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Commercial real estate on the upswing
Recovery is tangible and sentiment in the world’s major real estate markets is clearly more positive than a year ago. Investment markets are improving across the globe, with a significant weight of money chasing real estate opportunities. While the vast majority of investors remain focused on prime high quality assets, a few are now beginning to consider off-prime assets and locations. Leasing markets too, are showing signs of increased activity, not only in the Asia Pacific region, but in several core markets across Europe and the United States. Office markets such as London and Shanghai, which only a few months ago were recording a sharp decline in rents, are now projected to see double digit prime rental growth during 2010. Improving economic growth coupled with corporate occupiers taking advantage of the window of opportunity to upgrade or consolidate on favourable terms will create greater churn in the corporate occupier markets in 2010. However, even in the most buoyant markets, confidence is still being dampened by the persistent debt crisis, constrained lending and the trillions of dollars of property debt still reluctantly held by the banks.
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BRIC’s leading the recovery
The BRICs are leading the global real estate markets into recovery. Their combined economies are projected to expand by 8 percent in 2010, reinforcing their position as the growing economic and real estate force. In China, India and Brazil domestic-led expansion is boosting real estate demand across all sectors, but particularly for residential. Even the Russian market, which has been severely impacted by the recession, is beginning to bounce back in some areas. Domestic players have continued to dominate the BRIC investment and leasing markets over the past year. A return of foreign activity is likely in 2010 as risk appetite grows, at least for BRIC’s Tier 1 and 2 cities, with Tier 3 and 4 cities considered too high a risk at present. Longer term, the much discussed burgeoning middle classes will fuel further real estate expansion, particularly for residential, retail and warehousing.
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BRIC Markets Compared
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China |
India |
Brazil |
Russia |
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Economic Dynamism |
High |
High |
Medium |
Low |
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Stimulus Impact |
High |
High |
High |
Low |
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Real Estate Investment - Domestic Activity |
High |
Medium |
Medium |
Medium |
|
Real Estate Investment - Foreign Activity |
Medium |
Low |
Increasing |
Low |
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Occupier Demand* - Domestic Activity |
High |
Medium |
Medium |
Medium |
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Occupier Demand* - New Foreign Activity |
Medium |
Medium |
Medium |
Medium |
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Vacancy* |
High |
High |
Low |
High |
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Supply Pipeline* |
High |
High |
Medium |
High |
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Rental Trend* |
Increasing |
Stabilizing |
Increasing |
Stabilizing |
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Yield Trend* |
Compressing |
Compressing |
Compressing |
Compressing |
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*Trend relates to prime offices
China: Domestic-led growth
In China, the strong domestic-led nature of economic growth is reflected in current real estate market dynamics. Retail, primary residential housing sales and non-bonded logistics have been doing well, while Grade A office and luxury residential leasing as well as bonded logistics (i.e. markets dependent on foreign demand) have had a tougher time, although these sectors have also stabilised since Q4 2009. The investment market is strong; high liquidity has been heavily driven by domestic investors and there has been no sign of distressed assets. Yields have compressed sharply and are now at all time lows across all sectors. Corporate occupier demand led by domestic firms is strong and is pushing up rents in Tier 1 office markets; prime rents in Shanghai are projected to rise by as much as 15-20 percent in 2010. Retail sales continue to boom, driven by strong job creation, strong income growth and urbanization, and supported by the development of more high quality and better managed shopping centre formats. In 2010, the return of foreign investors is anticipated, as well as the beginnings of an uptick in MNC business activity. China will be a highly policy driven market as the government looks to direct capital towards infrastructure and away from speculative property development and land price inflation. Overall, policy will be tightened due to a real risk of overheating and asset price inflation.
India: Welcoming a new wave of offshoring
Sentiment in the Indian real estate market is improving on the back of a buoyant economy. The country's recent economic performance has retained traction, even during the sharp global economic recession. As in China, there are mounting risks of overheating and asset price inflation, and the government has recently announced plans to pull back on spending. The residential sector has been the biggest beneficiary of recent stimulus packages, with an average of 30-40,000 units sold per quarter; prices have risen by 10-20 percent in both Mumbai and Delhi. In the commercial sectors, developers have been highly nimble over the past year and they have responded quickly to changing economic circumstances by creating new and different opportunities; this is particularly evident in the office and retail sectors where a number of schemes have been converted to residential uses, with others being delayed or shelved. A new wave of offshoring is expected to have a major impact on the Indian market. As the global business environment becomes more competitive, a new generation of companies are being forced to consider offshoring for the first time; several US companies including Deloitte and NetApp have registered significant space requirements in India.
Russia: Markets are stabilising
The Russian real estate market has been deeply affected by the recession. An 8 percent contraction in the economy during 2009 severely affected corporate occupier demand and also dented confidence among investors who were used to double-digit returns. Developers and owners became increasingly flexible, initiating a very sharp contraction in real estate prices to reflect the new market reality; prime office values fell by over 70 percent in Moscow between mid 2008 and mid 2009, among the highest corrections in the world. However, the market has stabilised remarkably quickly in 2010 as have GDP levels. An expected recovery to 3-4 percent economic growth will serve as a reassuring sign and will underpin real estate demand. Despite the improvements, the markets remain vulnerable, and any faltering in economic growth could derail the recovery.
Brazil: A rising international profile
Brazil continues to be a focus for investors, as one of the few countries outside the Asia Pacific region exhibiting strong economic growth. With a predicted 5 percent growth for 2010, its economy is now benefiting from several years of structural reforms. The recent discovery of substantial oil reserves and the future hosting of two major international sports events (FIFA World Cup 2014 and Olympics 2016) will further boost the country’s profile and benefit the long term potential of the real estate markets. As in China and India, the residential sector is booming, and the growing middle class will boost demand for mass housing, retail and warehousing. Both domestic and foreign investors are striving to acquire Brazilian properties or to invest in funds, although overall investment volumes are still low due to lack of existing assets for sale. In the office markets, vacancy rates are low by current international standards and rental values are rising. Rio de Janeiro was one the few major office markets worldwide to record double-digit prime rental growth in 2009.
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Key contacts in BRIC markets
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