Property Markets: The Quarter in Review

Transcription

1 January 11, 2013 Investment Team Update February 18, 2016 PERSPECTIVE FROM FRANKLIN REAL ASSET ADVISORS With global property markets in different stages of the real estate cycle, various economic forces are impacting regions and sectors in distinct ways. In this market review, Franklin Real Asset Advisors explores the macroeconomic environment and notable real estate sectors in the United States, Europe and Asia over the fourth quarter of 2015, identifying where they see opportunities across the landscape. US Property Markets Vacancy rates in the office space sector continued to decline through year-end, driven primarily by the technology sector in key cities such as Seattle and the San Francisco Bay Area. Due to the recent downturn in oil prices, vacancy rates in energy driven markets such as Houston increased somewhat. during the month of December 2015 alone, holding the unemployment rate at 5%. Despite concerns over the inflation rate stubbornly below target rate and overall global economic headwinds potentially impacting trade, we believe the US economy is poised to further strengthen in 2016, with consensus GDP estimates coming in at approximately 2.5% to 2.7% for 2015 overall. Chart 1: US Unemployment Continues to Decline January 2000 December % 10% 8% Within the multifamily sector, net absorption remained positive for the seventh consecutive quarter with net absorption forecast to remain above-average through 2018 due to continued strong fundamentals. The rapid growth of e-commerce is continuing to drive demand for distribution centers and data-center infrastructure within the industrial sector. 6% 4% 2% 5.00% Retail real estate continued to improve over the fourth quarter amid slowly growing rents and decreasing vacancy rates. After a significant period of loose monetary policy, the US Federal Reserve (Fed) raised interest rates modestly from 0 to 25 basis points in December 2015 and is likely to consider further modest interest-rate raises into The move from the Fed was widely anticipated and recognized the gains in the overall economy after the global financial crisis. Key indicators, such as gross domestic product (GDP) and employment were modest but positive with GDP growing by 2.0% annualized in the third quarter of 2015 and continuing strengthening of the job market with 292,000 new jobs 0% United States Unemployment Rate Source: FactSet, US Department of Labor. See for additional data provider information. The above chart is for illustrative and discussion purposes only. In terms of transactional volume, the third quarter of 2015 was one of the most active quarters in recent history with direct investment into US commercial real estate reaching $109 billion, according to CBRE. Year-to-date, direct investment totaled $340 billion. Of this capital, approximately 14% was cross-border

2 capital, rising from 2014 s 10% level. Canada remains the largest cross-border investor, followed by China and Germany as noted by CBRE. The continued demand from global investors has led to a modest capitalization rate compression in the third quarter of For office, absorption continued its positive trend. According to Jones Lang LaSalle, high-growth technology and large-user markets, such as Dallas, Chicago and Silicon Valley have accounted for approximately 23% of national occupancy gains for Seattle topped all other markets, citing occupancy gains of approximately 1.3 million square feet, as technology companies continue to seek space in the market. Overall, office markets marked approximately 37 million square feet of absorption yearto-date through the third quarter of 2015, as noted by Jones Lang LaSalle. Not surprisingly, energy driven Houston marked declines of approximately 89,000 square feet, the first recorded occupancy decline since the recent downturn in crude oil prices. Rental rates across the United States increased moderately by just over 1.5% during the third quarter of 2015, marking a cumulative 4.3% increase since the beginning of the year. Central business districts (CBDs) have continued to cite the strongest increases with landlords benefiting from strong tenant demand and decreasing supply in the Class A segment of the market. The modest but sustained economic recovery in the United States has continued to stimulate tenant demand in the core office markets of the United States. We believe this spillover effect will likely benefit second- and third-tier markets into Third quarter 2015, multifamily properties across the United States have continued to enjoy strong fundamentals and posted the seventh consecutive quarter of positive net absorption according to CBRE. CBRE also notes that on a rolling four-quarter basis, net absorption totaled nearly 189,000 units in the third quarter of 2015, down approximately 9.8% from a year ago. CBRE forecasts net absorption across the major US markets to remain above average through 2018, despite new supply coming on line in 2016 through Investor interest in multifamily real estate has remained strong. We believe that while new supply will be delivered in earnest throughout 2016 and beyond, fundamentals remain strong and overall absorption is forecast to remain positive into Nationwide, industrial real estate marked an average vacancy rate of approximately 7.4% in the third quarter of 2015 according to Cushman and Wakefield, reflecting the below market-level supply pipeline and modest but growing demand. Strong demand, positive space absorption combined with low vacancies continues to place upward pressure on rents in most industrial hubs throughout the United States. Looking forward into 2016, a stronger economy may support continued gains in job growth and further decrease the unemployment rate. Online retailing has continued to provide favorable growth demand for industrial real estate with online retailers seeking a variety of space options for customer fulfillment and information technology infrastructure. Cushman and Wakefield has forecast net absorption to continue to outpace new supply in 2016, despite their belief that industrial real estate is likely to have a narrow demand and supply imbalance. According to Jones Lang LaSalle, retail fundamentals continued to mark improvements during the quarter. Net absorption in major markets marked one of the highest quarters in 2015 coming in at just over 27 million square feet as cited by Jones Lang LaSalle. According to Jones Lang LaSalle, rents are slowly growing, increasing by approximately 1.8% year-over-year. New construction of retail properties has begun, delivering the most square feet into the major markets in more than two years as cited by Jones Lang LaSalle. Further supporting improving retail fundamentals, demand has exceeded supply in three of the past four quarters, resulting in consistent compression with overall vacancy rates and increasing rents as well. European Property Markets Commercial real estate investments rose 17% versus the fourth quarter of 2014, with investment volumes in Central and Eastern European countries (excluding Russia) reaching historic highs in Against this backdrop of increased investment volumes, prime office yields in London and Frankfurt declined while yields in Paris and Madrid remained stable. Within the office sector, take-up has gained momentum in the fourth quarter of 2015 with office vacancy in London declining for the eleventh consecutive quarter. Rental growth has also increased in the German markets of Dusseldorf and Berlin. Retail rents in the various prime districts in the eurozone have started to increase due to declining unemployment and increasing consumer confidence. The European Union (EU) continued on its path of modest economic recovery, entering its third consecutive year of growth. The latest forecast by the European Commission shows the EU real GDP expanded by 1.9% for 2015 with the Euro Area growth lagging behind at 1.5%. At its last meeting, the European Central Bank s extended the maturity of its quantitative easing program, combating the threats of global economic slowdown and deflation emerging respectively from the pessimistic outlook on growth in China and the emerging markets and the falling oil prices. Economic growth in the EU is expected to strengthen further in 2016 driven by private consumption. Consumer confidence and employment are both at six-year highs and wage growth has been becoming more evident in the United Kingdom and Germany. 2

3 Keeping in line with investment growth in previous quarters, watermarks got pushed even higher during the fourth quarter of 2015 with transaction volumes across Europe up by 17% on 2014, outgrowing the pre-recession peak. The core European markets remain a top preference for investors but an increasing number of overseas buyers are looking outside these markets, attracted by the higher returns. Investment in Central and Eastern European countries (excluding Russia) reached a historic high in 2015, reflecting a 20% rise year-on-year, with Czech Republic and Poland posting the strongest volume increases. In the Nordic region, Sweden, traditionally the largest and most active property market, was surpassed by Norway which witnessed very strong investment growth despite the weaker economic growth as a result of low oil prices. Chart 2: European Investment Turnover ( m) Investment Turnover (EUR Millions) Q Q ,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10, Q '07 4Q '08 4Q '09 4Q '10 4Q '11 4Q '12 4Q '13 4Q '14 4Q '15 EUR Millions Source: CB Richard Ellis. The above chart is for illustrative and discussion purposes only. Investment yields have continued to remain low with prime office yields in London and Frankfurt falling by 25 basis points to 3.25% and 30 basis points to 4.00% respectively, while Paris at 3.25% and Madrid at 4.25% remained stable. Similar trends could be observed for prime yields in high street retail locations, dropping further in Paris by 25 basis points to 3.00% and in Frankfurt by 10 basis points to 3.80%. In London, prime high street yields remained stable at 2.00%. Vacancy rates across the main markets also declined further with media and technology occupiers dominating the demand for space. In London, the vacancy rate in the office sector has now fallen for 11 successive quarters and only the shortage of new supply and refurbished stock is starting to constrain transaction levels. Prime rents remain at record levels in a number of London submarkets with average office prime rents recording growth of 9% year-on-year. In Germany, take-up increased significantly year-on-year in Düsseldorf (+46%) and Berlin (+43%), while the other five largest cities also experienced a growth in take-up, albeit at a slower rate. Overall, the average vacancy rate across Germany s seven largest cities dropped to its lowest level since 2002 reaching 6.4% by the end of the In Paris, take-up of office space increased by 18% in the fourth quarter versus 2014, resulting in an overall 1% increase for the year compared to Improving economic conditions with declining unemployment rates in most European markets has improved consumer confidence which is gradually lifting private consumption. We believe this should ultimately start to drive retailer s demand for space and increase retail rents across the EU. The lack of availability on the best streets in some cities has already been causing rents to increase. Growth of average prime high street and shopping center rents in all of the core European markets accelerated in the fourth quarter with many markets experiencing a double digit growth in Asian Property Markets Japanese property markets have continued to strengthen, especially among office space in prime locations. Rental rates in the five central wards in Tokyo rose more than expected at year-end. Chinese economic growth continued to slow over the fourth quarter of 2015 sparking concern about the weakening RMB and its effect on offshore debt much of which is concentrated in the real estate sector. Accommodative policies by the Chinese government including multiple interest-rate cuts have supported the housing market. Residential construction slowed significantly versus the same period in 2014 due to concerns over excess inventory and high land prices. Despite record economic growth forecast until at least 2018 in India, current conditions on the ground for real estate investors are mixed. Absorption in tier one cities such as Mumbai improved versus the same period in 2014 but remained steady in Bangalore and declined in lower-tier cities such as Noida. In Japan, the economy contracted in the third quarter of 2015 by an annualized 0.8%, slipping the country back into a technical recession. Economists are expecting the economy to grow only moderately in the next few quarters. As a result, policymakers are under growing pressure to deploy new and more effective stimulus policies to sustainably pull Japan out of stagnation. Recently, politicians and Bank of Japan officials have been overly cautious and held off on expanding stimulus measures. Despite this, the Japanese real estate market has continued to strengthen on the back of improving fundamentals. The Miki Shoji office building vacancy rate survey of Tokyo s five main wards fell by a further 0.5%, declining to a low of 4.03% as of December 2015, from 4.53% as of September The Tokyo office rental cycle continues its upward trend with the average office (all grades) 3

4 12/97 12/98 12/99 12/00 12/01 12/02 12/03 12/04 12/05 12/06 12/07 12/08 12/09 12/10 12/11 12/12 12/13 12/14 12/15 asking rent per tsubo (equivalent to 3.3 square meters) for the five central wards of Tokyo was up over the quarter by 0.5% to 17,692 from the previous quarter, which equates to a 4.36% increase year-on-year. The average asking rent for new modern Grade A office buildings across the five central wards of Tokyo rose a surprisingly high 6.21% year-on-year to 28,647 per tsubo. As expected, office rents are rising more quickly, particularly in central Tokyo, when compared to outlying areas. Going forward, local analysts are expecting office rental growth to accelerate in 2016 as a result of firm demand and continued low vacancies coupled with relatively low supply. Over the quarter, only a few new large office buildings were completed in Tokyo. Looking ahead, office supply is expected to be muted in Mori Building s Tokyo office market supply survey shows that the average gross office supply in will be 900,000 square meters per year, 9% lower than Tokyo s historical average of 1.0 million square meters since However, supply is expected to increase to 1.3 million square meters in 2018 and 1.8 million square meters in Chart 3: Vacancy Rates in Tokyo Continue to Decline Office Vacancy Rate (Tokyo Major 5 Wards Average) December 1997 December % 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% Source: Miki Shoji. The above chart is for illustrative and discussion purposes only. 4.03% China s fourth quarter 2015 GDP grew 6.8% year-on-year, translating to a FY2015 GDP growth of 6.9%. As expected, this is down from FY2014 s 7.4% growth. Industrial production and fixed asset investment were weaker than expected, while the much watched retail sales growth was up 11.1% year-on-year but lower than consensus estimates of 11.3%. Investors are focused on and worried about a global spillover from China s continuing market turmoil and economic slowdown. In addition, the recent weakening of the RMB has increased investor concerns about off-shore denominated debt especially in the real estate industry. According to the National Bureau of Statistics, China s FY15 total residential gross-floor-area (GFA) sales increased 6.9% in volume, while in value terms it increased 16.6% year-on-year. The Chinese government s stimulus measures and policy support over the last year, especially the multiple interest-rate cuts and less restrictive mortgage requirements, have served to revive the lackluster housing market. However, residential GFA starts for new construction was down 14.6% year-on-year. An inventory overhang (especially in Tier 3 and Tier 4 cities) coupled with very high land prices in Tier 1 cities have caused local real estate developers to adopt a more cautious approach in terms of launching new residential projects. In the Chinese office sector, the current polarization in performance between Tier 1 and other cities is expected to further widen. According to CBRE, while Tier 1 cities have seen strong tenant demand with an average vacancy rate of below 7%, the average office vacancy in Tier 2 cities has risen to above 25% on the back of increasing supply and moribund demand. In particular, Tier 2 cities like Tianjin, Chongqing, and Nanjing have office vacancy rates of 30% 40%. With the increasing internationalization of the Chinese economy and the resulting demand for prime office space from multinational corporations, China s core office CBDs in Tier 1 cities are expected to perform well. The office vacancy rates of Shanghai s Lujiazui and Huaihai Road prime office districts, and Beijing s Financial Street and IThub of Zongguancun, are expected to remain around 5% or less for the foreseeable future. The World Bank recently forecasted that India will be the fastestgrowing large economy until at least 2018, with GDP growth estimated at 7.8% in 2016, and 7.9% in 2017 and Economists have noted that the country is in the midst of a cyclical upturn, with domestic consumption and government capital spending driving growth. However, the correlation between the positive macroeconomic picture and current conditions on the ground for real estate investors are unfortunately not strong. Expectations in 2015 were ultimately overly optimistic, particularly with respect to the residential sector. Fortunately, recent data have been more promising. Jones Lang recently reported that for the top three cities for the fourth quarter of 2015, absorption (presales) improved in Mumbai (+12% year-on-year) and Gurgaon (+22% year-on-year), but was steady in Bangalore (+3% year-onyear) and weak in Noida (-22% year-on-year). Furthermore, inventory appears to be stabilizing particularly in the National Capital Region due to low launches and some pickup in sales. Meanwhile, the office sector witnessed robust demand and increasing rents across several Indian cities in Jones Lang also noted that total office absorption in 2015 came in at 35 million square feet, the second highest in the country s history (after 2011). This suggests that we should see average office vacancies (currently 16%) trend lower, and we have already begun to see investor appetite for office assets. 4

5 WHAT ARE THE RISKS? All investments involve risks, including possible loss of principal. The risks associated with a private equity real estate strategy include, but are not limited to various risks inherent in the ownership of real estate property, such as fluctuations in lease occupancy rates and operating expenses, variations in rental schedules, which in turn may be adversely affected by general and local economic conditions, the supply and demand for real estate properties, zoning laws, rent control laws, real property taxes, the availability and costs of financing, environmental laws, and uninsured losses (generally from catastrophic events such as earthquakes, floods and wars). Real estate securities involve special risks, such as declines in the value of real estate and increased susceptibility to adverse economic or regulatory developments affecting the sector. Investments in REITs involve additional risks; since REITs typically are invested in a limited number of projects or in a particular market segment, they are more susceptible to adverse developments affecting a single project or market segment from more broadly diversified investments. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Special risks are associated with foreign investing, including currency fluctuations, economic instability and political developments; investments in emerging markets involve heightened risks related to the same factors. To the extent a strategy focuses on particular countries, regions, industries, sectors or types of investment from time to time, it may be subject to greater risks of adverse developments in such areas of focus than a strategy that invests in a wider variety of countries, regions, industries, sectors or investments. IMPORTANT LEGAL INFORMATION The foregoing information reflects our analysis and opinions as of December 31, 2015, unless otherwise indicated. This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice. Because market and economic conditions are subject to rapid change, opinions provided are valid only as of the date indicated. The portfolio managers analysis of issues, market sectors, and of the economic environment may have changed since the date of this commentary. Charts included are for illustrative and discussion purposes only and are subject to change. There is no assurance that any forecast, projection or estimate will be realized or that any investment strategy will be successful. The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as of the publication date and may change without notice. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market. All investments involve risks, including possible loss of principal. Data from third party sources may have been used in the preparation of this material and Franklin Templeton Investments ( FTI ) has not independently verified, validated or audited such data. Statements of fact are from sources considered to be reliable, but no representation or warranty is made as to their completeness or accuracy. FTI accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user. Products, services and information may not be available in all jurisdictions and are offered outside the U.S. by other FTI affiliates and/or their distributors as local laws and regulation permits. Please consult your own professional adviser for further information on availability of products and services in your jurisdiction. Issued in the U.S. by Franklin Templeton Distributors, Inc., One Franklin Parkway, San Mateo, California , (800) DIAL BEN/ , franklintempleton.com - Franklin Templeton Distributors, Inc. is the principal distributor of Franklin Templeton Investments U.S. registered products, which are available only in jurisdictions where an offer or solicitation of such products is permitted under applicable laws and regulation. 5

6 IMPORTANT LEGAL INFORMATION (cont d.) Australia: Issued by Franklin Templeton Investments Australia Limited (ABN ) (Australian Financial Services License Holder No ), Level 19, 101 Collins Street, Melbourne, Victoria, Austria/Germany: Issued by Franklin Templeton Investment Services GmbH, Mainzer Landstraße 16, D Frankfurt am Main, Germany. Authorized in Germany by IHK Frankfurt M., Reg. no. D-F-125-TMX1-08. Canada: Issued by Franklin Templeton Investments Corp., 5000 Yonge Street, Suite 900 Toronto, ON, M2N 0A7, Fax: (416) , (800) , Dubai: Issued by Franklin Templeton Investments (ME) Limited, authorized and regulated by the Dubai Financial Services Authority. Dubai office: Franklin Templeton Investments, The Gate, East Wing, Level 2, Dubai International Financial Centre, P.O. Box , Dubai, U.A.E., Tel.: Fax: France: Issued by Franklin Templeton France S.A., 20 rue de la Paix, Paris, France. Hong Kong: Issued by Franklin Templeton Investments (Asia) Limited, 17/F, Chater House, 8 Connaught Road Central, Hong Kong. Italy: Issued by Franklin Templeton Italia Sim S.p.A., Corso Italia, 1 Milan, 20122, Italy. Japan: Issued by Franklin Templeton Investments Japan Limited. Korea: Issued by Franklin Templeton Investment Trust Management Co., Ltd., 3rd fl., CCMM Building, 12 Youido-Dong, Youngdungpo-Gu, Seoul, Korea Luxembourg/Benelux: Issued by Franklin Templeton International Services, S.à r.l. Supervised by the Commission de Surveillance du Secteur Financier - 8A, rue Albert Borschette, L-1246 Luxembourg - Tel: Fax: Malaysia: Issued by Franklin Templeton Asset Management (Malaysia) Sdn. Bhd. & Franklin Templeton GSC Asset Management Sdn. Bhd. Nordic regions: Issued by Franklin Templeton Investment Management Limited (FTIML), Swedish Branch, Blasieholmsgatan 5, Se Stockholm, Sweden. FTIML is authorised and regulated in the United Kingdom by the Financial Conduct Authority and is authorised to conduct certain investment services in Denmark, Sweden, Norway & Finland. Poland: Issued by Templeton Asset Management (Poland) TFI S.A., Rondo ONZ 1; Warsaw. Romania: Issued by the Bucharest branch of Franklin Templeton Investment Management Limited, Buzesti Street, Premium Point, 7th-8th Floor, Bucharest 1, Romania. Registered with CNVM under no. PJM05SSAM/400001/ , and authorized and regulated in the UK by the Financial Conduct Authority. Singapore: Issued by Templeton Asset Management Ltd. Registration No. (UEN) E, 7 Temasek Boulevard, #38-03 Suntec Tower One, , Singapore. Spain: Issued by the branch of Franklin Templeton Investment Management, Professional of the Financial Sector under the Supervision of CNMV, José Ortega y Gasset 29, Madrid. South Africa: Issued by Franklin Templeton Investments SA (PTY) Ltd which is an authorized Financial Services Provider. Tel: +27 (11) Fax: +27 (11) Switzerland & Liechtenstein: Issued by Franklin Templeton Switzerland Ltd, Stockerstrasse 38, CH-8002 Zurich. UK: Issued by Franklin Templeton Investment Management Limited (FTIML), registered office: Cannon Place, 78 Cannon Street, London, EC4N 6HL. Authorized and regulated in the United Kingdom by the Financial Conduct Authority. Offshore Americas: In the U.S., this publication is made available only to financial intermediaries by Templeton/Franklin Investment Services, 100 Fountain Parkway, St. Petersburg, Florida Tel: (800) (USA Toll-Free), (877) (Canada Toll-Free), and Fax: (727) Investments are not FDIC insured; may lose value; and are not bank guaranteed. Distribution outside the U.S. may be made by Templeton Global Advisors Limited or other sub-distributors, intermediaries, dealers or professional investors that have been engaged by Templeton Global Advisors Limited to distribute shares of Franklin Templeton funds in certain jurisdictions. This is not an offer to sell or a solicitation of an offer to purchase securities in any jurisdiction where it would be illegal to do so. Please visit to be directed to your local Franklin Templeton website. franklintempletoninstitutonal.com Copyright 2016 Franklin Templeton Investments. All rights reserved. 2/16