Our latest quarterly review of global capital markets explores the appetite for deal-making across EMEA, North America, and APAC.
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Taking Stock
A review of global real estate capital markets, Q3 2024
An interest-rate driven downturn in real estate capital markets is gradually giving way to an interest-rate driven recovery. The eagerly anticipated pivot in monetary policy is finally upon us, with many global central banks now feeling more at ease with the outlook for inflation. Sentiment in the market has already noticeably improved, while various indicators across pricing and activity metrics would suggest that the bottom is either already behind us, or very close to being behind us.
Oliver Salmon
Director, World Research Global Capital Markets
Rasheed Hassan
Head of Global Cross Border Investment Global Capital Markets
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We hope you enjoy our latest review of global real estate capital markets.
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A review of global real estate capital markets, Q1 2024
Taking Stock
Real estate capital markets remained subdued in the first quarter of 2024. Investment turnover across all sectors fell by 18% on the year, registering the lowest quarterly outturn in over a decade. The economic environment, meanwhile, remains broadly unchanged. Growth has now likely bottomed out, with high frequency data showing some growing momentum at the beginning of this year, while risks to the outlook are evenly balanced.
Yet ‘sticky’ inflation, particularly in the fiscally-charged US economy, is delaying expectations for a policy pivot from the major global central banks. This is feeding into investor behaviour; occupational markets, particularly in the office sector, broadly mirror the fortunes of the wider economy. But capital markets have detached from this reality, and investors are struggling to agree on what constitutes value in a high interest rate environment.
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Our latest review of global real estate capital markets explores the appetite for deal-making across EMEA, North America, and APAC.
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Oliver Salmon
Director, World Research Global Capital Markets
Rasheed Hassan
Head of Global Cross Border Investment Global Capital Markets
We hope you enjoy our latest review of global real estate capital markets.
Global outlook
Director, World Research, Global Capital Markets
Oliver Salmon
The global living sector posted a second consecutive quarter of positive growth in investment in Q3…there is also good momentum in fundraising activity; the US$27.6bn of capital raised across nearly 50 fund closures was double the amount raised in Q3 last year.
The US Fed cut rates in September for the first time since 2020.
50bps
Global living investment in Q3 rose by 5.5% on the year.
US$45.2bn
Single and multifamily housing attracted the majority of investment.
15bps
The share of institutional buyers in 2024 is up 6ppts on the 10-year average.
30.5%
The global economy is largely tracking expectations. High frequency data continue to show a modest expansion in activity, with PMI surveys highlighting ongoing strength in the services sector, helping to offset some recent weakness in global manufacturing, particularly in Western Europe. A recovery in inflation-adjusted household incomes – underpinned by rising wages, solid employment outcomes, and falling inflation – is providing a catalyst for growth that should sustain solid momentum via a virtuous cycle running from consumer spending to confidence, manufacturing, and investment.
A soft landing remains the highest probability scenario, with some rotation in growth away from the US and towards Europe. The Chinese economy will continue to labour somewhat, underpinned by weak domestic demand, unless the central government targets new stimulus at households. But the rest of Asia should benefit from a wider cyclical upturn, particularly through strong trade growth, with AI-related investment driving high demand for semiconductors from key producers in East Asia.
Inflation continued to fall through the last quarter, with headline rates now back to target in most major economies. Lower energy prices are responsible for much of the disinflationary trend; global benchmark oil prices have fallen to around US$70-75/barrel on the back of weak global demand, and easing supply pressures, despite some conflict-driven volatility in the Middle East. Central bankers remain reticent in declaring victory however, with services price inflation – a better indicator of domestic price pressures – generally tracking at around 2-3 percentage points (ppts) above target in most jurisdictions. Labour market dynamics show little risk of a wage-price spiral however; wage growth is slowing, and inflation expectations remain well anchored.
Confident policymakers beget confident investors
Policymakers are clearly more comfortable in the inflation outlook, and their attention is now shifting towards growth. The US Fed, mandated to target both low inflation and full employment, pivoted with a 50 basis point (bps) rate cut in September in response to a series of weak labour market data, with chair Jerome Powell emphasising that “the upside risks to inflation have diminished and the downside risks to employment have increased.” ECB President Christine Lagarde noted that “the recovery [in Europe] is facing headwinds” at their latest meeting.
Across advanced economies, central banks in Europe were the first to start lowering interest rates, with the ECB cutting by a cumulative 75bps since June. Many emerging market economies are also well advanced in easing rates, having pre-empted the US Fed tightening policy back in 2021. In Asia Pacific, the Bank of Japan raised rates for a second time in August, as part of wider efforts to wean the economy off years of ultra loose policy. The Reserve Bank of Australia remains in a shrinking group of central banks yet to pivot on rates.
Continued economic growth (albeit modest) in combination with easing financial conditions, should continue to encourage risk-on investors – global equity markets have seen strong inflows of capital, with leading benchmark indices hitting record highs. Real estate investors should follow suit as we move into next year, driving a more sustained rebound in activity.
However, while the underlying risk environment is more balanced than it was 12 months ago, geopolitical risk remains elevated. A recent escalation in conflict in the Middle East has led to some volatility in oil prices, although there is limited feed through to inflation. But as concerns over interest rates and inflation dissipate as we move into 2025, geopolitics will continue to occupy the mind of investors, particularly those deploying capital into relatively illiquid markets such as real estate.
Global LIVING investment turnover
Global investment of nearly US$53bn across the living sectors in the last quarter represented a 14% increase on the year, the first year-on-year rise in activity since Q2 2022. This compares to continued declines in investment of around 10-20% across the office, retail, and logistics sectors, with investors clearly showing a preference for assets in the living sector as we look ahead to a wider recovery in real estate capital markets. This outperformance represents a realisation of wider investor intentions, as reported in the various sentiment surveys of the last year or two, which highlight a clear rotation in allocations favouring the various living sectors.
Single and multifamily housing attracted around 85% of total living investment this quarter, with large domestic institutional investors supporting a notable increase in investment in the US, particularly across larger portfolio deals. Global investment in Purpose Built Student Accommodation (PBSA) nearly doubled, underpinned by a single large deal in the UK – Mapletree’s US$1.3bn acquisition of platform from Cuscaden Peak Investments – which accounted for nearly 30% of global turnover. Activity in the senior living space was relatively muted by contrast, with the US$3.3bn of global investment representing the weakest quarterly outturn since Q2 2020.
Investors show that life is for Living
Prime office yields, Q3 2024
Source: Savills Research and Macrobond.
Note: Yields may be different to quoted values in markets where the convention is to use a gross rather than net value. Values based on end-of-quarter data.
Net initial yields are estimated by local Savills experts to represent the achievable yield, including transaction and non-recoverable costs, on a hypothetical Grade A asset of institutional scale, in a prime location, fully let. The risk premium is calculated by subtracting the end-of-period domestic ten-year government bond yield (as a proxy for the relevant risk-free rate of return) from the net initial yield. Data is end-of-quarter values.
(as at end-September)
Methodology
Key transactions
Building: Arc Place
Tenant: Warner Brothers Entertainment, Dyson, eBay, ADA, Viva Republica, Lotte Capital, and others
Lease Length (WAULT): Undisclosed
Area: 675,000 sqft
Price/NIY: US$588mn (KRW792bn) / 4.3%
Vendor: Blackstone
Vendor Nationality: US
Purchaser: Koramco
Purchaser Nationality: South Korea
Comments: Representing the largest deal in South Korea this year so far, Arc Place was sold at a 40% premium (in local currency terms) to the 2016 purchase price, following significant refurbishments, positioning Arc Place as a “premier, highly-coveted office asset in the heart of Seoul’s Gangnam district.”
Seoul
Vendor Nationality: Australia
Purchaser: Keppel REIT
Purchaser Nationality: Singapore
Comments: Keppel REIT purchased a 50% stake in the asset, with Mirvac retaining the remaining 50% interest. 255 George Street is located in the CBD and has good transport links, along with high ESG credentials. The office has an estimated 93% occupancy rate and with strong occupier covenants. The transaction provides a comparable from which to benchmark prime office pricing in Australia.
Building: 255 George Street
Tenant: Australian Taxation Office, Bank of Queensland, and others
Lease Length (WAULT): 6.8 years
Area: 420,000 sqft
Price/NIY: US$238mn (AUD364mn) / Above 6%
Vendor: Mirvac
sydney
Vendor Nationality: Canada
Purchaser: Olayan Group and Lunate
Purchaser Nationality: Saudi Arabia, UAE
Comments: This transactions is one of the largest single commercial real estate transactions in the Middle East, and could open the door for more institutional capital in the region, with Brookfield successfully exiting a 49% stake in the building. The joint venture between ICD and Brookfield was formed in 2011, with the building opening in 2020 and achieving a 98% occupancy in just 2 years.
Building: ICD Brookfield Place
Tenant: Bank of America, BNP Paribas, UBS, JP Morgan, Clifford Chance, EY, and others
Lease Length (WAULT): Undisclosed
Area: 1.15mn sqft
Price/NIY: (estimated)/undisclosed
Vendor: Brookfield
Dubai
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City: United States
Sub-sector: Multifamily
Units: 5,200
Price/NIY: US$2.1bn/Undisclosed
Vendor: Quarterra
Vendor Nationality: United States
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Vendor Nationality: Belgium
Purchaser: Government of Belgium
Purchaser Nationality: Belgium
Comments: With the European Commission aiming to reduce its office footprint by 25% by 2030, the Government of Belgium, via its Sovereign Wealth Fund, will renovate the buildings and redevelop some to create more housing and social spaces, as part of a wider push to revitalise the area.
key transactions
The global living sector posted a second consecutive quarter of positive growth in investment in Q3, with total turnover of US$45.2bn representing a 5.5% increase on the year. This represents a strong turnaround from the first quarter, which was the weakest in over a decade. Total investment year-to-date is now up by nearly 4%, despite the 15% decline in Q1. There is also good momentum in fundraising activity; the US$27.6bn of capital raised across nearly 50 fund closures was double the amount raised in Q3 last year, and follows an equally strong second quarter.
The recovery in deal activity this year is most evident in North America, as well as in the UK and Northern Europe. Across Western Europe, and the Asia Pacific region, investment activity continued to decline in the third quarter. Southern Europe has also experienced a decline in activity this year, although not due to a lack of enthusiasm from investors, with solid activity in the multifamily sector helping to offset a more muted quarter for both student and senior living.
In the US, while the wider economy faces a lack of housing, the multifamily sector is facing a temporary glut of supply, as new development initiated during a construction boom in 2021-22 continues to hit the market. Over 750,000 units (on an annualised basis) were delivered by the private sector in August alone, the strongest month in 50-years. This is leading to some vacancy risk, particularly in the South, where much of the development has occurred. This is weighing on rental growth, which may cause a few problems for those investors who bought at the peak of the market, looking to refinance at higher interest rates.
In one of the largest known instances of distress, a US$1.8bn loan secured on a 3,200 unit multifamily asset in San Francisco went into special servicing in April, ahead of a looming maturity.
Investors are largely unperturbed however, with large portfolio transactions helping to support overall deal activity this year, showing a willingness to deploy their cash when the opportunity presents itself. This desire to buy through the cycle highlights their conviction in the underlying fundamentals of the sector. Furthermore, construction data would suggest that surplus will soon give way to scarcity, and where there is scarcity, there is generally money to be made.
In terms of the outlook for new supply, similar trends are apparent in most institutionalised multifamily markets across Europe and Asia Pacific, underpinned by a combination of build cost pressures, high debt costs, and economic uncertainty. In the UK, for example, new residential starts have fallen by more than 50%, while in Germany, many debt-constrained developers are prioritising balance sheet repair over initiating new construction. This is encouraging investors back to the market, in combination with the more favourable interest rate environment, which is a tailwind for all sectors. This is less true for Asia Pacific; in the two most liquid markets in the region, Japan and Australia, rates are either increasing, or are unlikely to fall until next year.
Affordability is a growing concern for investors, following several years of strong rental growth in the sector. This is feeding into some regulatory risk, even in the relatively liberal US market.
Supply side dynamics driving the market
Vendor Nationality: United Kingdom
Purchaser: The Universities Superannuation Scheme (USS)
Purchaser Nationality: United Kingdom
Comments: Sage Housing, backed by US private equity group Blackstone, sold a portfolio of social housing to the USS pension scheme. The portfolio consists of 3,000 homes across 250 sites, predominantly in the South East of England, and represents the largest acquisition of shared ownership homes since the scheme was launched in the UK in 1990.
City: Multiple, South East region
Sub-sector: Affordable housing
Units: 3,000
Price/NIY: £405m(US$520m)/Undisclosed
Vendor: Sage Housing
key transactions
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Methodology
Net initial yields are estimated by local Savills experts to represent the achievable yield, including transaction and non-recoverable costs, on a hypothetical Grade A asset of institutional scale, in a prime location, fully let. The risk premium is calculated by subtracting the end-of-period domestic ten-year government bond yield (as a proxy for the relevant risk-free rate of return) from the net initial yield. Data is end-of-quarter values.
Source: Savills Research and Macrobond.
Note: Yields may be different to quoted values in markets where the convention is to use a gross rather than net value. Values based on end-of-quarter data. See Methodology for details.
Multifamily
Student
Prime yield
Outlook for yields, next 12 months
Typical LTV
All-in cost of debt
Cash-on-cash yield
Risk premium (over gov bonds)
Paris 4.25%
London 4.85%
Madrid 4.70%
Berlin 4.50%
Prime yield
Outlook for yields, next 12 months
Paris 4.25%
London 5.25%
Madrid 4.90%
Berlin 4.50%
Typical LTV
Paris 55%
London 60%
Madrid 55%
Berlin 55%
All-in cost of debt
Paris 3.80%
London 5.50%
Madrid 4.30%
Berlin 3.80%
Cash-on-cash yield
Paris 4.80%
London 3.88%
Madrid 5.19%
Berlin 5.36%
Risk premium (over gov bonds)
Paris 1.33%
London 0.85%
Madrid 1.77%
Berlin 2.38%
Student
Prime yield
Outlook for yields, next 12 months
Typical LTV
All-in cost of debt
Cash-on-cash yield
Risk premium (over gov bonds)
Sydney 4.00%
Copenhagen 4.00%
Stockholm 4.25%
Tokyo 3.40%
Paris 4.25%
London 4.00%
Madrid 4.25%
Melbourne 4.50%
Berlin 3.60%
Prime yield
Sydney 4.00%
Copenhagen 4.00%
Stockholm 4.25%
Tokyo 3.40%
Paris 4.25%
London 5.25%
Madrid 4.25%
Melbourne 4.50%
Berlin 3.60%
Typical LTV
Sydney 55%
Copenhagen 63%
Stockholm 60%
Tokyo 60%
Paris 55%
London 60%
Madrid 55%
Melbourne 55%
Berlin 55%
All-in cost of debt
Sydney 6.50%
Copenhagen 3.25%
Stockholm 3.79%
Tokyo 1.10%
Paris 3.80%
London 5.50%
Madrid 4.30%
Melbourne 6.50%
Berlin 3.80%
Cash-on-cash yield
Sydney 0.94%
Copenhagen 5.25%
Stockholm 4.94%
Tokyo 6.85%
Paris 4.80%
London 1.75%
Madrid 4.19%
Melbourne 2.06%
Berlin 3.36%
Risk premium (over gov bonds)
Sydney 0.00%
Copenhagen 1.98%
Stockholm 1.83%
Tokyo 2.55%
Paris 1.33%
London 0.00%
Madrid 1.32%
Melbourne 0.50%
Berlin 1.48%
Multifamily
Prime office yields, Q3 2024
(as at end-September)
aermont
uss
Vendor Nationality: Sweden
Purchaser: Aermont Capital and Alm Equity
Purchaser Nationality: UK and Sweden
Comments: In one of the largest residential deals ever to complete in Sweden, and the largest deal globally in Q3, UK-based Aermont Capital and Swedish investor Alm Equity have formed a joint venture to purchase a mixed portfolio of residential properties and building rights from the developer Svenska Nyttobostäder (which is currently in the process of merging with Alm Equity).
City: Stockholm
Sub-sector: Multifamily
Units: 20 property portfolio
Price/NIY: SEK8.4bn(US$815m)/Undisclosed
Vendor: Svenska Nyttobostäder
Outlook for yields, next 12 months
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While investment is down, sentiment is up. Liquidity is improving, with larger investors returning to the market, leading to more competitive processes.
Total living investment across the EMEA region fell by 10.2% y/y to US$8.3bn in Q3. This decline bucks the recent trend; Q2 was the best quarter for deal activity in the living sector in nearly two years, although this was largely thanks to Mapletree’s acquisition of a major Purpose Built Student Accommodation (PBSA) portfolio spanning the UK and German markets for £1.0bn (US$1.3bn).
While investment is down, sentiment is up. Liquidity is improving, with larger investors returning to the market, leading to more competitive processes. There is growing interest across the entire living space, although much of the early cycle activity is centred on European PBSA. Investors are showing a preference for the UK and Spanish markets, favoured both from a fundamental perspective (including positive net migration trends), as well as from a price discovery viewpoint. As such, regional activity is likely to pick up as we approach the year-end; in the UK for example, there are several large deals expected to close in Q4.
In the multifamily space, there were several notable transactions in the quarter. First, in the Netherlands, TPG Angelo Gordon and partners acquired a Dutch residential portfolio of around 3,000 single and multifamily units for €695m (US$770m), a deal that was completed at the second attempt, after the vendor European Residential REIT failed to achieve price expectations when it first brought the portfolio to market last year. And in Sweden, one of the largest ever residential transactions completed, with UK-based Aermont Capital and Swedish investor Alm Equity forming a joint venture to purchase a mixed portfolio of residential properties and building rights for a reported SEK8.4bn (€730m).
A collapse in construction is exacerbating the wider structural issue of an acute undersupply in housing delivery across much of Europe, driving strong rental growth in those markets not subject to regulation. In the UK, average rents were up by more than 7% y/y in September (based on the rental component of CPI inflation), registering a near 20% peak-to-trough increase over the last few years. In Sweden, rents were up by nearly 5% y/y, and 12% peak-to-trough.
In Germany, debt distress in the construction sector has severely limited the pipeline of housebuilding, exacerbating common headwinds, including build cost inflation and a higher cost of financing. Many property companies, facing the challenge of refinancing existing debt, have focused on strengthening their balance sheets over breaking ground on new projects. As such, the number of permits for new residential units issued so far this year was the lowest since 2010. Other institutionalised markets have also seen a significant decline in development activity; in Sweden, new residential starts have hit a 12-year low, while in Denmark, they are at the lowest level since 2015.
While the supply side dynamics continue to present a compelling reason to invest, there are also growing concerns for multifamily investors over both affordability and regulatory risk, given recent strong rental growth.
APAC
North America
EMEA
APAC
North America
EMEA
Residential construction starts
Director, World Research
Oliver Salmon
The occupational backdrop facing investors warrants some caution in deploying capital in the short term. There has been a surge in new multifamily completions in recent months.
Fundraising for the living sector reached US$21.8bn in the third quarter, more than double the level in Q3 2023.
+143%
Living investment rose by of 14% y/y in the US in Q3.
US$33.5bn
Annualised multifamily completions hit a 50-year high in August.
750,000
Director, World Research
Oliver Salmon
Expectations of higher interest rates [in Japan] may be feeding into some investor caution as we approach the end of the year.
Australia median asking rents
Deal activity continues to pick up momentum in the US, with a solid outturn in Q3 following up a from strong second quarter. Total investment of US$33.5bn in Q3 was 14% up on the year. Quarterly turnover has been tracking in the US$20-30bn range since the beginning of 2023, a step down from the US$50-150bn range seen through 2021-22, and around two-thirds of the pre-Covid average. But recent quarters suggest that the market is ready to break out of this relative malaise.
Activity should continue to trend higher in the coming quarters, assuming fundraising leads investment, with North American funds targeting the living sector raising US$21.6bn in Q3, the best quarter since Q2 2023. Meanwhile, while mortgage rates are falling, they remain well above the mid-3% levels that prevailed during the boom years in 2021-22, and outside offices, multifamily accounts for the largest share of distress in commercial real estate loans. This should however increase the number of motivated sellers in the market, supporting overall liquidity.
The occupational backdrop facing investors warrants some caution in deploying capital in the short term. There has been a surge in new multifamily completions (with two or more units) in recent months – hitting a five-decade high in August – as the legacy of a construction boom in the years post-Covid, when interest rates were at rock bottom, continues to wash through the sector. This should however represent the peak; new starts have fallen sharply since mid-2023, and with a lead time to completion of around 18 months, new supply should follow suit as we move towards the end of this year.
Eventually an excess will become a dearth, with new starts falling by 30% year-to-date amidst elevated construction costs, and tighter financial conditions.
Sun Belt markets have seen the largest onboarding of new supply. According to RealPage Market Analytics, the Texan cities of Austin, Dallas, and to a lesser extent Houston, accounted for around 15% of all new units supplied to the US market in Q3. Phoenix to the West, and Atlanta, Charlotte, and others to the East, have also seen significant new supply, while New York provides an exception to the rule. This is pushing the rental vacancy rate higher, which for the Sun Belt region has risen by around 150bps to 8.4% in Q3, compared with a national average of around of 5.8% (the highest since 2011, according to Moody’s Analytics).
On average, multifamily rents have been rising at around 2.5% y/y, which is broadly in line with the latest rate of inflation. But there is some disparity by region; while the tightly supplied Midwest, and some Northeast markets, have seen strong growth, Southern markets such as Austin have seen notable rental declines. Occupancy rates are also higher in the Midwest, with cities such as Chicago seeing an occupancy rate for multifamily buildings above 95%.
Many of these Southern markets have also seen a notable decline in investment in the first three quarters of this year, including Austin (-29%), Atlanta (-12%), and Dallas (-10%). The trend is not ubiquitous; turnover of US$3.1bn in Phoenix’s market represents a 24% increase on the year, for example, while the Midwest region has actually seen the weakest performance so far this year, with activity down by 12%, underpinned by a 28% decline in Chicago.
Investment in the living sector totalled US$1.8bn in Q3. This represented a 41.1% decline on the year, with deal activity seeing a sequential slowdown as we’ve moved through this year.
It was a quiet Q3 in terms of deal activity in Japan; with just JPY174bn (US$1.1bn) invested in the living sector, the weakest quarter in nearly five years. But while Q3 was more than 31% down on the year, year-to-date turnover compares more favourably against 2023. There was only one transaction of note this quarter, the JPY23bn (US$143m) joint venture purchase by the Canadian insurance company Manulife Financial, and the Japanese investor Kenedix, of a portfolio of nine high quality assets located across Tokyo and Osaka.
Expectations of higher interest rates may be feeding into some investor caution as we approach the end of the year; prime yields have risen by just 10bps to 3.4% since the beginning of 2023, while JGB yields are up by around 75bps since the Bank of Japan abandoned their Yield Curve Control (YCC) policy and started raising rates.
Nevertheless, the occupational backdrop remains positive for landlords, supported by continued strong net migration into urban areas, and a recovery in real wage growth (inflation-adjusted wage growth in June returned to positive territory for the first time in two years).
Rents of ‘mid-market’ apartments in Tokyo rose by 5.9% y/y in Q3, while average occupancy remains above 96%. The subdued housing supply outlook should continue to support the performance of multifamily; strong double-digit house price growth in Tokyo is squeezing affordability, pushing more people into the rented sector. The outlook for continued rental growth should support the underwrite for the sector, despite an increase in the cost of funding.
A similar story is playing out in Australia – still a relatively nascent sector by comparison – with very little transacting in the quarter. Just AUD334m (US$222m) was invested across a handful of deals, representing a 54% y/y decline in turnover. The year-to-date is not too dissimilar; total investment is nearly two-thirds down on the same period last year, including the ‘sale’ of 50 Quay Street in Brisbane, which was really a transfer to seed a new Joint Venture between the Japanese firm Sumitomo Forestry, and the developer Cedar Pacific.
We should see a stronger final quarter, with several notable deals exchanging after the quarter end, including the purchase of a Build-to-Rent (BTR) portfolio by Hines and Ontario Teachers – consisting of 354 units across two assets in Brisbane – for a reported AUD350m (US$242m). But there is a lack of product in the market, and few willing sellers, with a price expectations gap still apparent in holding back liquidity.
Supply-side dynamics remain a key driver of investor returns in Australia. Approvals for flats and apartments are down by 12% year-to-date (up to August), and nearly 60% down on the 2015-19 average for the same period. Meanwhile higher interest rates are reducing housing affordability – with data from the Australian Housing Industry Association indicating that affordability is the lowest on record, spanning a period of nearly 30 years.
These dynamics are supporting very strong rental growth; average median rents for residential units across the largest five cities were up by 13.6% y/y at end of Q3 2024, according to PropTrack, even though this is down from a peak in excess of 18%. Investors may just be waiting for rates to come down before entering the BTR market.
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The average deal size in 2024 has risen noticeably since last year.
17.4%
EMEA living investment in Q3 fell by 10.2% y/y.
US$8.3bn
German construction starts have almost halved since their peak in 2022.
-44%
Average rents across the five largest Australian cities continued to rise in September 2024.
13.6% y/y
APAC living investment in the third quarter was 41.1% down from Q3 2023.
US$1.8bn
The Japanese living sector continues to attract the largest share of regional living investment.
62%
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Last quarter, we spoke of a ‘tilt to the positive,’ but it now feels like we are in recovery mode.
We have referenced rising rents for a long time, but we are now witnessing yield compression, to varying degrees, in many markets now and across sectors. This is being driven by a healthy blend of falling borrowing costs (a combination of a reduction in underlying forward rates, as well as lender competition leading to tighter margins), the adoption of rental growth forecasts in investor underwriting, and competition for a small amount of buyable assets from a growing pool of buyers.
The buyer types are evolving too. In 2023 we saw a big uptick in activity from private investors, unimpeded by committees and guidelines, who could act with haste if they saw an opportunity, and could be flexible on hold periods if markets did not recover as quickly as anticipated. Over the last six to 12 months, we have seen private equity groups dominating many processes, starting with smaller assets with exceptionally strong fundamentals, where they could be very confident in deep liquidity at the point of exit. This group has been growing, as has the breadth of sectors (the majority will do offices now) and geographies they will consider.
Additionally, the lot sizes are increasing quickly. Larger single assets, portfolios and M&A are all back in the conversation.
This is providing vendors with more confidence and will help transaction volumes. Lastly, the highly sought after core institutional money is also back in the market, looking to increase exposure to areas that have not had the same levels of attention in recent years, including offices and retail, particularly in locations that are showing the strongest underlying fundamentals.
This downturn has been characterised by a lack of distress and this does continue to be the case, so far anyway. However, a lack of distress does not mean an absence of stress. The last two years have shown us that the market has a resilience that has surprised many on the upside. There is much more equity and debt capital in the system as a whole, and lessons were learned from the GFC about the negative ramifications of overleverage.
However, stress does remain in the sector, and we are not out of the woods yet. A major global investor was recently keen to point out that given some of the challenges they can still see in their own portfolio, despite their sheer size and liquidity, they can only imagine the situations that others, less fortunate than them, may be facing. With the emergence of greater market confidence and improving pricing, more owners are choosing or being encouraged by their lenders to call time on their ownerships and sell.
All of the above will not dramatically improve 2024 investment turnover figures, but it should set the scene for a better 2025.
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Savills 2024
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Industrial and Logistics
Annual Review
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Industrial and Logistics
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