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A report by the Royal Institution of Chartered Surveyors (RICS)

Introduction

This second RICS commercial property survey covers market conditions for the first six months of 2005. Information has been collected from over 100 cities, with participants from leading international real estate organisations and local firms.

Global results summary

Corporate business property demand rose at a slower pace in most parts of the world to varying degrees, and remains subdued in Western Europe. Expansion in global economic activity has felt the impact of higher oil prices. Still, investment demand for commercial property has accelerated in most regions. Sustained low interest rates continue to fuel demand, particularly in North America and Developed Asia, but also increasingly in the emerging economies of Europe and Asia.

Occupier market

The first half of 2005 continued to record very strong increases in business occupation of property in the emerging economies of Asia. Solid domestic demand in China and India have insulated these economies from external influences such as higher oil prices and slower growth in world trade. A slowdown in the key markets of Western Europe has dented export-led growth in Emerging economies of Europe. While occupier activity remains robust in these countries, the pace of expansion has eased. Despite a widening of the trade imbalance and a plunge in household savings, the US economy remains strong. Private consumption and investment continue to grow, supporting an upward trend in job creation. Business occupier demand for property continued to rise firmly, and is outpacing growth in Western Europe, Developed Asia and Australasia. Across the Atlantic, the euro area economy remains sluggish due to the detrimental impact of an appreciation in the euro in recent years. Business demand for commercial property is showing the lowest rise of all world regions. Property demand in the UK has slowed sharply outside of the office sector, as higher interest rates have resulted in a near standstill in consumer spending and manufacturing output in the past year. The Japanese economy has shown renewed signs of life after a pause in the latter half of 2004. Occupier activity rose at a slightly slower pace, but rents are clearly picking up. Employment is rising, supported by ongoing adjustments of company balance sheets in response to the banking crisis.

Investment market

As opposed to the mild slowdown in occupier market activity, investment demand for real estate has accelerated. Low long-term lending rates have been sustained globally despite a turn in the interest rate cycle (most notably led by the Anglo- Saxon economies), raising appetite for risk in the real estate markets of both developed and emerging markets. Very strong investment demand prevails in North America. Long-term market interest rates have failed to follow the increases in short-term rates instigated by the Federal Reserve in the past year, continuing to fuel demand for property assets. In Developed Asia, and in particular Japan, investment activity is also rising rapidly. Competition for property assets has intensified amid a still very low interest rate environment and stable economic growth conditions. Investment demand is rising at a steady pace in Western Europe overall, though this includes a pickup within the euro area and a mild slowdown in the UK. Demand for real estate assets has seemingly turned around in the previously laggard countries of Germany and Italy despite tepid economic performance. Investor enthusiasm for property in Emerging Europe is unabated due to the perception that many of these economies will catch up with Western European income levels. Measures by the Chinese authorities to cool the domestic economy have not prevented a significant strengthening of commercial property investment demand. On the other hand, in India, investment activity rose at a relatively modest pace but asset values have been re-priced upwards again, sharply.

Forecast

• Occupier market: The outlook for business occupier space requirements in the second half of 2005 are generally similar to the first half, with Emerging Asia expected to see the most rapid growth. Interestingly though, a firm improvement in activity levels is envisaged in Western Europe, most markedly in Germany.
• Investment market: Investment demand is expected to accelerate sharply in most regions from already heated levels. Key exceptions are the USA and Developed Asia where further interest rate rises, or a turn in the monetary cycle, may cool investor real estate demand.

Western Europe

Occupier demand

The euro area economy has lost steam over the past year. As a result, business demand for commercial property showed only a moderate rise in the first half of 2005, and is the slowest of all world regions. The economic slowdown is due to a loss of competitiveness following the cumulative impact of the euro’s appreciation since the lows of 2002, as well as a softening of the expansion in world trade. Ongoing corporate restructuring has also put a cap on investment spending and employment growth. However, growth has been maintained in business and financial sectors with job creation still firm into 2005. No surprise that the improving trend in demand for office space has been sustained. Historically low market interest rates and rising profitability should underpin steady increases in occupier demand for premises in the latter half of 2005, but the economy is vulnerable to renewed increases in oil prices.

Occupier demand for commercial property is rising at a limited pace in France (Paris) and rents are stable. Rising house prices and low interest rates have bolstered the domestic economy but weaker export activity has been a drag on output due to euro appreciation. In Italy, which suffered a recession at the turn of the year, property demand conditions are flat. In the absence of a currency depreciation, economic difficulties can only be resolved through labour market reform and the acceptance that real wage rises need to be contained. German property demand has strengthened slightly and rents are no longer falling. After a period of torpor, the domestic economy is slowly turning around as falls in labour costs give the economy an edge in world markets, while industry has taken advantage of growth in emerging Europe and Asia. Job vacancies are clearly rising pointing to better employment conditions. Business occupier demand in the first half of 2005 rose firmly in Spain as the domestic economy continues to expand quickly on the back of rising construction activity and booming house prices. Strong demand prevails in Dublin as expectations by some commentators of an economic bust so far prove misplaced. In Athens, business property demand is improving. Demand was flat last year due to occupier expectations that rents would fall due to extra floor space supplied for the Olympic Games. Occupier activity stagnated in the Benelux region and fell back in Lisbon. Business appetite for property has come to a standstill in the UK following strong growth last year. A rapid slowdown in UK consumer spending growth and weak industrial activity has hurt business confidence. However, economic conditions have now stabilised as the negative impact of last year’s interest rate fade, though growth is still below trend. The demand for office space remains firm but has tapered off or dropped for the retail and industrial sectors.

Investment demand

Investment demand for real estate continues to rise firmly. A prolonged period of sustained low interest rates continues to fuel market demand. While growth in investment activity showed a clear strengthening in the euro area, some dynamism has been lost in non-euro countries, namely the UK, though even here investment continues to rise. The previously static or declining investment markets of Germany and Italy have improved with yields also slipping back. Investment demand continues to grow strongly in Spain. In France (Paris) demand is also strong though rising at a slower pace than recorded in the latter half of 2004. Investors are still re-pricing assets as signified by yields declining across Western Europe. High levels of foreign investment activity in Germany and France are particularly notable, while financial institutions have been strong buyers in the UK. In Spain, Dublin and Amsterdam, private individuals are active purchasers in the market.

Latin America

Occupier market

Occupier demand for commercial property has increased across Latin America in the first half of 2005. Economic activity rose strongly into 2005 supported by prudent macroeconomic policies and structural reforms. High and rising commodity prices, driven by tremendous growth in China has supported the economy as well. In Sao Paulo, the commercial property market has been relatively stagnant following significant fiscal/monetary tightening, with growth in the first half of 2005 weaker. Business demand for property and rents are up firmly in Mexico City. Occupier activity has withstood a slight cooling in exports and a tightening of monetary policy to curb inflation. Inflation is starting to slow which may allow interest rates to fall. Argentina continues to recover well from recession. The completion of debt restructuring is likely to lift confidence but growth is expected to slow from the near double digit rates of 2003/2004 due to capacity constraints. The consumer led recovery has boosted property demand across all sectors in Buenos Aires. Rapid growth evident in Chile has been galvanised by strong global copper prices. Business investment has been strong and occupier demand for property and rents are up firmly.

Investment market

Investment demand for commercial property increased moderately in the first half of 2005 with the greatest rise in demand evident in the retail sector. Debt consolidation in Argentina combined with bankruptcy reform measures in Brazil may inject greater investor confidence into the commercial property investment market. However, political uncertainty, particularly in Brazil, may still contain investment demand. The introduction of REITs in Argentina and Mexico is likely to stimulate reform in investment practice which will encourage inflows of capital into the sector. Private domestic individuals are generally the most active buyers of property along with real estate companies.

Africa and Middle East

Occupier market

In South Africa, economic growth has eased although domestic demand is firm due to falling interest rates and the positive impact of rising house prices on wealth. Consumer spending is up, supporting retail occupier activity. Office demand has been strong with firm expansion in financial and business services contributing to robust demand in Johannesburg. A strengthening Rand and softer global growth though has reduced output growth and occupier activity in the industrial market. In the Gulf States, high oil prices, increased oil production and strong export growth have all contributed to robust economic activity. Occupier demand for real estate has increased at a break neck speed reducing availability and pushing up rents rapidly in centres such as Dubai. In UAE, an increase in infrastructure and private sector investment has attracted foreign direct Investment. Economic activity is rising at a steady pace in many East and Southern African states at the beginning of 2005, with growth for the sub-region averaging 5 per cent. Fiscal consolidation has enabled governments to reduce interest rates, which have acted as a stimulus to domestic economies. Occupier demand expanded modestly although available space is rising, offering limited support to rents. In Gaborone, occupier activity has been negatively affected by a falling US dollar which has reduced revenues from commodity exports, while government spending has been squeezed. In Kenya, growth has improved in recent years, giving a lift to the occupier market, though it is a modest turnaround following stagnation prior to 2002.

Investment market

Investment demand for real estate assets in Johannesburg rose strongly and yields have dropped again significantly. Along with domestic financial institutions, foreign investors have been active in the market. Expansion in occupier and investor activity across all sectors is expected to continue. A favourable climate for investment is apparent in Dubai, with a healthy rise in investor demand for real estate assets. Foreign investors have competed with domestic individuals and real estate companies to purchase in Dubai though yields are edging higher. In Southern and East Africa there is moderate purchase interest mainly from domestic private individuals and real estate companies.

Acknowledgement: This article is extracted from the Global Property Survey published by The Royal Institution of Chartered Surveyors (RICS) in September 2005. Global Property Survey looks at business trends in investment demand for commercial property in over 100 cities across the globe, in both developed and emerging markets. The information is gathered from 334 contributors and includes property market forecasts which would be of interest to global businesses and investors alike. The survey also covers cities in Latin America, Africa and the Middle East for the first time. Published every six months, the report can be viewed in full at www.rics.org/globalproperty.

 

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