INVESTMENT VOLUME WILL PICK UP IN 2021
COVID-19 has weighed heavily on global commercial real estate investment. As uncertainty grips markets around the world, CBRE predicts that investment volume will fall by 38% in 2020 and grow by 50% in 2021.1
FIGURE 3: GLOBAL REAL ESTATE INVESTMENT & CROSS-BORDER CAPITAL
Source: CBRE Research, Real Capital Analytics (Americas), Q2 2020.
PRIME ASSETS HIGHLY SOUGHT BY INVESTORS
Well-located, fully occupied office properties and prime logistics facilities continue to trade well. Transactions of single-tenant properties are increasing—a trend also occurring in other world markets like Paris, Boston, Japan, Australia, Germany and Korea, where purchase-for-occupancy or sale-leaseback options offer the potential to minimize risk for both the landlord and tenant.
DEBT MARKETS SUBDUED
Demand for financing is down due to fewer sales transactions, but the refinancing market remains active. New loans have more restrictive credit standards, such as lower loan-to-value ratios and more assurance on future revenue streams. The cost of borrowing has slightly increased in the U.S., while the risk premium has widened due to lower interest rates.
Nevertheless, the private equity world has ample liquidity. Capital available for real estate investment is estimated at $328 billion globally.2 Value-add funds remain particularly active as opportunistic investors move down the risk spectrum. Other risk-averse institutional investors, such as pension funds and insurance companies, will continue to invest in core and income-driven assets.
SELLERS EXIT THE MARKET
Property repricing has been moderate and confined to riskier assets. Distressed selling also has been limited. Many investors expect property values to drop significantly based on depressed rental income, but some sellers are taking assets off market rather than making significant price reductions. CBRE’s preliminary forecast is for a 14% drop in capital value in 2020 and a 3.4% increase in 2021. Owners who are unwilling to sell at discounts will have to extend holding by a few years—an option not fully available for close-ended funds. A wave of fund expirations in 2021 may possibly motivate fund managers to sell.
FIGURE 4: GLOBAL INVESTMENT RETURNS OUTLOOK
Source: CBRE Research, MSCI/IPD, Q2 2020.
YIELD EXPANSION LIMITED AND SECTOR-SPECIFIC
Compared to retail, the forecasts for yield expansion in the office, industrial and alternative-asset sectors do not appear as strong. By mid-2021, an average primary market3 may see office yields rise by 50 to 75 bps and industrial yields by less than 25 bps. By then, economic recovery and rising liquidity will start to lower yields. Meanwhile, global bond yields likely will stay low for the foreseeable future, making real estate more appealing.
FIGURE 5: COMPOSITE YIELDS BY MAJOR PROPERTY TYPES
Source: CBRE Research, Q2 2020.
LOWER HEDGING COSTS FAVOR THE U.S.
Cross-border capital’s share of total global investment volume fell to a six-year low of 24% in 2019. Foreign investment in the U.S. plunged by 54% in 2019, partially due to the strong expectation of a fall in the U.S. dollar that increased hedging costs for global investors. However, the dollar rose in March and April 2020 and global investor expectations have now shifted to dollar depreciation. For European, Canadian, Japanese and Singaporean investors, a window of hedging with exceptionally low cost has opened in the U.S. Chinese investors will even secure a 1.8% currency gain on top of asset returns, but capital controls likely will hinder such opportunities.
Similarly, emerging markets like Brazil, whose currency greatly depreciated against the U.S. dollar and the euro, are well positioned to offer higher returns to global investors. However, some countries that are still struggling with virus control have travel restrictions and underwriting challenges that will restrain cross-border capital flows. An upturn in cross-border investment likely will occur in 2021.
FIGURE 6: HEDGING COST AGAINST U.S. DOLLAR DEPRECIATION
Source: Chatham Financial, CBRE Research, July 2020.
UPSIDE FOR THE DIGITAL ECONOMY
Though the global pandemic was unexpected, real estate market participants had considered a short-lived downturn scenario in a late-cycle world. The search for downturn protection and higher yield motivated many to diversify into alternative property types and secondary markets. Data centers, cold-storage and self-storage facilities are leading examples of growth, riding on fundamental demand drivers such as big data, the Internet of Things, online grocery and labor mobility. Secondary markets, often with less population density, are favorably staged for reopening and some will experience less of a drop in investment activity. For example, Hamburg, Minneapolis and Denver are outperforming in industrial and apartment sales.
1 This forecast is a baseline scenario built on a range of indicators including GDP, interest rates and yield spreads.
2 2020 Global Real Estate Report, Preqin, Q1 2020.
3 CBRE tracks top 30 markets based on size, growth and price in each sector across 22 countries. Statistics are generic averages.
