Our latest quarterly review of global capital markets explores the appetite for deal-making across EMEA, North America, and APAC.
Welcome
Taking Stock
A review of global real estate capital markets, Q3 2024
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.
EXPLORE THE REPORT
Global outlook
Regional outlook
Market view
GLOBAL OUTLOOK
Savills 2024
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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.
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Annual Review
Living
Offices
Industrial and Logistics
regional OUTLOOK
Director, World Research
The US Fed cut rates in September for the first time since 2020.
50bps
Global office investment in Q3 fell by 0.4% y/y.
US$34.6bn
The market share of private investors year-to-date is 10ppts above the 10-year average.
34.9%
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 office investment turnover
Global investment was broadly flat in the third quarter, with the US$34.6bn in completed transactions representing a 0.6% decline on the year. While Q3 represented the weakest quarter since Q3 2009, year-to-date investment is also comparable to the same period last year, with the global office sector finding some stability after a period of decline. When benchmarked against the other core sectors, including the retail and industrial sectors, transactional activity is holding up reasonably well, as investors grow more comfortable with the value proposition of good quality offices. This is supported by the fundraising data, with over US$42bn raised year-to-date by real estate funds targeting the office sector, according to RealfinX data. Good assets are seeing competitive bidding, particularly in those markets where the occupational fundamentals are strongest, such as South Korea. Location and access to local amenities remain key in driving values, as these cannot be improved with additional capital expenditure. Such trends are exemplified in Paris; while activity in the CBD is holding up reasonably well, supported by a very low vacancy rate of 2.8%, very little is trading in the suburbs. In recent years, liquidity has been supported by a whole new investor base. Many major buyers in the pre-Covid era are likely chastened by either realised or unrealised losses on existing portfolios, with office capital values down by nearly 30% since 2019, according to MSCI data. Of the largest office investors in the period 2015-19, only GIC, the Singaporean sovereign wealth fund, and US-based investment manager Hines, remain in the list of most active buyers since the beginning of 2023. This may change as the recovery gathers momentum. Already we’ve seen an increase in the average deal size this year, as well as a rebound in portfolio and M&A activity (albeit much of which has a healthcare or life sciences angle).
Institutional capital is returning to the market, although investors remain very selective when deploying capital. Vendors have taken notice, feeling more confident in launching sales processes on larger assets in those markets considered past the bottom, such as the UK. These will provide key pricing points in the early recovery cycle, as well as testing the appetite of investors, as there has been far less liquidity for larger lot sizes in recent years, particularly at the sharpest end of pricing. Falling interest rates, coupled with strong rental performance, are helping to stabilise prime yields, which are unchanged across all markets this quarter, with the exception of Shanghai, a market still challenged by significant oversupply. Some markets are expected to see yield compression over the next 12 months – including London City, Madrid, and Milan – although they will need more competitive bidding pressure given that risk premiums remain tight. Across a number of Western European cities, including in Berlin, Madrid, and Paris, investors are now able to get accretive returns on debt financing, which will hopefully encourage even more institutions and, importantly, core buyers back to the market. Occupational markets remain two-tiered; office-based employment is slowing across most advanced economies, largely mirroring wider labour market dynamics in a soft landing growth environment. This is particularly true across the US and Western European markets. Furthermore, the economic outlook doesn’t necessarily support major expansion activity by corporates. However, bifurcation will continue to be a theme that will drive tenant demand for high quality buildings. Those markets with a limited supply of these best-in-class offices – including Paris CBD, Stockholm, and Seoul – may well see the strongest returns in this cycle.
Buyer's remorse holding back recovery
Prime office yields, Q3 2024
Los Angeles 8.00%
Sydney 5.85%
Shanghai (Lujiazui) 4.75%
Hong Kong 1.82%
Tokyo 2.60%
Singapore 3.60%
Seoul 4.25%
New York 5.00%
Paris 4.25%
Frankfurt 4.50%
Madrid 4.90%
London (City) 5.25%
Dubai 6.75%
Sydney
Shanghai (Lujiazui)
Frankfurt
Tokyo
Hong Kong
Singapore
Los Angeles
Paris
London (City)
Madrid
Dubai
New York
Seoul
Prime yield
Outlook for yields, next 12 months
Typical LTV
All-in cost of debt
Cash-on-cash yield
Risk premium (over gov bonds)
Source: Savills Research and Macrobond. 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.
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 building located in the CBD, over 50,000 sq ft in size, fully let to a single good profile tenant on a long lease. The typical LTV and cost of debt represent the anticipated competitive lending terms available in each market. Cash-on-cash returns illustrate the initial yield on equity, assuming the aforementioned LTV and debt costs. 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
welcome
Mumbai 8.25%
Mumbai
Sydney 53%
Shanghai (Lujiazui) 50%
Frankfurt 55%
Tokyo 60%
Hong Kong 40%
Singapore 50%
Los Angeles 53%
Paris 55%
London (City) 60%
Madrid 55%
Dubai 50%
Mumbai 60%
New York 53%
Seoul 63%
Sydney 5.90%
Shanghai (Lujiazui) 4.00%
Frankfurt 3.80%
Tokyo 1.10%
Hong Kong 6.25%
Singapore 4.00%
Los Angeles 7.75%
Paris 3.80%
London (City) 5.50%
Madrid 4.30%
Dubai 7.00%
Mumbai 9.50%
New York 7.75%
Seoul 4.50%
Sydney 5.79%
Shanghai (Lujiazui) 5.50%
Frankfurt 4.58%
Tokyo 4.85%
Hong Kong -1.13%
Los Angeles 8.28%
Paris 4.80%
London (City) 4.88%
Madrid 5.63%
Dubai 6.50%
Mumbai 6.38%
New York 1.96%
Seoul 3.83%
Sydney 1.86%
Shanghai (Lujiazui) 2.60%
Frankfurt 2.38%
Tokyo 1.75%
Hong Kong -0.95%
Singapore 0.98%
Los Angeles 4.19%
Paris 1.33%
London (City) 1.25%
Madrid 1.97%
Dubai 2.94%
Mumbai 1.50%
New York 1.19%
Seoul 1.26%
Milan 4.25%
Milan
Milan 55%
Milan 3.94%
Milan 0.88%
Vendor Nationality: China Purchaser: Oval Real Estate Purchaser Nationality: UK Comments: This deal represents the first income-producing office transaction over £100m to complete this year in London. The sales process witnessed competitive bidding amongst US-based private equity investors, attracted by the asset’s significant reversionary potential (subject to capital investment) and prime location near major transportation networks. The transaction price was reportedly 7% below the initial guide price.
City: London Building: 14 St George Street Tenant: Antin Infrastructure Partners, Trafigura, Ellerman Investments Lease Length (WAULT): 6 years Area: 52,000 sqft Price/NIY: £125.4m (US$161.2m)/3.9% Vendor: Chinese Estates
key transactions
Vendor Nationality: US Purchaser: Starwood Capital/Artisan Realty Advisors JV Purchaser Nationality: US Comments: The Pacific Corporate Towers office complex, situated in the Los Angeles submarket of El Segundo, was reportedly to be sold out of distress. The final price represents a 20% discount to the US$606m paid by the vendors back in 2017, but it is reported that they were struggling to service the debt on the property, with the complex now nearly 50% vacant, according to CoStar data.
City: Los Angeles Building: Pacific Corporate Towers (3 building campus) Tenant: Guthy-Renker, WeWork, SAIC Lease Length (WAULT): Undisclosed Area: 1.6m sq ft Price/NIY: US$485m/Undisclosed Vendor: Beacon Capital Partners/ 3Edgewood JV
Vendor Nationality: South Korea Purchaser: Samsung SRA Purchaser Nationality: South Korea Comments: The Asset represents the largest single asset transaction globally to complete in the third quarter, and reportedly the largest income-producing real estate deal in South Korea so far this year. It is understood that there was significant interest in the sale, from both domestic and foreign investors, including US private equity group KKR.
City: Seoul Building: The Asset Tenant: Samsung Fire & Marine Insurance, KB Bank, Hyundai Capital Lease Length (WAULT): Undisclosed Area: 873,000 sq ft Price/NIY: KRW 1.1tn (US$825m)/3.4% Vendor: Koramco
Good assets are seeing competitive bidding, particularly in those markets where the occupational fundamentals are strongest.
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Berlin 4.50%
Berlin 55%
Berlin 3.80%
Berlin 4.55%
Berlin 2.38%
Berlin
Those attending EXPO REAL in October will have noted a pivot in sentiment on offices compared with last year… There is clearly more confidence in the fundamentals across both buy side and sell side protagonists.
Total office investment across EMEA fell by 17.2% y/y in Q3, with the US$8.9bn in completed transactions representing the weakest quarterly outturn in 18 years. This, however, followed a relatively encouraging first half of the year, and there remains a sense of optimism that the regional market remains in recovery mode. As such, the weak summer period is expected to be more anomaly than trend. Many of those attending EXPO REAL in October will have noted a pivot in sentiment on offices compared with last year, with less speculation, or indeed deliberation, on the ‘future of the office.’ There is clearly more confidence in the fundamentals across both buy side and sell side protagonists. The latter, in particular, is important when considering the pre-requisites for recovery. With a lack of motivated sellers, discretionary sellers have largely postponed disposals, partly in fear of not meeting price expectations, but also in the hope of riding any interest-rate driven recovery in values/refinancing opportunities. This has resulted in a limited amount of stock coming to market, holding back transactional activity and inhibiting price discovery. The lack of stock has been most apparent in the largest, most liquid European markets such as the UK, Germany, and the Netherlands. The UK market – considered a first mover through this cycle, and thus expected to lead the wider region – has seen reasonable activity for deals below £100m, but there have been very few large transactions, with a number sales processes being withdrawn as pricing failed to meet expectations. The second half of the year may prove to be a turning point; Q3 saw the first income-producing office transaction over £100m to complete this year, and several large assets are now in the market (all in excess of £300m), ranging from core to value add in profile. Germany too is anticipating an increase in stock as we approach year-end.
This will test the appetite and capacity of the investor community. A series of positive sale outcomes will provide a catalyst to transactional activity as we look ahead to next year. One buyer group that has been largely absent through this cycle is long-haul cross border capital. But there is plenty of evidence that US private equity is firmly back again bidding for and buying core-plus and discounted core assets. These larger lot sizes will provide an opportunity to return to the market at scale, and perhaps, do the deal that marks the bottom of the cycle. In the interim, while core mainland European markets have struggled – including France, where investors have been very selective in their acquisitions, particularly outside the CBD – some peripheral markets have grown in prominence. Across Southern Europe, this is supported by robust occupational dynamics. In Spain, while privates and family offices remain the most active buyer type, institutions are looking at the market, with more sales expected to close before the end of the year. Activity in Italy has been buoyed by a number of larger deals, focusing on Milan and Rome. Scandinavia too has seen a growing share of regional investment; in Sweden, while core office yields can be challenging for many foreign investors, domestic pension funds remain active, and there is reasonable liquidity for larger lot sizes, relative to other major markets in the region. This is evidenced by the recent SEK2.8bn (US$275m) purchase of the Femte Hötorgshusetthe asset in Stockholm by the local listed developer Wallenstam, which is planning to refurbish the building, in what will be their first venture in the CBD area of the Swedish capital city.
APAC
North America
EMEA
European office share of investment by market
Falling prices will further compound the narrative around the refinancing of existing debt, with distress continuing to build in the sector, despite the prospect of lower interest rates.
Listed office REITs are trading at a near 20% discount to NAV.
-20%
US office investment rose by 9.1% y/y in Q3.
US$12.8bn
The delinquency rate on office CMBS has increased by nearly 300bps in the last year.
8.4%
Hong Kong and Mainland China are weighing on the regional aggregate…with other major markets seeing some positive growth in [investment] activity so this year.
Risk premium on global prime offices
US office investment of US$12.8bn in Q3 was up by 9.1% on the year, as the transactional market looks to be finding a floor. The year-to-date comparison is even more encouraging, with investment up 12.2% on the same period last year. But this is flattered by several large deals in the healthcare/life sciences space; across the more ‘traditional’ office-use sectors, turnover is broadly flat on a year-to-date comparison, and remains nearly 70% down on the peak in 2019. Investor sentiment remains very bearish on US offices, despite the encouraging investment data. This is evidenced by public market pricing, with listed office REITs trading at a near 20% discount to NAV in August, compared to an all-property average of 4%. This reflects expectations of either further price declines, or that a catch-up in valuations is needed, with the data indicating that average values continue to decline, showing a growing divergence with trends in other sectors. Falling prices will further compound the narrative around the refinancing of existing debt, with distress continuing to build in the sector, despite the prospect of lower interest rates (debt costs came in by 25bps this quarter). The CMBS delinquency rate on office loans pushed above 8% in September, according to Trepp, up from a low of 1.5% in August 2022, and the highest in a decade. While a relatively small share of outstanding debt, CMBS represents the largest share of loans coming due over the next few years. There remains a clear divide between the performance of Class A and Class B assets; prime yields are unchanged since the beginning of last year, and the next move is likely to be inwards, particularly in Los Angeles when the outward movement was more pronounced. This flight-to-
prime is encouraging some value-add and opportunistic investors with a manage-to-core strategy to deploy when discounted assets come to market. The largest deal of this quarter – the sale of Pacific Corporate Towers for US$485m – was sold out of distress after the previous owners were reported to be struggling to service the underlying debt. Occupational markets appear closer to a bottom. Leasing volumes improved this quarter, with several major markets including Los Angeles and Manhattan having their best quarter since Covid-19. The latter, which has seen a stronger return-to-office, has benefited from solid take up in the banking sector, which stands to benefit from a soft landing and ‘un-inversion’ in the yield curve. Other pockets of encouragement include the growth in AI tech starts-ups in San Francisco and Silicon Valley, the legal sector in Chicago, and the relocation of corporate HQ locations to the Texan cities of Dallas and Houston. Tenant activity is however largely driven by expiries and renewals, and availability rates continue to rise as occupiers right-size their office requirements. Competition for tenants is fierce; concessions remain elevated, and tenants are increasingly looking for landlords with strong balance sheets and a willingness to invest in their buildings. The softening labour market is a further headwind. At the national level, office-based employment growth is virtually stagnant, with many major markets such as Los Angeles, San Francisco, Manhattan, and Chicago all seeing negative growth. As such, supply dynamics will be key in driving a reversal in fortunes; new construction is now at a 10-year low and falling, while repurposing activity is helping to support a decline in stock in some markets (supported by price declines and local government support).
Total office investment across the APAC region of US$12.3bn represented a 16.5% increase on Q3 2023. Year-to-date, turnover is 5.2% up on the same period last year. Hong Kong and Mainland China are weighing on the regional aggregate however, with other major markets seeing more positive growth in activity so far this year. South Korea remains the hottest office market in the region. Domestic investors have been actively closing transactions, not put off by the relatively tight yields on offer, encouraged by strong rental growth in Seoul’s tightly supplied market. Seoul was home to the largest global office deal this quarter, Samsung SRA’s purchase of The Asset from Koramco for KRW1.1tn (US$825m) at a reported yield of 3.4%. This deal, as well as the sale of Donuimum D Tower for KRW900bn (US$652m), again to a domestic buyer, were understood to have received plenty of interest from both domestic and international investors, who are looking to be more aggressive in a bid to gain a foothold in the market. It was a very quiet quarter in Japan, with few transactions of note. This is despite the positivity surrounding the occupational market, with strong corporate performance supporting office relocations and expansions (although high construction costs appear to be inhibiting some relocation plans). Across Tokyo, vacancy remains low at just 3.1%, while Grade A rents were up by 2.5% y/y in Q3, hitting a post-pandemic high in the process. Investor interest may be tempered by the threat of new supply, with expected completions next year set to match that of 2023. But pre-leasing activity has been reasonable, and the market should be able to absorb new stock without significant disruption, providing demand remains robust. After a slow start to the year, liquidity is returning to the Australian market. Investment is up by nearly 44% year-to-date, albeit from a very low base (2023 was the worst year since 2009). More notable perhaps is the increase in volume
of larger deals, providing a growing base of evidence to mark-the-market, which should support activity in the coming months by establishing more realistic price expectations for both buyers and sellers (prime yields came in this quarter by 25bps). This includes the largest single property transaction of the quarter, 367 Collins Street, sold to PAG for AUD315m (US$206m) at a quoted yield of 7%. Looking ahead, a strong pipeline in pending deals would indicate reasonable momentum in the near term. The office market in Hong Kong remains in a difficult place. Rents are falling, vacancy is rising, and still there is a glut of new supply in the pipeline. Values continue to fall, and investment activity is dominated by distressed sales. The few active investors are primarily interested in acquiring high quality buildings at discounted values. The largest deal of quarter, the sale of Cheung Kei Center, was sold by receivers for a reported HKD2.5bn (US$320m), representing a 44% discount from the previous sale in 2016. In the stratified sector, there is more liquidity, allowing some private family offices to transact at a much smaller scale. The Mainland Chinese market is also characterised by distress – the only notable transaction recorded this quarter was a disposal by Sino-Ocean – a struggling developer that is going through a restructuring plan with creditors to avoid liquidation – who sold its two-thirds majority stake in the Indigo Phase II development project in Beijing (consisting of seven office towers, a mall, and a hotel) for a reported RMB4bn (US$552m). Both domestic and foreign buyers are showing more caution, reflecting ongoing pressures on office leasing demand, with landlords competing aggressively for tenants in an oversupplied market, often with heavily discounted rents. The prime yield for Shanghai was moved out by 25bps this quarter to 4.75%, and we anticipate continuing to see upward pressure.
market view
Cross border investment year-to-date has fallen sharply from its 10-year average.
-81.5%
Investment in EMEA offices fell by 17.2% on the year.
US$8.9bn
The share of deals in Western Europe has fallen by 10ppts compared with the long-term average.
68%
Year to date investment in China has only reached US$8.0bn.
-17.9%
Investment in APAC offices rose by 16.5% y/y in Q3.
US$12.3bn
South Korea attracted the most investment across the APAC region in Q3.
23%
US commercial property prices
Head of Global Cross Border Investment
Rasheed Hassan shares his view on the market
regional outlook
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.
