Continued momentum extends the real estate cycle

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1 Continued momentum extends the real estate cycle Global Capital Markets Research Q Executive Summary Global transactional volumes were unchanged in the third quarter of 2017 compared to the same period a year ago, coming in at US$166 billion (Figure 1). This brings YTD 2017 volumes to US$464 billion, 2% higher than the first three quarters of A strong performance in EMEA saw YTD volumes jump by 14% thanks to robust activity in the UK and Germany. Asia Pacific followed close behind with activity increasing by 12%. The Americas saw year-to-date volumes dip by 11% as investment in the US slipped in the third quarter. A record third quarter has led to Berlin becoming the third most popular destination for crossborder investment on a year-to-date basis. Three high profile acquisitions by overseas investors topped off a quarter which saw nearly US$3 billion in capital inflows to the German capital. Global demand for industrial assets has not let up, with the sector posting an impressive 32% increase in volumes compared to the same period last year. Meanwhile, structural concerns over retail, particularly in developed markets, lingered as investment dropped by 14%. Inter-regional investment is up 25% thanks to sustained demand from Asian investors. So far this year buyers from Asia have spent more than US$26 billion on property in the US and Europe. US multifamily volumes were up 9% from last quarter, up to US$36 billion. After a marked decline in the first quarter, investment has rebounded over the last 6 months, however year-to-date volumes are still down 12% from Contents Executive Summary 1 Global & Regional 2 Cities 3 Cross border 4 US Multifamily 6 Outlook 7 Methodology & contacts 8 Authors Josh Gelormini Director US Research josh.gelormini@am.jll.com Pranav Sethuraman Global Capital Markets Senior Analyst pranav.sethuraman@am.jll.com More information theinvestor.jll 27 October 2017 With global real estate investment activity broadly tracking last year s pace, the market is poised to continue this performance into the fourth quarter. The weight of capital seeking to enter the sector is significant and, despite being late in the cycle, fundamentals are still supportive of investment activity. We still anticipate full-year 2017 volumes to more or less be in line with the US$650 billion we recorded last year. Figure 1: Direct Commercial Real Estate Volumes, Q Q US$ Billions Q Q % change Q Q Q % change Q Q YTD 2016 YTD 2017 % change YTD 2016-YTD 2017 Americas % 77-20% % EMEA % 56 24% % Asia Pacific % 33 5% % TOTAL % 166 0% % *All currency figures in this report are in US dollars, unless otherwise noted. These are converted from local currencies using a quarterly average rate. 1

2 GLOBAL AND REGIONAL Activity keeps up in Q3 Politics continue to influence markets Yet another quarter has passed in which political uncertainty has had a major impact on global markets. Geopolitical tensions ranging from Korea to Catalonia have given investors plenty of reasons to exercise caution. Nevertheless, real estate continues to perform, and the third quarter saw volumes of US$166 billion, level with the performance we recorded in the third quarter of 2016 (Figure 2). This brings YTD 2017 volumes to US$464 billion, 2% higher than last year s mark. Figure 2: Direct Commercial Real Estate Volumes By Region, Q Q respectively. Both China and Japan were unable to better their third quarter performances from last year, but a strong start to the year in both countries has YTD volumes up 11% and 3% respectively. Third quarter volumes are down 20% from last year in the Americas, bringing YTD investment down by 11% to US$184 billion. While volumes have declined in the US for the third quarter in a row, the country is still the world s biggest real estate market by a significant margin (Figure 3). A bright spot in the region has been Canada, where year-to-date investment is up 31% to its highest level this cycle. Figure 3: Largest Markets for Transactional Volumes, YTD 2017 Europe surges ahead It has been over a year since the Brexit vote and there remains uncertainty about how the UK will exit the EU. Real estate investors, on the other hand, were increasingly unfazed by the ambiguity as investment volumes in EMEA jumped by 14% to reach US$183 billion. Activity in the UK was up by 30% in the third quarter bringing year-to-date volumes 28% higher than last year. Foreign buyers, in particular, have not lost their appetite for Central London offices, as another mega-deal made the books this quarter. Retail cools down while industrial stays hot Structural shifts in the global economy are being felt in the retail and industrial sectors. The rise of e-commerce and click-andcollect are playing a role in how investors view the retail sector overall, and YTD 2017 volumes are down by 14% (Figure 4). On the other hand, this has benefitted the industrial sector where volumes are up 32% on the back of strong investor demand. Figure 4: Global Transactional Volumes by Sector, YTD 2016 & YTD 2017 On the continent, the German market kept up its strong performance as investors flocked to the Eurozone s biggest economy. Cross-border investment is up 23% from last quarter and YTD volumes are at their highest point since The Dutch market has been very active since the beginning of the year. Third quarter investment was more than double last year s level, bringing YTD volumes to record highs. Quarterly volumes in Asia Pacific are up 5% from last year, boosting YTD volumes by 12% to US$97 billion. Sustained demand from domestic investors in Singapore and Hong Kong led to year-on-year investment growth of 28% and 17% 2

3 CITIES Los Angeles and New York battle for second London streaks ahead of the rest Affirming its place as the world s most traded city, London has widened the gap with second place. With US$26.0 billion transacted so far in 2017, London is nearly US$9 billion ahead of Los Angeles (Figure 5). In spite of all the uncertainty surrounding Brexit, investors have remained committed to London s property market and it does not look like it will lose its top spot this year. The battle for second place, between Los Angeles and New York, has intensified, as New York conceded one rank this quarter and fell to third. Less than US$1 billion separated the two last quarter, but a strong third quarter performance helped Los Angeles jump ahead into second. While New York still sees significantly more cross-border capital, Los Angeles has attracted the attention of domestic investors who spent US$5.6 billion more there than in New York. More than US$3.2 billion of that capital went to the industrial sector, where US investors have dominated the market with over 84% market share. In a microcosm of the overall Dutch property market, crossborder investors outspent their domestic counter parts by nearly US$1.5 billion in Amsterdam (Figure 6). French investors and global funds have been particularly active over the last three quarters which has helped boost YTD cross-border investment by 523%. Figure 6: 10 Largest Recipient Cities of Cross Border Investment, YTD 2016 & YTD 2017 Figure 5: Most Active Cities, YTD 2017 Rank YTD 2016 Rank YTD 2017 City Cross-border capital targets Berlin YTD 2017 (US$bn) YTD 2016 (US$bn) 2 1 London Los Angeles New York Tokyo Paris Singapore Boston Hong Kong Washington, DC Seoul Source - JLL American cities still dominate Despite an overall drop in US volumes this quarter, American cities still outnumber Asia Pacific and European cities in our list of the top 20 global markets (Figure 7). As a highly transparent market with strong demographics and an innovative economy, the US has solidified its place as a top investment destination. These factors, combined with attractive risk-adjusted returns and largely supportive fundamentals, continue to make US markets appealing to investors. Figure 7: Top 20 Cities for Transactional Volumes, YTD 2017 Thanks to a record third quarter, Berlin has emerged as a hotspot for cross-border investment as foreign investors spent nearly US$3 billion in the third quarter alone. As the capital of the Eurozone s biggest economy, Berlin is an attractive market for cross-border investors. In one of the biggest single-asset deals of the quarter, Oxford Properties and Madison International Realty acquired the Sony Center from Korea s NPS. The other marquee deal of the quarter was Axel Springer s agreement to sell their future HQ to Norway s national pension fund for US$499 million while also selling their current office to Blackstone and Quincap Partners for US$388 million. These transactions highlight the broad base of investor demand for property in Berlin. 3

4 CROSS BORDER Capital continues to move around the world Figure 8: Inter-Regional Flows, YTD 2017 (US$158 billion in total) Source: JLL Property Data (UK); Real Capital Analytics (USA) Global funds and Asian investors continue to spend As the most active movers of capital so far this year, global funds and Asian investors have made inter-regional acquisitions totalling more than US$65.8 billion, 21% more than in the first three quarters of 2016 (Figure 8). Almost all of this capital went to developed markets in North America and Europe, which have been the biggest beneficiaries of overall global capital flows so far this year (Figure 9). With US$19.8 billion in net purchases through the first three quarters, Asian investors are behind their pace from 2016 but have still managed to outspend their rivals from all other regions by a significant margin (Figure 10). The source of this capital is heavily concentrated, with China, Hong Kong, and Singapore contributing 75% of the total. However, for the first time since 2012, China was not the biggest exporter of capital from Asia after the first three quarters of the year; Hong Kong investors took the lead in Q3 thanks to a mega-deal in Central London. Looking ahead to Q4 and beyond it is hard to speculate as to whether or not the current level of inter-regional outflows from China are sustainable. Capital outflows may taper as the government seeks to crack down on extravagant cross-border spending. With real estate listed among the sectors that regulators will be keeping a close eye on, Chinese firms continue to be under strong pressure to limit their overseas acquisitions. Figure 9: Net Beneficiaries of Inter Regional Flows, YTD 2016 & YTD 2017 Figure 10: Net Buying & Selling, YTD 2016 & YTD

5 CROSS BORDER Inter-regional flows drive activity Cross-border flows tick up again Global transaction volumes were driven by inter-regional flows in the third quarter of Domestic activity stayed level and intraregional flows declined slightly, but capital flows across the regions jumped up by 26% from last quarter (Figure 11). Figure 12: Top 10 Cross Border Purchasers by Source of Capital, YTD 2016 & YTD 2017 Compared to last year, total cross-border flows are up 11% in Q3 but performance is mixed across regions. EMEA (46%) and Asia Pacific (27%) are both significantly up on last year while the Americas (-33%) fell further behind. Figure 11: Global Cross Border Transactional Volumes, Q Q The Walkie Talkie tops the table British investors regain their top spot After losing their top spot to the Germans last quarter, British investors took back first place to become the biggest movers of capital. While cross-border activity fell by 50% in the third quarter, the strong start to the year has kept the UK on top with US$11.7 billion in overseas purchases (Figure 12). Not far behind are Canadian investors who maintained a strong focus on European property in the third quarter. A recordbreaking US$5.5 billion in Q3 acquisitions, of which US$2.9 billion was spent in Europe, helped bring them right behind British investors to second place in our rankings. Unsurprisingly, leading the way for Canadians investors were the major pension funds who invested US$3.1 billion in foreign assets in Q3, making up 56% of all Canadian cross-border purchases. Oxford s purchase of the Sony Center in Berlin and Ivanhoe Cambridge s acquisition of Evergreen Industrial Properties, a portfolio of industrial assets in the US, were major cross-border deals from the third quarter. Canadian investors are now just US$473 million behind the first place British, and as we move into the final quarter of the year we look to be set for a photo finish. For the second time this year, the sale of a Central London office tower to a Hong Kong based buyer is the biggest cross-border transaction of the quarter (Figure 13). The Walkie Talkie, as 20 Fenchurch Street is known due to its unique design, was purchased by an arm of LKK Group in what was the UK s biggest single-asset transaction ever. The purchase continues the proliferation of Asian capital, particularly from Hong Kong, into London. Given the rising prices and stiff competition from mainland firms at home, Hong Kong investors have increasingly looked abroad to invest in real estate. With US$6.9 billion in acquisitions in London so far this year, Hong Kong based buyers are now the biggest spenders in the London property market. Figure 13: Noteworthy Cross Border Deals in Q Property Name Location Sector 20 Fenchurch Street Sale Price ($ US m) Purchaser Purchaser Source of Capital London Office 1,678 LKK Group Hong Kong Sony Center Berlin Office 1,293 Evergreen Industrial Properties Brockton Portfolio Oxford Properties/Madison International Realty Canada/USA USA Industrial 995 Ivanhoe Cambridge Canada UK Industrial 731 Blackstone Global Merin Portfolio Netherlands Office/Industrial 730 Dream Global REIT Canada Source - JLL 5

6 US MULTIFAMILY Sturdy suburban and sunbelt demand US multifamily investment rebounds Rental apartment properties saw investment grow to nearly US$36 billion in the third quarter, an increase of 9% from the second quarter and essentially even with last year s volumes (Figure 14). This marks the second consecutive quarter in which multifamily activity maintained last year s pace, following a marked deceleration in deal volume in the opening quarter of As a result of the soft first quarter, year-to-date volumes are down by approximately 12%. Despite the strong rebound in activity over the past 6 months, multifamily investment is anticipated to pull back moderately over the coming quarters as investors digest the slowing, but still positive, rent growth and returns the sector is seeing across the country amid robust new development activity. In addition, multifamily investment volumes over the period were unsustainably high, given product supply constraints. Figure 15: Most Active US Cities for Multifamily Transactions, Q Q Figure 14: US Residential Transactional Volumes, 2011 Q Spreads remain attractive The Federal Reserve is now commencing its program to taper the size of its balance sheet. Over a period of several years, its balance sheet will be progressively cut from its current US$4.5 billion. Additionally, the Fed continues on its interest rate hiking cycle with broad expectations for the next 25 bps increase in its policy rate to occur in December. Communication of its plans to the markets has been ample, and as such, Treasury market investors have digested policy moves well. The 10-year Treasury yield have remained largely stable over the course of Q3 as have multifamily yields (Figure 16). Spreads for the sector still remain very healthy from a historical perspective, with further room for compression Figure 16: US Residential Spreads: Initial Multifamily Yields over US Treasuries, Q Q Mixed performance across markets Even though total investment in the multifamily sector picked up in the third quarter, there is notable variation within markets. The biggest shift by far has been in New York, where activity is down by more than 50% for the four quarters ending in Q3, on a yearon-year basis, to US$9 billion (Figure 15). Less core supply on the market and a more cautious stance on the part of domestic investors are behind the reduced pace. Capital is shifting its focus incrementally to suburban markets in general and also toward primary Sunbelt markets such as Dallas and Atlanta, while several coastal gateway markets see somewhat more selectivity among investors given their active development pipelines. 6

7 Outlook Real estate continues to perform 2017 investment activity still on track After three quarters, global transaction volumes in 2017 are largely unchanged from the levels we saw last year, and the real estate sector is poised to continue its strong performance. Figure 18: Global Real Estate Dry Powder, 2000 YTD 2017 In the face of geopolitical tensions around the world and uncertainty over interest rates, investors have remained committed to global real estate. The weight of capital seeking to access the sector remains significant and, despite being deep in the cycle, investors are actively looking for new ways to deploy funds. Global gateway markets remain liquid and occupier fundamentals are still supportive of investment activity. Given these factors, we expect 2017 transaction volumes will stay level with the US$650 billion recorded in 2016 (Figure 17). Figure 17: Historical & Forecast Global Transactional Volumes by Region, Dry powder reaching record highs The weight of capital looking to enter global real estate markets is substantial. With a full quarter still to go in 2017, total private dry powder stands at US$252 billion, in line with the total for all of last year (Figure 18). Private real estate dry powder has grown by 12% and 17% in the last two years respectively, and 2017 looks set to eclipse last year s record total and build on that progress. Public and direct markets diverge in the UK For the second time this year, a UK REIT has sold a trophy asset in central London to an Asian investor for a significant premium. Following up on British Land and Oxford Properties sale of The Leadenhall Building at a 24% premium earlier this year, Landsec and Canary Wharf Group have sold The Walkie Talkie at a 13% premium to its last valuation. Nevertheless, both REITs are trading at discounts to NAV and with UK REITS on average trading at just over a 17% discount to NAV (Figure 19), there appears to be a growing divergence between the physical and listed markets. Direct real estate buyers, particularly those from Asia, have shown that they are wiling to pay top dollar for high quality assets but public markets still seem to have doubts about the UK real estate sector. Meanwhile, European REITs are trading at an average of just 1.6% below NAV, a spread of more than 15.5% to their UK equivalents. Figure 19: UK and EU REIT Discount to NAV, YTD 2017 As the cycle draws on and the hunt for yield intensifies, investors have looked to new channels, and new strategies, to meet their real estate allocations. Among the biggest beneficiaries of this change in the investment environment has been debt funds. As of Q3 2017, the total amount of dry powder held by debt funds stood at US$48 billion, the largest amount recorded since Moreover, this capital source represents nearly 20% of dry powder globally. With the supply of marketed stock decreasing in gateway markets around the world, we can expect more investors to access real estate through new means, such as debt. 7

8 Notes and Methodology Direct Real Estate Investment Entity Level Deals Development Deals Asia Pacific Europe Middle East and Africa Americas Exchange Rates Grossed-up Figures Refers to the purchase of individual commercial property assets or portfolio of assets (or shares in special purpose vehicles that own assets). Includes: All transactions over US$5m Sectors covered are office, retail, hotels, industrial, mixed-use and other (includes nursing homes, student accommodation, etc) The data includes property company M&A, including REIT formations, where the following conditions are met: The transaction is essentially a Real Estate transaction Significant assets over and above the real estate assets (e.g. workforce, intellectual property, goodwill etc.) are not transferred 70% + of revenues come directly from rental income Transactions involve a significant changes of ownership Transaction must be at market price Only includes the percentage sold to new investors at the IPO price Excludes: Entity-level transactions; development deals; and multi-family residential investment Refers to corporate acquisitions, where significant assets over and above the real estate assets are transferred (e.g. workforce, intellectual property, goodwill etc). E.g. REIT privatisation Transaction churn e.g. where a company sells real estate assets to a majority-owned subsidiary Refers to transactions categorised as forward funded development and land transactions Varying coverage of the direct real estate investment markets in Australia, China, Hong Kong, India, Indonesia, Japan, Macau, Malaysia, New Zealand, Philippines, Singapore, South Korea, Taiwan, Vietnam, and Thailand Varying coverage of the direct real estate investment markets in Austria, Belgium, Bulgaria, Croatia, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Iceland, Italy, Luxembourg, Netherlands, Norway, Poland, Portugal, Romania, Russia, Slovakia, Slovenia, Spain, Sweden, Switzerland, Turkey and the UK Varying coverage of the direct real estate markets in Bahrain, Israel, Kuwait, Lebanon, Qatar, Saudi Arabia, and UAE In Africa, we cover South Africa with varying coverage across the rest of the continent. Detailed coverage of the direct real estate investment markets in Canada and the USA and partial coverage of Argentina, Brazil, Chile, Colombia, Costa Rica, Mexico, Panama and Peru We convert transaction values into US$ at the average daily rate for the quarter in which the transaction occurred Volumes are grossed-up to reflect market coverage Who we are? JLL Global Capital Markets is an integrated network of 1,500 of the globe s most knowledgeable and best connected deal makers. Our teams have spent their careers in local and international markets, building unbeatable experience and relationships with capital sources and investors in every market across the globe. You can rely on us to secure the best pricing and opportunities available in the market. For more information visit COPYRIGHT JONES LANG LASALLE IP, INC Unauthorised reproduction prohibited. This report is based on material that we believe to be reliable. While every effort has been made to ensure its accuracy, we cannot offer any warranty that it contains no factual errors. Jones Lang LaSalle takes no responsibility for any damage or loss suffered by reason of the inaccuracy or incorrectness of this publication. 8