2015 is expected to record the best real estate performance since the global financial crisis. In 2016, Generali Real Estate expects an acceleration in investment volumes in Southern Europe, and especially in Italy.
Paris – Generali Real Estate, one of the world’s largest real estate asset managers with more than €27 billion of AuM, has published its latest “Market Perspective” report.
Jacques Plas, Head of Research, commented: “2015 is expected to record the best real estate performance since the global financial crisis, despite the year-end slowdown in the Asian, US and UK markets. In 2016, we estimate that returns will be lower across the board as capital growth rates will reduce. However, we expect an acceleration in investment volumes in Southern Europe, and especially in Italy, due to relatively attractive net initial yields and renewed expectations of a cyclical recovery in rental growth.”
Globally, 2015 is expected to record the best real estate performance since the global financial crisis. At the end of third quarter 2015, the global MSCI IPD real estate funds index posted a total return of 13.4%. Global investment activity continued to expand, reaching US $ 173 billion at the end of last September, equal to a cumulative 13% growth year-to-date in fixed exchange rates.
However, in the US and UK, the last available figures were slowing down. On these two markets, which are by far the two leading global investment markets, some questions arise about the pricing level achieved so far in London, New York or California for prime assets, highlighting the need for greater selectivity. The primary driver of the shift in sentiment was coming from the prospects for higher interest rates ahead, coupled with softer rental growth expectations compared to last quarters.
Southern European countries are resuming growth in capital values and transaction volumes. Furthermore, Germany and France are benefitting from the steady decline in capitalization rates and thus also contribute to the overall good performance. The European commercial real estate investment activity remained strong, with an investment volume of nearly €61.7 billion in Q3 2015 (increasing by 18% yoy). European office leasing activity strengthened, with the office take-up reaching over 3 million sqm in the third quarter, increasing by 29% yoy. Prime yields of the office markets remained relatively strong in the third quarter, albeit slightly declining – for instance, they were at 4.5% in Milan, 3.3% in Paris, and 3.5% in Central London.
The Italian commercial property investment volume in Q3 2015 amounted to €1.5 billion, an annual increase of 46%. Foreign capital continued to dominate the market, attracting 85% of investments this quarter.
In the US, solid commercial real estate space demand led to positive annual rental growth. Looking ahead, market conditions are likely to remain healthy and the office vacancy rate is expected to continue decreasing in the coming quarters.
In the UK, given the current low level of available supply in the Central London office market, the increase in development pipeline is unlikely to have a strong impact on office vacancy rates and Generali Real Estate expects further rental growth.
In Asia, investment activity for the first nine months totaled US$66.2 billion (i.e. -23% as compared to the same period in 2014). The APAC economic outlook remains bleak and office demand is unlikely to outpace the large volume of new supply. Thus, an upward trend in the Asia-Pacific vacancy rate is more likely in the coming quarters.
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Sources: CBRE, C&W, RCA, GRE research, Generali Investments research