Cross-border transactions now account for a third of property deals, and the most transparent markets hold the most appeal
Investment in many mature real estate markets is booming and this has been the case for about ten years now. At the same time these markets are experiencing unprecedented cross-border investment activity. In times of low returns in almost all major asset classes and despite cap rates being close to their lowest levels in many key real estate markets, commercial real estate – especially in the key European markets – continues to generate comparably attractive net yield spreads (against the respective ten-year government bond rates). Obviously, each asset class comes with its specific risk and return profile, and past performance is not a guide to future performance.
In light of this long-lasting boom, market participants are becoming sceptical about the potential for further growth. Their concern is driven by more than just market cyclicality as political factors and changes in the capital markets could also affect property investment. This network of mutually influential factors is made more complex by the importance of international capital. The search for yield remains a key motivation behind investment decisions, and there are no signs of material changes in this trend. This leads to yield compression in most regions and sectors and sustained investor demand. Despite initial yields remaining low in many mature markets, real estate prices appear not to be drifting far from their fundamental values and are priced fairly in comparison with stocks or bonds, thanks to the strong occupier demand. An interesting feature of this cycle is that demand for commercial real estate is driven not only by strong domestic investors but also by international, cross-border investors.
Figure 1: Direct commercial real estate transaction volumes
Figure 2: Top 30 cities for direct commercial real estate investment
In 2018, the total investment volume was approximately $733bn (according to JLL). This represents a 4% increase