s fastest rate of rental growth in Q3 (at 60% year-on-year). 
  • Vacancies have continued to edge downwards.  At 13.8%, the global office vacancy rate is now at its lowest for two years.  The supply pipeline in advanced markets remains very low and, in the current climate, further cancellations/postponements of projects are likely. 
  • Retailer demand across major emerging markets remains buoyant, as retailers seek to tap into rising incomes and favourable demographics. 
  • Increasing caution is tempering the recovery of industrial warehousing markets.  Demand for logistics space remains healthy in China.
  • Trading performance continues to be strong in the hotels sector, although global volumes are likely to slow from the lofty levels of H1.  Portfolio deals dominate hotels activity.
  • The US rental apartment sector continues its expansion.  In the tightest multifamily markets, rental growth is likely to remain robust, underpinned by low supply and positive demographics.