Real estate 2018 capital market outlook trends

JLL global capital flows outlook 2018

Capital flows into and out of a real estate market are an important indicator of its health and outlook, sometimes pre-empting price increases or corrections.

How did 2017 fare with regards to real estate capital flows, and how does the 2018 outlook look for real estate investors?

Here are 4 things to watch out for.

In summary, here’s how 2018 looks like, according to JLL.

The volume of office vestments globally will be down 5 to 10% due to macroprudential measures in various countries, but that will not stop capital values inching higher by 2% and rents by 3%. Development is likely to slow as investors once again turn their focus to income producing assets.

Leasing will be stable though vacancy could rise as corporate occupiers, industries and workforces grapple with the large macro trends of digitization, a mobile workforce and co-working.

Also read: PWC ULI real estate Asia Pacific outlook 2018

Summary of 2017 across the world

Global transactional volumes in the third quarter of 2017 were virtually identical to levels in 3Q 2016. Year to date volumes rose to US$464b, up 1% from the same 9 month period in 2016.

This showing was relatively decent with the backdrop of investors coping with geopolitical tensions, the prospect of rising interest rates and political uncertainty especially in the US.

Given the weight of capital still searching for investment targets, JLL expects about US$650b of transaction volume by the end of 2017, similar to 2016.

This will soften to about US$600b as investors start becoming more cautious in this investment climate where yields are becoming tighter.

Focus on Singapore’s office sector

Regarding Singapore, the capital flows outlook report by JLL mention that an improvement in market sentiment is underpinning a recovery in Singapore’s residential and office sector.

As at the end of 3Q2017, the city state saw US$11.5b of investment volumes, an increase of 26% compared to the first 3 quarters of 2016.

This came on the back of a 5.3% change in capital values, and yields compressing to 5.3%. This represents a yield gap of 139 bps with the country’s 10 year government bond rate.

On the real estate market occupier side, rents were up 3%, net absorption up 2.3% but vacancy rate remains high at 11.9% due to the inflow of supply.

Also read: 8 things to know about the real estate market from MAS’ financial stability review

The 2018 to 2019 supply pipeline of metro area CBD office space is relatively benign at 2.5% of existing stock.

After a muted start to the year, Singapore’s office transactional volume in the first 3 quarters of 2017 rose 28% compared to the same period last year.

Shifts in Singapore office yields saw it declining about 5 basis points between 3Q 2016 and 3Q 2017.

As of October 2017, JLL expects capital values to rise by 5 to 10% for the whole of 2017, with the same increase in 2018.

Within Asia pacific, growth between 3Q2016 and 3Q2017 in Singapore is third highest between 5 to 10%, behind Hong Kong at about 25% and Sydney at 20%.

Driving the yield compression and capital value increase is a landlord favourable market across the period 2017 to 2019.

This is underpinned by generally stable market conditions, and an improving sense of optimism about the economy. Vacancy rates of approximately 11% are therefore expected to remain stable or see some declines.

In tandem with declining vacancy rates, rental growth has been and will likely continue to be strong. Between 3Q2016 and 3Q2017, rents in Singapore grew about 3%, behind Sydney at 32% and Hong Kong at 7%.

In 2018, Singapore office rents are expected to grow 10 to 20% as the supply pipeline remains muted.

In terms of the cycle, the Singapore office market is in the “rental growth accelerating” phase, with a pick up expected in 2018.

Focus on Singapore’s retail and industrial sector

In the retail sector, Singapore rents moved lower, with the steepest decline in the Marina submarket.

In terms of the cycle, the retail and industrial sectors are both in the “rental values bottoming out” phase.

The recent uplift in economic and trade performance is helping to support the leasing of logistics space in Singapore, especially as it pertains to high spec space.

Also read: 11 things to know about Capitaland Retail China Trust’s acquisition of Rock Square in Guangzhou

Focus on Australia’s office sector

Australia’s GDP grew 2.5% in 2016, expected to fall to 2.2% in 2017 and rise marginally higher to 2.3% in 2018, according to JLL.

Investment volumes in Australia rose to US$6.8b in 3Q2017, 18% stronger than the same period last year.

Offshore buyers, especially from China, made up a significant bulk of the capital sources. JLL estimates that up to one-third of total deal activity contributed by cross-border buyers.

JLL expects deal availability in the next 12 months to rise as more owners become willing to divest in the face of robust pricing and a seller-favourable part of the cycle.

Leasing volumes are down 34% year on year in Australia compared to the third quarter, but this is off exceptional 2016 levels.

All markets registered declines in office leasing volumes in 3Q2017 with the exception of Perth. New leasing is down in Melbourne and Sydney due to lower vacancy rates.


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