Records broken as market looks to push through US$600 bn in 2014

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1 Records broken as market looks to push through US$6 bn in 214 Capital Markets Research, 213 Executive Summary Five years of consistent growth in global investment markets has seen volumes reach US$563 billion1 in 213. The final quarter of the year exceeded our expectations with US$198 billion recorded, as new buyers continue to enter the direct commercial real estate investment market (Figure 1). New annual transactional records were set in many markets including Australia (US$22 bn), Canada (US$18 bn), China (US$25 bn) and Singapore (US$ bn). Improved pricing is encouraging vendors to put more stock onto the market increasing transactional levels and in particularly, pushing volumes to a new high of US$7 billion. For the first time in many years we now see volumes across prime and secondary cities moving higher together. Stock in the major cities continues to be highly sought after but so do good quality assets in regional locations. While we have seen the amount of money coming out of China more than double in 213, the traditional sources of capital from the United States, Germany and the Middle East continue to dominate the cross-border investment markets. As risk appetite improves we have recorded more activity in smaller countries and cities accompanied by investors looking at opportunities outside the office and retail sectors. There are more deals in hotels, industrial/logistics, mixed use schemes and niche sectors such as healthcare, which can provide higher yield opportunities. London regained the top spot from New York in 213 with international investors continuing to play a major role. Conversely Hong Kong has seen volumes drop 35% as governmental measures including increased property taxes begin to take hold. The US multifamily investment market ended the year 6% higher at US$86 billion. Activity has spread to cities across the country with Dallas and Houston two of the most actively traded cities in the country. With the impetus of 213 continuing into 214 we expect transactional volumes to break the US$6 billion level in 214. Our initial estimate is US$65 billion, given a 2% increase in the US and further growth in and Europe. Contents Executive Summary 1 & regional 2 Cities 3 Cross border 4 Residential 6 Outlook 7 Methodology & Contacts 9 Authors David Green-Morgan Capital Markets Research Director david.green-morgan@ap.jll.com Josh Gelormini Director, US Research josh.gelormini@am.jll.com Caroline Dehe Associate Director, ICG caroline.dehe@eu.jll.com Victoria Clark Business Analyst, ICG victoria.clark@eu.jll.com More information 29 January 214 Figure 1: Direct Commercial Real Estate Volumes, US$ Billions % change % change % change % 75 18% % EMEA % 61 18% % % 27 39% % Total % % % 1 All currency figures in this report are in US dollars, unless otherwise noted. These are converted from local currencies using a quarterly average rate.

2 GLOBAL & REGIONAL Records broken in AP & AM All three regions record double digit growth in 213 In 213 all three regions recorded significant increases over 2, 18% in the, 21% in EMEA and 29% in Asia Pacific. As a result full year volumes reached US$563 billion with all regions exceeding their growth due to improving investor sentiment globally and strong liquidity. The final quarter of 213 reached US$198 billion which has only been beaten by two US$2+ billion quarters in 27 (Figure 2). The 41% increase over the third quarter follows the pattern of recent years where investors spend annual allocations in the final three months. In previous years this has also been boosted by expiring or changing tax laws in certain countries around the world, but that was largely absent in 213 it was driven by pure demand for real estate. sets new high as Australia, China & Singapore have record years outperformed in 213 with 29% growth to set a new record of US$7 billion, up from the previous high of US$1 billion in 27. Abenomics has turned the market around in Japan where volumes doubled in local currency terms. Chinese domestic investment rose to a new high in 213 but it is outside of the country where Chinese money is having a real impact; Australia and Singapore rose to record highs partly on the back of large increases in Chinese investment (Figure 3). The three biggest markets in Europe all saw transaction volumes increase but they were supported in 213 by the smaller markets witnessing a comeback in investor demand, albeit from a low base. In the it was a case of North vs. South, as the US, Canada and Mexico all pushed higher while Latin America struggled to match 2 s performance as Brazil, one of the largest markets, was down 74% as a slower economy caused investor pull back. Figure 2: Direct Commercial Real Estate Volumes by Region, EMEA Rolling Four Quarters Average Figure 3: Largest Markets for Transactional Volumes 213 USA UK Japan Germany China France Australia Canada Singapore Sweden US$25 bn US$22 bn US$22 bn US$18 bn US$ bn US$ bn US$38 bn US$68 bn US$42 bn US$215 bn Cross-Border Domestic Figure 4: Transactional Volumes by Sector, 2 & 213 Office Retail 23% 17% Risk curve investors look at hotels, industrial and mixed use schemes Consistent with the rest of 213, investors continued to move up the risk curve in the final quarter with hotels, industrial and mixed use assets all seeing increased investor demand (Figure 4). While many new cross-border investors have focused on the office sector we are seeing them more interested in other sectors, as well as office assets in more peripheral locations. 2 Jones Lang LaSalle Capital Flows 29 January 214 Industrial 25% Hotel 51% Mixed 24% Other -14%

3 CITIES Foreigners scour smaller cities London pips NY as foreign money dominates London has regained its spot as the most liquid city in the world with overseas investment once again at the heart of transactional activity. The fear of a lack of good quality stock had raised concerns in many of the world s prime markets that investor activity may slow, but this has yet to eventuate. In our top only Paris and Washington DC have seen transactions lower in 213 than in 2 (Figure 5). Hong Kong has slipped out of the top rankings with transactional activity down 35%. Governmental measures to cool the wider market through a doubling of stamp duty have impacted on commercial volumes, although pricing is yet to adjust to reflect the increase in transactional costs. Canadians & Koreans focus on Chicago With cross-border activity increasing in the final quarter of the year, many of the largest cities in the world have benefitted from an increase in overseas investment. However none can match the growth that Chicago has recorded in 213, with Canadians and Koreans especially active as investors look for higher yielding opportunities (Figure 6). Manulife from Canada and Mirae Asset Management from Korea both bought office buildings on the same street, West Wacker in the Chicago CBD. Shanghai has seen a resurgence in foreign interest with 62% growth in activity as the flow of money into and out of China becomes easier. Much of the investment is flowing in from other parts of with Singaporeans particularly active in acquiring assets. Prime & secondary cities growing together 213 was in some ways a year of two halves with transactional volumes increasing significantly as we moved through the year, in line with global economic confidence and increased investor demand for real assets. Much of this rise in transactional activity came in the secondary markets and smaller cities while activity in the major world cities continued apace. The picture across North America is particularly interesting. While foreign investors look across the region for opportunities and push volumes higher in a number of cities (Figure 7) many US investors are looking outside the region for better opportunities that offer higher returns. This trend of growing volumes across smaller markets is set to continue in Jones Lang LaSalle Capital Flows 29 January 214 Figure 5: Most Active Cities 213 Rank 2 Rank 213 City 213 () 2 () 1 1 London New York Tokyo Paris Los Angeles Chicago Singapore Shanghai Washington, DC Sydney Figure 6: Largest Recipient Cities of Cross Border Investment, 2 & 213 London New York Paris Chicago Los Angeles Shanghai Washington, DC Sydney Seattle San Francisco 62% 34% -11% 49% -54% 279% 59% -13% 2% Figure 7: Top 2 cities for Transactional Volumes 213 London New York Tokyo Paris Los Angeles Chicago Singapore Shanghai Washington, DC Seoul Hong Kong Boston Dallas Houston Silicon Valley Seattle Sydney Munich San Francisco Moscow 8% EMEA

4 Europe remains the epicentre of global transactional flows Investment into Europe once again was heavily influenced by flows of money from other parts of the world as buyers continue to look at the major European cities for safety and security of income while also looking at more opportunistic transactions across the region. However, the make-up of that inward investment has changed over the last year (Figure 8). A quarter of all purchasing activity in Europe comes from investors outside the region, but in comparison to 2 when investors from were the largest net investors, in 213 US and Middle Eastern groups have picked up their pace of investment. Middle Eastern investors have more than doubled their net investment into the region by concentrating on the biggest markets of the UK, France and Germany. The and continue to see more inter-regional sellers than buyers (Figure 9). This reflects the strength of domestic groups outbidding international investors. funds continued to sell assets during 213, disposing of US$14 billion more property than they bought. All other inter-regional groups are net investors into commercial property with Middle Eastern and Asian buyers increasing their exposure to other regions. For the first time since the financial crisis European investors have now become positive net buyers outside their home region (Figure ). Figure 9: Net Beneficiaries of Inter Regional Flows, 2 Figure 8: Inter-Regional Flows, 213 (US$176 billion in total) & 213 EMEA Figure : Net Buying & Selling, 2 & 213 Europe Middle East Property Data (UK); Real Capital Analytics (USA) 4 Jones Lang LaSalle Capital Flows 29 January

5 CROSS BORDER More mature capital sources are back Final quarter volumes boosted by international investors International investors continue to make up a large part of the overall transactional market, with new entrants combining with the traditional sources of cross-border capital to move volumes higher (Figure 11). There are quite significant regional differences, while international investors make up over 2% of all purchasing activity in Europe and the they account for only 7% in. On a net basis inter-regional investors are almost twice as active in the and Europe as they are in. In 213 the majority of inter-regional activity in was international investors exiting their investments. Growth comes from Asia, but old sources provide consistency 213 will be seen as the year when Chinese capital became one of the most active and important sources of capital within commercial property markets. The 5% growth we have recorded over 2 (US$3.5 US$8 bn) is due to the 3 groups from China we know are looking to export capital (Figure ). Much of their activity has been concentrated in a small number of markets, UK, USA, Singapore and Australia but given the potential and size of this capital it is likely to spread quickly to big and small markets during 214. While the largest year on year growth has come from China, in absolute terms the more mature sources of cross-border capital continue to dominate. Given the improving US economy, US funds are deploying more capital overseas and as German institutional money comes to the end of structural changes in their funds arrangements we have recorded an uptick in their cross-border activity. Redevelopment opportunity entices developers The allure of acquiring real estate in a global city enticed the Lodha Group from India to make its first overseas purchase, with a potential office to residential redevelopment (Figure 13). JLL are meeting more international investors interested in development and redevelopment opportunities in global property hotspots. Elsewhere the strength of Chinese capital was evident in the final quarter with Fosun purchasing a major New York office tower while the Norwegians through NBIM continue to acquire assets through joint ventures and partnerships around the world. 5 Jones Lang LaSalle Capital Flows 29 January 214 Figure 11: Cross Border Transactional Volumes, % Figure : Top Cross Border Purchasers by Source of Capital 2 & 213 USA Germany Middle East Canada China UK Singapore Hong Kong Norway Figure 13: Noteworthy Cross-Border Deals in 213 Property Name Location Sector Sale Price ($ US m) One Chase Manhattan Plaza Seven Times Square New York New York Purchaser Purchaser Source of Capital Office 725 Fosun China Office 684 Norges bank Investment Management (NBIM) Norway KF Portfolio Sweden Retail 599 Starwood USA One Grosvenor Square Avenue des Champs Elysee 41% 41% 42% 45% 36% 36% 45% 4% 48% 45% 42% 43% 44% 45% 42% 43% 4% 4% 41% Domestic Intra-regional Inter-regional Cross Border as % of total London Office 495 Lodha Group India Paris Retail 354 Thor Equities USA 6% 5% 4% 3% 2% % %

6 RESIDENTIAL Demand booms as yields converge U.S. Multifamily trading finishes 213 on high note U.S. multifamily transactions were remarkably strong in the final quarter of 213, surging by 27% year on year to reach more than US$34 billion. For the full year, volumes rose by 6% to US$86 billion. US sales activity is now at its highest level since the recovery from the recession commenced (Figure 14). Residential investors in the US were on the whole unfazed with respect to higher interest rates and volatility, as well as the expected winding down of the sector s Government Sponsored Enterprises, as the continued appeal and strong fundamentals of the product type outweighed such concerns. Demand for this asset class is also strong in other major global cities leading to fears of a bubble forming in 214. Investor demand, from both owner-occupiers and increasingly institutional investors, is outstripping supply raising prices. U.S. investors increasingly target Sunbelt cities A major shift as 213 drew to a close was the increasing prominence of investment activity in major sunbelt cities across the US. While demand for assets in primary markets such as NY, Washington, DC and LA remains robust, near record low initial yields and in some cases less supply has nudged investors increasingly toward cities in the sunbelt. Houston and Dallas are good examples, where residential volumes for 213 increased by 45% and 4% to become the 2 nd and 3 rd most actively-traded cities (Figure 15). Other large markets experiencing growth during the year include Atlanta and Phoenix, with even more impressive gains found in the somewhat smaller southeast metro markets of Charlotte and Raleigh-Durham. Higher interest rates taken fully in stride Figure 14: US Residential Transactional Volumes Figure 15: Most Active US Cities for Residential Transactions, Figure 16: US Residential Spreads: Initial Multifamily Yields over US Treasuries, % Despite the rather sudden and fairly substantial increase in long-term interest rates in 213, pricing across the U.S. multifamily sector was impacted only marginally. The dollarweighted average national initial yield ended 213 almost precisely where it began at just over 5.6%. At the same time, the yield on the -year Treasury bond increased to the point where average 213 spreads were more than bps narrower than the average in 2 (Figure 16). Given the intensity of investor appetite for U.S. multifamily product, as well as prospective further rises in interest rates, there would appear to be ample scope for continued spread narrowing over the coming quarters. 7% 6% 5% 4% 3% 2% 1% % Apartment Yield Ten-Year Treasury Yield 6 Jones Lang LaSalle Capital Flows 29 January 214

7 OUTLOOK Breaking through US$6 bn in 214 US momentum to push markets to US$65 billion The first quarter will see no let-up in the demand for direct real estate all the way along the risk curve. Sellers who have held off releasing stock until valuations reflected their own estimates are keen to capitalise on the strong demand. JLL continues to see new buyers coming to the market, especially but not exclusively in emerging markets. Given this background we are confident that the market will break through the US$6 billion level in 214. Our initial estimate is that volumes will come in at US$65 billion for the full year, a 15% increase on 213 (Figure 17). The US is set to record the strongest growth in 214 with a 2% increase. and European markets are expected to see volume growth of around %. Link between property yields and long term bond rates is not strong - real estate fundamentals more relevant Although historically there has not been a strong relationship between -year government bond rates and prime property yields, their current disconnect is making property more appealing to investors (Figure 18). Although tapering has finally started and Government changes to interest rates are uncertain the flow of funds into direct real estate didn t skip a beat. But as we have mentioned in previous reports the continuing decoupling of occupational and investment markets is more of a concern. While we have started to record rental growth in some locations such as London, Singapore and New York, many locations continue to suffer from rental declines and a lack of tenant demand. Figure 17: Historical & Forecast Transactional Volumes by Region, EMEA (forecast) Figure 18: Prime London Office Yield, Base Rate & -Year Bond Yield, Prime London Office Yield -Year Bond Yield UK Base Rate, Datastream Has the US REIT market already priced in cap rate expansion? Figure 19: US S&P 5 & REIT Index, % differential in performance The listed markets can be good leading indicators of where the direct market may follow. For most of the last three years the US REIT index has tracked the broader market higher, leading the market for a period (Figure 19). However, the prospect of monetary tightening saw a correction from which the sector has yet to recover. This implies that REIT investors are expecting cap rates to reverse their downward trend, something we haven t seen yet. Indeed according to our analysis even more money is chasing assets, the ratio of bids to assets has increased during the year from 7:1 in H1 to :1 in H2 (Figure 2). 7 Jones Lang LaSalle Capital Flows 29 January Index = 1 January Source: Datastream US REITs S&P 5

8 OUTLOOK What we think for 214 Figure 2: Weight of money into prime property What is your outlook for 214? Arthur de Haast, JLL, Lead Director, International Capital Group A broadening equity base continues to view real estate as offering attractive risk adjusted returns while debt markets are rapidly returning to full functionality in all major markets across the globe. With cap rates now at or near record lows in many core markets we see only limited scope for further compression. We therefore expect investors to seek out higher returns by increasingly focusing on non-core assets in core markets and core assets in non-core markets. Key challenges for investors in 214 will include sourcing sufficient product (particularly in core markets) to meet growing capital allocations and remaining competitive in an increasingly robust market environment. Although in some markets investment activity appears to have moved well ahead of real estate fundamentals we believe this is to be a relatively short term phenomena with occupier demand and thus rental growth expected to catch up in most of these markets in the near term. Medium to long term investors need to start considering the likely impact of a rise in interest rates. What will be the most important trends in the this year? Steve Collins, JLL, International Capital Group, Alongside the improving economic picture and the transparent nature of the markets (US #1 in JLL Transparency Index), we see the continued re-urbanization of major US cities. Young professionals no longer want to live in the suburbs; they want to be back in the city where the action is. NY, Chicago, SF, DC and Seattle are examples of cities that had major tenant relocations back into the CBD from the suburbs during 213, this will keep on happening. Who are the investors to look out for in 214 from Asia Pacific? Alistair Meadows, JLL, International Capital Group, Asian investors especially Chinese developers and insurance groups have become aggressive players on the global stage. The diversity of capital and types (institutional & private) will continue to spread as real estate becomes a global asset class of choice. Private investors are becoming increasingly important sources of wealth and I expect them to continue to selectively buy high profile trophy assets up to $1b for wealth preservation purposes. What do you see as the biggest challenges for the European markets in 214? Matthew Richards, JLL, International Capital Group, Europe The biggest challenge for the European market will be limited availability of core investment opportunities. The shortage of investment opportunities, combined with a huge competition, may result in further yield compression in some of the key markets. Investment activity will be dominated by the core markets of UK, France & Germany. However, in 214 we expect increased activity in Spain, Italy and notably Ireland. There will be genuinely 6-7 markets across Europe that will see a pick-up in volumes. What are the expected impacts of structural change to global retail in 214? Shelley Matthews, JLL, International Capital Group, Retail A major challenge facing retail investors this year, and indeed in the medium term is the underwriting of future tenant performance and cash flows. Major structural change in the retail industry, particularly driven by the continued migration of retail sales to online is resulting in a more focussed and polarised demand for space. Asset selection, in both the prime and secondary sub-sectors is becoming increasingly challenging. As a result understanding the retailer landscape has never been more important, with traditional methods of analysis requiring real time intelligence and validation. The re-urbanisation of US cities is a structural shift that is attracting investors. Where will Middle Eastern investors focus their investment activity in 214? Fadi Moussalli, International Capital Group, Middle East With continued high levels of hydrocarbon income pushing fiscal surpluses higher in the GCC I expect more government money will be allocated towards direct overseas real estate investments, propelling the export of capital higher in 214. London will continue to be a highly sought after destination but interest is also being expressed in Germany on the back of a few deals in 213. Middle Eastern investors will continue to be attracted by the hospitality sector, particularly high profile assets in Europe and the US. 8 Jones Lang LaSalle Capital Flows 29 January 214

9 OUTLOOK Notes And Methodology Direct Real Estate Investment Breaking through US$6 bn in 214 Entity Level Deals Development Deals Europe Middle East and Africa Exchange Rates Grossed-up Figures Refers to the purchase of individual commercial property assets or portfolio of assets (or shares in special purpose vehicles that own assets). Includes: All transactions over US$ 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 7% + 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 Belgium, Bulgaria, Croatia, Czech Republic, Finland, France, Germany, Hungary, Iceland, Italy, Luxembourg, Netherlands, Poland, 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 Egypt and South Africa 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 For more information please contact the following International Capital Group representatives in your region: Arthur de Haast Tel arthur.dehasst@eu.jll.com Rob Gibson Tel robert.gibson@eu.jll.com David Green-Morgan Tel david.green-morgan@ap.jll.com Shelley Matthews Retail Tel shelley.matthews@eu.jll.com Lucy Fletcher Canada Tel lucy.fletcher@am.jll.com Steve Collins Tel steve.collins@am.jll.com Rob Hielscher Tel rob.hielscher@am.jll.com Matthew Richards Europe Tel matthew.richards@eu.jll.com Alistair Meadows Tel alistair.meadows@ap.jll.com John Talbot Australia Tel john.talbot@ap.jll.com Darren Xia China Tel darren.xia@ap.jll.com Fadi Moussalli Middle East & North Africa Tel fadi.moussalli@jll.com Who we are? Jones Lang LaSalle Capital Markets is an integrated network of 1,3 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 presentation.