OUTLOOK 2019 - FORECASTS FOR REAL ESTATE IN THE WORLD'S LEADING CITIES - Knight Frank
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GLOBAL
OUTLOOK
2019
FORECASTS FOR REAL ESTATE IN THE WORLD’S LEADING CITIES.
1 2 3 4 5
Executive
Summary
The coming 12-months will
see a shift in focus for property European Second tier Global Senior living Private rental
investors as they respond to a logistics office markets R&D hubs sector/Multifamily
The Global Cities Yes, the sector is already The likes of Madrid and Tight development The biggest global Where the US has led,
more uncertain global economy very popular with the past Warsaw, where occupier pipelines mean that demographic trend the UK and Europe have
Amsterdam and the rising cost of debt. Liam two years seeing record markets have been slower locations such as Boston, underpins this sector, which followed with burgeoning
investment volumes. However, to hit the expansion the San Francisco Bay is still embryonic in most pipelines of stock
Berlin Bailey, Knight Frank’s Global we believe key markets in phase offer a compelling Area, Amsterdam and markets. While most activity delivered in 2018. For
Beijing Head of Research, sets out ten mainland Europe are set to
benefit from rental growth. We
investment and
development opportunity.
London will deliver strong
future rental growth.
will be in suburban and ex-
urban locations, we believe
2019 we like Amsterdam,
Berlin, Dublin and Madrid
Bengaluru opportunities for the year ahead. favour core markets where the strongest returns will be for their employment
the barriers to entry are high captured by the operators growth and strong
Birmingham (such as Hamburg, Barcelona who deliver a true urban offer economic fundamentals.
Boston and Venlo) but also ultra large in major global centres.
opportunities with good labour
Brisbane pools that can still service
major conurbations.
Delhi
Dubai
We see ten key opportunity
Trade tensions, political events, and
Dublin an increasing debt burden alongside
Frankfurt rising interest rates will all conspire to
Geneva
Hong Kong
make 2019 a challenging year for the
global economy.
We expect a moderate economic
areas for investors in 2019
Jakarta
Contents deceleration in worldwide GDP
6 7 8 9 10
growth, and the change in the economic
Kuala Lumpur
landscape will demand a response from
London property investors.
Los Angeles Executive Summary 02 Higher interest rates and the end of
quantitative easing means we are reaching
Madrid Key Opportunities 03 the end of the ‘everything bubble’. For the
Melbourne past decade it was enough for investors to
Chief Economist’s Outlook 04
Mexico City buy property in major gateway markets
Office Occupier Outlook 08 and the generosity of central banks would
Moscow
help ensure strong returns.
Mumbai Office Capital Markets Outlook 10
The shift towards a more normalised
New York City Industrial & Retail Outlook 12 monetary policy means that investment
Paris strategies will change as investors focus
Prime Office Yields vs on income, asset management, specialist Flexible offices Healthcare Hotels Retail True mixed-use
San Francisco Cost of Finance 14 sectors and development opportunities to Office occupiers from all Western European countries Hotel operators who can The rise of online has turned The retreat of retail from
Seoul secure outperformance as debt costs rise. sectors and of all sizes including the UK, France, leverage technological sentiment against retail CBDs demands a radical
Prime Residential Forecasts 16 are seeking product that Germany, Spain, The innovation, and capitalise and pricing has in many approach to mixed-
Shanghai In this report, we have set out
better aligns real estate Netherlands and the Nordics on data capture will deliver markets moved accordingly. use and place-making
Global Strategies 18 Knight Frank’s view on likely market to their disrupted, fast are expected to lead the way enhanced performance Many good (though not opportunities. The scale
Singapore
performance in 2019 and highlight moving operational reality. in terms of attracting capital and returns. Expect necessarily prime) assets of the issue will mean
Sydney Risk Radar 22 opportunities across commercial and Flexible space with high into healthcare in 2019. The increased investment in with strong fundamentals those developers who can
degrees of customer uniting key factors include London as well as UK and are mispriced. On the basis engage with city authorities
Tokyo residential markets globally. We have
Opportunities Radar 24 service and flexible rapidly ageing populations, European regional centres. of strong fundamentals, we and other stakeholders
considered the outlook for rents, yields, leases will be in demand formalised healthcare are leaning towards retail will win.
Vancouver
Contacts 27 transaction volumes, and have set out our particularly in tech infrastructure, significant warehousing in Australia,
Warsaw thinking on global debt markets and the dominated markets such GDP spend on health and flagship high street shops
as Berlin, London, Boston social care, and increasing in Madrid and Paris, and UK
Washington DC Note: All prices are in US dollars. outlook for property lending. and Singapore. privatisation of the sector. food-stores.
2 GLOBAL OUTLOOK 2019 3
GLOBAL OUTLOOK 2019
The prime yield compression stage of expected to tighten monetary policy next slow lending to the point of causing a be high in nearly all the key global cities,
Chief
the property investment cycle has either year and beyond. downturn. Policymakers look to curb due to years of constrained development
completed, or is close to the end, in the The risk for the global economy is excess while allowing sustained growth. and lots of pre-letting. A common theme
leading global cities. However, tight that policymakers may hike rates too The Bank of England steadily raised emerging when researching this report was
Economist’s
development pipelines over several years aggressively and derail growth. Moreover, interest rates from 2004 to 2007, but that vacancy rates are falling, partly due to
have created leasing supply crunches, the US is ready for higher rates, but is the commercial property yields hardened. the pipeline issues already mentioned, but
particularly for offices and logistics same true of those economies who peg This was because a buoyant occupier also thanks to rising demand.
Outlook property. This is coinciding with stronger their currencies to the dollar? After all, market, and the resulting rental growth
China’s economy appears to be slowing. gave property investors the confidence
occupier demand. We see the search War for talent
for returns pushing investors up the This creates a double risk for a number of to buy.
nations in the Middle East and Asia who Higher interest rates will cause money More investors will have the confidence
risk curve to pursue refurbishment
now have economies that are significantly to flow into banks, which they can earn to pursue strategies involving rental
and development opportunities; or
exposed to both the US and China. more income on by lending to the wider growth because, in the cities covered
diversifying into the specialist sectors.
The rollercoaster ride for equity and world than purchasing government by this report, so many of the necessary
In the coming years, investors will
“
bond markets are also symptomatic bonds. Under pressure from the finance ingredients for higher rents are in place.
adapt to a world with fewer certainties,
of wider concerns. Geo-political risks director to lend, origination teams Rapid expansion by technology firms and
but plenty of opportunities for those
abound, from the Brexit saga in the UK, coworking operators are a recurring
prepared to be more adventurous. will extend more finance to property
to the trade confrontation between the theme around the world. Typically they
investors in the coming years.
US and China, to fresh storm clouds are seeking high quality, well located
Improving expectations on rental
Volatile markets gathering over Italy. After years of
growth should give more investors the offices, as employers want wow-factor
Jitters over rate rises and When judging the outlook for global
buoyant expansion, the tech sector
We see the search confidence to make leveraged buys, offices that promote staff satisfaction and
faces widespread concerns over the
volatile financial markets property markets in the next few years,
sustainability of its rapid growth. for returns pushing particularly given the supply problems collaborative working.
the forecaster encounters contradictory found across global occupier markets. This reflects the fact that so many
should not deter property
signals. The International Monetary Fund
What will all this mean for real estate investors up the We see this being particularly the case major economies are either at or close
investors from focussing (IMF) is predicting worldwide GDP
in the coming years? risk curve to pursue in the coming years, as financial markets to full employment, creating a battle
on the opportunities in the growth to decelerate from 3.7% in 2018 refurbishment have often over-estimated the pace at among employers for the best workers.
Rate cycle
Global Cities. to 3.5% in 2019. This suggests a year of and development which monetary policy will tighten, while We see wage inflation picking up in 2019,
continued expansion, just at a slightly Often the property world views a rising the property world has under-estimated and alternative ways to retain staff, like
reduced pace. However, financial markets interest rate cycle with too much dread.
opportunities; or how quickly leasing supply is eroding. providing an exciting work environment,
James Roberts are currently volatile and concerned about Rate hikes will increase the cost of diversifying into The temptation to buy vacant properties will appeal more to corporations in
Chief Economist, Knight Frank the outlook, as leading central banks are debt, although no central bank wants to the alternatives .” for a quick refurbishment is likely to this context.
4 5
GLOBAL OUTLOOK 2019
Financial & Business Services Demographics are behind the growing cities in 2018, undaunted by the Trump
employment in the Global Cities staff shortages, and the political backlash presidency and Brexit.
Millions of jobs against immigration across the world Office rental growth forecast in 2019 – the global Top 10
will deepen the problems of occupiers Buildings with beds
trying to recruit talent. If workers struggle
Around the globe, occupier and Melbourne 10.1%
40 to move geographically, the jobs must
go to them, and we see corporations investment demand are adjusting to the
becoming more global, plus venturing changing landscape of how we shop.
into tier two cities looking for staff. That E-commerce has boosted demand for
these locations can potentially offer staff a logistics property, but left many older
better quality of life, through lower house shopping centres with empty units Sydney 8.6%
35
prices and shorter commutes, will add to that can be hard to fill. This is a global
the appeal for firms expanding their phenomenon that requires property
office networks. investors to adapt fast. Developers
Oxford Economics are forecasting are seeking locations for suburban
financial and business services warehouses for local deliveries. Shopping Bengaluru 6.6%
30 centre owners are considering radical
employment in the cities covered by this
report to increase by 2.6 million jobs redevelopment plans to replace some of
between 2019 and 2021. This could mean their floor space with other uses. This has
office demand increases by 287 million moved beyond leisure uses, with hotels
sq ft; the equivalent of more than three and residential property entering the mix. Delhi 6.5%
25 times the office space found in Singapore. This is one reason why the expression
‘buildings with beds’ is rising in popularity
“
Fuelling tech in the real estate world, as the mix of
property uses evolves to reflect societal
Moreover, if workers are in short supply, needs and consumer lifestyles. Buildings
20 companies will use automation, artificial with beds come in many forms, with care
intelligence (AI) and machine learning homes and retirement living reflecting If workers are
to free up people for higher value tasks. in short supply,
millions of jobs
the ageing population phenomenon
This will fuel the tech revolution further, which is becoming a pressing issue across companies will use
and create more of the start-up firms geographies.
who flock to the coworking centres. Also, As developing economies become
automation, artificial Boston 6.3%
15
greater use of IT in scientific R&D is wealthier, more money becomes available intelligence and
drawing more jobs in industries like life for higher education and holidays, driving machine learning
science into city centres, adding a new
dimension to the tech wave.
demand for student accommodation to free up people for Amsterdam 5.3%
and hotels. Moreover, flexible lifestyles,
Inevitably, this brings us back to the plus affordability issues, are pushing
higher value tasks.
10
stock market wobble for tech of late. private rented sector housing up the This will fuel the tech
This is undoubtedly a significant risk for property agenda. revolution further,
the outlook, although compared to the Berlin 5.1%
last big tech industry correction in 2001,
and create more of
there is a larger share of profitmaking
Active investors the start-up firms
5 firms who have been trading for years (or Consequently, opportunities in property who flock to the
decades) rather than months. Moreover, are there for those prepared to be active coworking centres.” Moscow 5.0%
there is evidence that tech is creating an investors: through diversifying into
economy all of its own – of services that new sectors, buying in different cities
exist because of the presence of tech – (either abroad or tier two, or both), and
from online fraud prevention, to cyber seeking assets that can be redeveloped or
2.6m
security, to the battle to curtail fake news. Singapore 4.8%
0 proactively managed. This will allow the
Overall, we believe there is a investor to remain a step ahead of the rate
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
compelling global case for continued tightening cycle, whose pace we suspect
rental growth across the Global Cities. could be slower than many assume.
Source: Oxford Economics
This is equally true of those locations
Dublin 4.0%
Note: The global cities includes - Amsterdam, Beijing, Bengaluru, Rental growth due to thin development
Berlin, Birmingham, Boston, Brisbane, Delhi, Dubai, Dublin, Frankfurt, increase in jobs forecast by Oxford
Geneva, Hong Kong, Jakarta, Kuala Lumpur, London, Los Angeles, that face the political rollercoaster of pipelines and better-than-expected
Economics in the financial and
Madrid, Melbourne, Mexico City, Mumbai, New York, Paris, San populism, as office rental growth has occupier demand, are now central to the business services employment
Francisco, Seoul, Shanghai, Singapore, Sydney, Tokyo, Vancouver,
Warsaw, Washington DC. The figures are for the Metro area. been in evidence in some US and UK outlook for property investment markets. between 2019 and 2021. Source: Knight Frank, Newmark Knight Frank
6 GLOBAL OUTLOOK 2019 7
GLOBAL OUTLOOK 2019
Global hotspots - Forecast office rental growth
Office
Three years to Dec 2021
Occupier
Outlook 10.6% 8.8% 10.7% 2.4% 10.5% 9.8% 15.4% 10.1% 13.2% -1.2% 2.7% 17.1% 17.3%
Boston Birmingham London (City) Paris Amsterdam Frankfurt Berlin Delhi Bengaluru Hong Kong Shanghai Melbourne Sydney
Tightening supply across
the Global Cities is set to
drive rental growth, in many
cases exceeding long-term
average levels. 9.8% 4.6% 11.5% 8.4% 4.6%
Madrid Warsaw Mumbai Singapore Brisbane
Tight supply
Forecast vacancy rate - 2018 vs 2021
Rank City 2018 2021
1 Berlin 2.0% 2.2%
2 Paris 2.1% 2.4%
3 Hong Kong 2.3% 2.4%
4 Tokyo 2.5% 2.9%
5 Bengaluru 3.2% 3.2%
6 San Francisco 3.4% 3.2%
7 Melbourne 3.8% 7.6%
8 Sydney 3.9% 5.4%
9 Beijing 5.1% 5.0%
10 London 6.2% 5.1%
11 Shanghai 6.5% 6.5%
12 Dublin 6.7% 8.7%
13 New York 7.2% 7.7%
14 Frankfurt 7.6% 6.9%
15 Boston 8.0% 7.2%
16 Dubai 9.0% 7.0%
17 Singapore 10.6% 8.8%
18 Seoul 11.0% 9.8%
19 Warsaw 11.1% 10.2%
20 Madrid 11.6% 9.0%
21 Moscow 12.5% 9.0% 7.7% -16.3% 2.6%
22 Brisbane 12.7% 11.8% Dublin Dubai Beijing
23 Washington DC 13.3% 15.6%
24 Mexico City 13.9% 12.1%
25 Los Angeles 13.9% 15.2% 9.4% -2.1% 0.7% 5.9% 2.1% 10.0% 4.9% 13.4% 9.1% -4.1%
26 Delhi 16.5% 15.0% San Francisco Los Angeles Mexico city Washington DC New York City Moscow Kuala Lumpur Jakarta Seoul Tokyo
27 Mumbai 19.8% 14.0%
28 Kuala Lumpur 20.0% 21.0%
29 Jakarta 25.1% 23.7%
Growth vs
10-year average
Source: Knight Frank, Newmark Knight Frank Source: Knight Frank, Newmark Knight Frank, Sumitomo Mitsui Trust Research Institute
8 9
GLOBAL OUTLOOK 2019
Global investment – Forecast offices sales volume
Office ($ billions) and prime yields for 2019
Capital
Markets $7.72
5.75%
$21.18
4.25%
$18.34
3.00%
$7.14
3.35%
$9.65
3.25%
$15.97
2.30%
$11.28
4.10%
$3.20
4.90%
$6.53
4.80%
Outlook Boston London Paris Amsterdam Frankfurt Hong Kong Shanghai Melbourne Sydney
In 2019, investors will continue
to diversify portfolios, with real
estate offering exposure to $8.03 $1.34 $5.02 $1.86
$3.02 3.00% 4.95% 3.34% 5.80%
rental growth in under-supplied 3.75% Berlin Warsaw Singapore Brisbane
city markets. Madrid
$10.95 $6.86 $17.23 $1.81
4.80% 5.30% 4.55% 4.00%
San Francisco Los Angeles New York City
Dublin
2019
forecast
$8.40 figures
6.20%
$1.50 $3.65 $ billion
Washington DC 4.50%
8.50%
Moscow Beijing Prime yield
$7.89
Change
4.50% from 2018
Source: Knight Frank, Newmark Knight Frank Note: London investment volume figure is Greater London; prime yield is the City of London (part of the CBD).
Seoul
10 11
Madrid 1,266,911,259 1,374,684,705 7
Amsterdam 1,590,231,598 1,302,453,566 8
GLOBAL OUTLOOK 2019
Shanghai 1,315,378,440 820,670,024 9
Brisbane 478,240,133 653,739,349 10
Global industrial & logistics and retail centres
Industrial
Forecast sales volumes 2019 (compared with 2018)
& Retail
Outlook $1.37bn
($1.27bn)
$1.45bn
($1.42bn)
$1.38bn
($1.38bn)
$1.30bn
($1.59bn)
$2.14bn
($3.33bn)
$4.76bn
($5.63bn)
$0.82bn $1.45bn $1.97bn $0.65bn
($1.32bn) ($1.29bn) ($1.59bn) ($0.48bn)
Madrid London Paris Amsterdam Singapore Hong Kong Shanghai Melbourne Sydney Brisbane
Industrial & Logistics The attraction is furthered as a
shift towards automated warehouses
The ongoing e-commerce revolution requires sizeable capital investment by
has fuelled unprecedented occupier and the occupier, pushing them towards
investor demand for industrial and logistic longer leases or, at the very least, more
property. In the digital age, pure-play regular re-gearing of leases. Industrial
e-retailers or e-marketplaces, together with investment will increasingly become a
more traditional (and hence challenged) long-term income play.
bricks and mortar retailers, are busy trying
to create competitive advantage in a fast
changing operational landscape. Retail markets
To do so they increasingly look to
Young, urban, cosmopolitan, high
real estate, with the warehouse, both
growth and progressive – these are the
individually and collectively in the form
common denominators across the ten
of a distribution network or supply chain,
global cities in which we expect retail
being very much in focus. Increased global
investment volumes to be highest in
occupational demand for warehousing
2019. Interestingly, these demographics
has led to similar demand from real estate also lend themselves to e-commerce and
investors with some $130bn invested in online penetration is significantly higher-
global industrial property during 2018, than-average in all of these cities.
according to RCA – a volume some 55% This is proof that an online retailing
above the ten year average. The structural hotbed can still be a magnet for retail
challenge facing the occupier is not real estate investment, with growing
disappearing and hence there will be no recognition that stores increasingly work
let-up in this investor demand across key in harmony with e-commerce, rather than
global markets during 2019 and beyond in conflict. To what degree are investment
(see chart). markets consistent with occupational
ones? Hong Kong, London and New York
“
also feature in the Top 5 most expensive
trading locations globally, while Sydney
ranks in the Top 10 on both measures.
Macro-economic stability and a strong
occupational base obviously remain
central to investment decisions, but not to
the subordination of the very lifeblood of
anything retail-related – consumers.
Increased global San Francisco New York Madrid London Singapore Hong Kong Beijing Shanghai Melbourne Sydney
occupational demand $2.79bn $3.59bn $1.86bn $3.99bn $1.33bn $10.14bn $1.22bn $2.46bn $1.80bn $1.93bn
“
($2.88bn) ($3.69bn) ($1.73bn) ($5.11bn) ($1.77bn) ($10.97bn) ($1.21bn) ($2.32bn) ($1.63bn) ($2.79bn)
for warehousing has led
to similar demand from
real estate investors with
some $130bn invested
in global industrial
Hong Kong, London
property during 2018.” Industrial
and New York all also
55%
Retail
feature in the Top 5
most expensive trading
Change locations globally, while
from 2018 Sydney ranks in the Top
2018 Global industrial property investments
55% above the ten year average
Source: Knight Frank, Newmark Knight Frank
NB: Investment volume data is preliminary 2018 from RCA 2018 figures in brackets 10 on both measures. ”
12 13GLOBAL OUTLOOK 2019
Prime office yields vs the cost of finance
3.0%
1.6%
% Prime office yield - Q4 2018 Cost of finance Spread over cost of finance
4.8%
3.3%
4.4%
3.0%
3.0%
4.0%
3.8%
3.8%
4.8%
4.8%
4.8%
4.5%
4.9%
3.3%
3.3%
3.4%
4.3%
3.4%
4.4%
2.3%
2.3%
1.6%
1.6%
1.9%
1.9%
4.1%
4.1%
4.1%
4%
Prime Office 4.5%
Yields vs Cost
4.9%
Of Finance
3.0%
1.6%
1.4%
2.3%
Knight Frank and Newmark
3.8%
Knight Frank’s debt and finance
experts in New York City and
London comment on the 4.9%
4.0%
market outlook. Knight Frank Finance,
Debt Advisory
4.3%
Despite ongoing political uncertainty,
2.9% European debt markets remain in
% good shape.
“
Senior margins have been squeezed by
4.4% Newmark Knight Frank, heightened competition resulting from
4.5% Debt & Structured Finance an increasing supply of debt providers
Recent equity market volatility have across Europe. In late 2018, one prime
weighed on capital market executions, office deal in London attracted a margin
3.0% as well as both fixed rate CMBS and of 105 bps, the lowest we have seen in
2.9% floating rate CLOs. some time. The UK and Ireland saw
However, we think that the impact senior margin reductions of 25 bps
is ultimately short-lived. Debt players throughout 2018, and Spain (-75 bps)
remain optimistic about capital
4.7% benefitted from a recovering residential
4.3% markets early on in 2019 with cash market, hence renewed interest from
accumulating on the sidelines from lenders who struggled to achieve
patient investors attempting to wait out desired returns in more established
4.1% the volatility. European markets.
While some lenders are using a wait- As political uncertainty grows, swap
5.0%
and-see approach in the short-term, no rates have come down, signalling a
“
major groups have indicated that they reduction in the overall cost of debt.
will rethink their long-term lending In 2019, we expect development 1.3% 1.4%
3.3% strategy. In fact, lenders have continued finance to become more readily In 2019, we expect
3.6% to enter the debt space throughout available, with certain lenders open development finance
2018, with several groups accelerating to providing speculative commercial
their debt platforms with a focus finance (albeit reserved for strong,
to become more
4.8%
on 2019. experienced and well capitalised readily available,
Berlin
Birmingham
While some lenders 4.0% Traditional equity players have sponsors). The European CMBS market 1.4% 0.4% 2.6% 1.6% -1.09% 1.2% 0.3% 0.26% 0.68% 0.62% 2.2% -0.09% 1.03% with certain lenders
are using a wait- found the risk/return profile of the will gain importance for investment open to providing
debt space even more palatable as the banks looking to manage their exposure
and-see approach speculative
Hong Kong
Melbourne
London
Paris
San Francisco
Shanghai
Singapore
Sydney
New York City
Berlin
Birmingham
Beijing
Frankfurt
cycle continues, and have been able to to commercial real estate.
in the short-term, no leverage their own expertise to succeed. On the whole, this year will be a commercial finance
major groups have Overall, despite more entrants to the good time to borrow with both margin (albeit reserved for
indicated that they debt space, lenders remain disciplined and cost of funds reducing, generating
strong, experienced
and have opted to compete on pricing enhanced returns for leveraged buyers.
will rethink long-term instead of offering more leverage or Lenders continue to be selective, but Source: Knight Frank, Newmark Knight Frank, Macrobond. Note: The cost of finance equates to the relevant 10 year swap
and well capitalised
lending strategy.” accepting poor credit. appetite will remain strong. rate, plus an estimated lending margin compiled by Knight Frank and Newmark Knight Frank in early December 2018. sponsors).”
Source: Knight Frank, Newmark Knight Frank, Macrobond. Note: The cost of finance equates to the relevant 10 year swap
1.37 rate, plus an estimated lending margin compiled by Knight Frank and Newmark Knight in early December 2018.
1.44
-0.47
1.57
-1.52
0.89 14 15
1.393.0%
VANCOUVER
GLOBAL OUTLOOK 2019
2.0%
LOS ANGELES
6.0%
MIAMI
2.0%
SYDNEY
-5.0% 1.0%
NEW YORK
MELBOURNE
6.0% Prime residential price growth forecast
BERLIN 1.0%
Prime
GENEVA
6.0%
MADRID
Residential
6.0%
Paris
3.0%
Forecasts
Vancouver
1.0%
London
0.0%
New York
Luxury residential price growth is slowing. Global economy in good shape… …and is supporting wealth creation Despite higher cost of finance and 2.0% 6.0%
Not everywhere, and it is not plunging; this Los Angeles Berlin
Global GDP (%) No. of individuals with $5m+ lower price growth, cross-border
is not 2008, but our Prime Global Cities
capital flows continue to rise
Index, which tracks the movement in prime
prices across 43 cities worldwide, although
Global investment volumes ($) 1.0%
Excluding developments Geneva
still rising, is doing so at its slowest rate since 3.7% 3.7% 3.7% 3.6m 3.7% 3.7% 3.7%
3.6m
2012. The proliferation of property market 3.6% 3.6% 6.0%
regulations, the rising cost of finance, 3.5% 3.5% Madrid
2,000
uncertainty surrounding2.5m Brexit and in 3.3%
2.5m 3.3%
2.3m 2.3m
some markets, a high volume of new prime 2.1m Cross border Domestic Unknown
2.1m
supply, is weighing on prime prices.
2012 More muted growth
2016 2017 is the main
2023 story for 2015 2016 2017 2018 2019 2023 2012 2016 2017 2023 2015 2016 2017 2018 2019 2023
-10.0%
2019 forecast. Of the 15 cities monitored, Hong Hong
Source: IMF World Economic Outlook Oct 2018 Source: Wealth-X
the key European cities of Madrid, Berlin
and Paris, lead our forecast for 2019 with 0.0%
growth of 6%. Still positive, but marginally But the rising cost of finance and more property regulations… Singapore
down on 2018, the normalisation of -5.0%
Mumbai
monetary policy, weaker economic growth 2.5 2.50
and a fragile political landscape post-Brexit ECB interest rate UK interest rate US interest rate HK interest rate 2.25
1,500 -2.4%
2.0 Dubai
will influence demand, but their relative
value will remain a key driver.
Markets that have been the recipients
1.5 2.0%
Sydney
of new macro-prudential measures in 2018
such as Hong Kong and Singapore will slip
1.0 1.0%
0.75 Melbourne
down the rankings as buyers adjust to the 0.5
new tax landscape.
Of the 15 cities, Sydney, London and 0.0 0.00
New York City sit mid-table with forecasts 2015 2016 2017 2018
of 0%-2% growth. A lack of new supply Source: Knight Frank, Macrobond
1,000
is supporting Sydney’s prime market. In
London, changes to stamp duty have now
...has led to slower rates of prime price growth Markets that saw
been fully absorbed, suggesting activity Prime prices performance (Indexed, 100 = Q1 2006 & new property market
could strengthen once political uncertainty 12-month % change) regulations in 2018
in relation to Brexit starts to recede. In New Year to Dec 2019
York City, luxury prices are recalibrating as Madrid 6.0%
the market grapples with the new federal 150
8 Berlin 6.0%
tax law, higher mortgage rates, and the Prime Global Cities Index* VANCOUVER
Paris 6.0%
12-month % change 7
absorption of high supply volumes in
130 Vancouver 3.0%
recent years. 500
6 Sydney 2.0%
Luxury house prices are now a distinct
Los Angeles 2.0%
Prime Cities Index*
asset class, a safe asset viewed by the wealthy NEW ZEALAND
12-month % change
110 5
as a viable alternative to government bonds. Geneva 1.0%
However, luxury housing has become 4 Melbourne 1.0%
more homogenised over the last decade 90 London 1.0%
which has led to greater synchronicity 3
HONG KONG Singapore 0.0%
when it comes to market cycles. Local
2 New York City 0.0%
policy interventions and economic shifts 70
have the capacity to disrupt these ties but Dubai -2.4%
1
broader macro themes from the rising cost SINGAPORE 0
Mumbai -5.0%
of finance to wealth creation, not to mention 50 0 Hong Kong -10.0%
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
the desire to have a foothold in some of the 2013 2014 2015 2016 2017 2018
Average 1.0%
world’s most transparent and prestigious
neighbourhoods, will keep them in check. Source: Knight Frank *Tracks the movement in prime prices across 43 cities worldwide. Source: RCA Source: Knight Frank
16 17GLOBAL OUTLOOK 2019
“
Global Strategies Occupiers have
Knight Frank’s sector experts give their views on the taken flight to
outlook for real estate in 2019, and beyond. quality space, as
they recognise real
estate not as a cost to
manage downwards,
but as a strategic
device capable of
facilitating business
transformation.”
Occupier markets Real estate capital markets for global investment, albeit one that will
see a further evolution in the characteristics
Dr Lee Elliott, Will Matthews, of purchases.
Global Head of Occupier Research Head of Commercial Research
Despite great geo-political uncertainty As attention turns to 2019, the Retail
and relatively moderate levels of fundamental drivers of the current global
Stephen Springham
growth over the last three years, global investment cycle remain intact. The
Head of Retail Research
occupational markets have shown macroeconomic story is still supportive of
resilience with many achieving record rental growth in many developed markets. Online continues to be the single largest
or near-record levels of demand. Property yields are relatively attractive driver of structural change in retail markets
Business disruption has necessitated compared with other sources of long-term globally. However, the mindset is slowly
transformation. As a result, occupiers income, despite a gradually rising tide of changing, particularly in mature online
have taken flight to quality space, as market interest rates. As a result, capital markets where actual experience is not
they recognise real estate not as a targeting the asset class continues to swell, necessarily consistent with perceived E-Commerce Retail market spend
driven by an evolving mix of institutional logic. The historic view was that online % of GDP 2018
cost to manage downwards, but as a
investors, private equity funds, and and physical retail were distinct; online
strategic device capable of facilitating
private wealth. Nevertheless, this intense could plug gaps in coverage, obviate the UK
business transformation. China
focus raises its own challenges. need for more expensive physical space
The corporate real estate decision South Korea
Yields have compressed to very low and see retailers significantly downsize Indonesia
has strategic relevance and is
levels, forcing some investors to seek their footprint. In reality, most retailers France
increasingly aligned to the realities US
opportunities further up the risk curve are seeing a more symbiotic relationship Vietnam
of the operating environment.
in order to maintain returns. Second and between online and physical stores. Yet, the Japan
Consequently, flexibility, quality and Colombia
third tier locations may offer this, but role of the latter is changing and traditional
service are all in demand, as occupiers Russia
sometimes at the expense of liquidity. performance metrics no longer apply. Turkey
are both disrupted by tech-enabled Forward-thinking investors are turning This is driving huge structural change Germany
new market entrants, and challenged to specialist property sectors, reliant on across all aspects of retail real estate
Australia
Spain
by a fierce war for tech and creative structural rather than cyclical drivers, but markets, including property valuations Canada
skills. Over the next three years, global these come with additional management and investments. There is a long way to Mexico
India
markets, generally short requirements. To deploy capital at scale go before the full ramifications are fully South Africa
of high quality supply, will see no in any sector will increasingly require understood. The future of retailing is not Italy
Brazil
shortage of demand and no reluctance investors to consider the purchase of about online. Nor is it about traditional
0% 2% 4% 6% 8% 10%
on the part of occupiers to pay for the entities, not just individual properties. stores. It is about both, and how the two
very best space. Overall, 2019 will be another strong year seamlessly interface. Source: Mintel
18 19GLOBAL OUTLOOK 2019
“
Multihousing Student accommodation see investment in Asia-Pacific increasing,
particularly in Australia.
Gráinne Gilmore, Matthew Bowen,
Head of UK Residential Research Partner, Residential Research
We estimate that global investment into
Hotels
Already an established asset class in the
US, multihousing – residential blocks student accommodation reached Philippa Goldstein, Hotel Analyst
built specifically to rent – is starting to over $15bn in 2018, marking the third
International leisure travel is on the rise,
gain traction in Europe and Australia. consecutive year of investment at this level.
In 2019, the increasing appeal of specialist spurred on by the growth in air travel, an
The search for long-term income has
property is likely to push the global volume expanding middle class, and a population
encouraged institutions to look at
invested in student property even higher. with greater desire and means to travel as
residential investment options in
In 2019, the UK market will continue disposable income rises.
markets characterised by a sharp rise in
to be driven by bulk purchases as new Mobile connectivity is providing brands On a global level, we
the proportion of people living in rented
accommodation. For example, in the entrants and existing investors look to with the opportunity to explore new expect the following
UK, one in ten households were living consolidate and acquire additional scale. ways of interacting with customers. Data
key themes: Asia
Yield compression will continue in many generation continues to proliferate with
in the private rented sector in the early
cloud-based systems progressively being
Pacific capital will
2000’s. That has now risen to one in five UK cities.
On a global level, we expect the rolled out in order to capture and gather play a bigger role in the
households, and in the coming years,
it is forecast that a quarter of all following key themes: Asia Pacific capital guest intelligence, thereby transforming the cross-border investment
households will be living in privately will play a bigger role in the cross-border level of insight. Digital check-in and the use market, with the UK
investment market, with the UK as a target of AI in hotels will increase in the years to
rented accommodation.
market. Cities in Europe are attracting come, becoming the new norm.
as a target market.
The granularity of residential renting,
with the ability to find a new tenant international students in greater volumes, Additionally, scaling and environmental Cities in Europe are
relatively swiftly, means that investors and this trend is likely to continue. efficiencies will not only offer higher attracting international
can expect true net yields, with no large Demand for UK student accommodation operating margins, but help connect with students in greater
will be robust, despite Brexit, thanks to a Millennials and Generation Z, who expect
void periods, no large tenant incentives
7.6% rise in overseas student applications a high level of environmental responsibility
volumes, and this trend
and no rent-free periods; which would
be typical of commercial investments. for the academic year 2018/2019. We also from businesses. is likely to continue. ”
Healthcare
Mandip Bhogal, Associate, Healthcare
Despite the lack of social care funding
and a shortage in the skilled labour
force, the healthcare sector has remained
resilient and robust over the past 12
months, particularly in direct
comparison to other property types and
the wider investment classes.
Due to the domestic nature of the
sector, with an ageing population and
a shortfall of good quality care home
stock fit for 21st century care, appetite for
development will remain strong in the
year ahead.
We estimate that there is circa $4.4bn
of UK private equity and circa $25bn of
overseas private equity looking to enter
the UK care home market in the coming
years. Investors are attracted by the long
dated income that healthcare real estate
presents, typically comprising 30-year
lease terms, with either Retail Price
Index-linked or fixed uplifts.
20 21GLOBAL OUTLOOK 2019
Risk Brexit
Radar US-China
trade war Rising
interest rates
Tech sector UK politics is presently in an
uncharacteristic period of volatility
growth and deadlock. A ‘hard’ Brexit,
whereby the UK defaults to a WTO
border with the European Union,
would be a step into the unknown
for the economy. The impact would
be greatest on manufacturing
industries in the UK, but will
reverberate around Europe; with
implications for Ireland, northern
France, and German exporters.
Both sides are now feeling the
Opportunities will emerge for non-
effects of the opening shots of the
EU countries to sell more goods to
This year’s forecasts trade confrontation between the
the UK. Also, British ports outside
Rather than a risk, in many key
US and China. Unsold soybeans global economies, tightening
coincide with significant the English Channel will see more
are piled up in the US, while PMI monetary policy is either an on-
geo-political risks, most of data for late 2018 suggested China’s
traffic. However, we note that recent
going reality or a near certainty. The
votes in the UK Parliament suggest
which are manageable. manufacturing sector is slowing. This Between August and December 2018, debate is whether central banks
advocates of a ‘hard’ Brexit are not
probably contributed to the two sides the Nasdaq 100 index fell by 17%, as could tighten by too much too
in the majority.
agreeing a 90 day moratorium on new investors became concerned over soon, and tip the economy back
James Roberts
tariffs in December. Because of the whether the tech sector can maintain into a downturn. However, major
Chief Economist, Knight Frank wider geo-political factors behind the heady levels of growth seen in
Risk level: 3.5
central banks have been guiding
the confrontation, we do not see a recent years. A tech slowdown would hawkishly and acting dovishly for
speedy conclusion. However, there is have major implications for real some time – effectively, hinting at
Compared to a year ago, many investors
now on both sides a desire to limit estate occupier markets, who have a faster pace of increase than has
are cautious on growth prospects. Much
further damage. benefitted from significant demand actually occurred. We expect them
of the apprehension arises from geo-
political concerns, which is playing out from this sector in recent years. to continue to pursue a gradual pace
in the form of financial market jitters. Risk level: 4 However, it is worth remembering of normalisation, and indeed some
Despite the nervous sentiment, the that many tech firms today are larger, central banks may even start to
actual data on the economy for much of better financed and more profitable loosen policy again in 2019 if
the world remains relatively stable. This than was the case during the 2001 circumstances become concerning.
suggests the global economy is in a strong technology shares crash. One possibility is China, should its
position to weather stormier conditions, economy slow abruptly; another is
should they appear. Below are the Risk level: 3.5 the UK should a ‘hard’ Brexit occur.
four key risks we have identified to the
forecasts in this document. Risk level: 3
22 23GLOBAL OUTLOOK 2019
The grey Coworking
workforce
Opportunities
Radar Despite the huge focus on
millennials, in many Global Cities,
People in
Coworking has had a
transformational impact on office
markets all over the globe in
2018, and while some markets are
job creation in recent years has in
some locations been faster for the
finance approaching maturity, on a global
level we expect to see continued
older demographics. In the UK, momentum in 2019. Traditional
since January 2017 employment of landlords are rapidly entering the
people aged 50+ has increased by market, while economic uncertainty
4.1%, compared to just 1.3% growth in some regions in 2019 will
for 16-34 year-olds. Ageing societies encourage more occupiers to seek
5G
around the world mean that more flexible office options. Some large
employers are encouraging staff corporations use coworking as a
to delay retirement, or become launch pad for getting staff to work
independent consultants. Those who in new ways.
left the workforce to start families are It will also be interesting to see
now finding more opportunities to how much progress is made on
return to their careers. extending the concept beyond offices.
What are the potential As older age groups account for WeWork already has its offshoots,
a bigger share of the workforce, we namely WeLive (shared housing) and
opportunities emerging now
see retailers and the leisure industry Since the global financial crisis, there WeGrow (education). This could
that could drive new growth in adapting in response. This could has been a surge of money flowing create additional opportunities for
the future? lead to new types of stores and into index-tracking funds. Also, the real estate sector.
entertainment appearing in city more trading decisions are made by
centres, aimed at a more discerning computers. JP Morgan estimate that
James Roberts
clientele with deeper pockets. 60% of US share deals now source
Chief Economist, Knight Frank In May 2018, certain districts of the from passive funds or automated
Qatari city of Doha became the first trading, leaving humans making fewer
At times like the present, when in the world to receive a 5G mobile decisions. However, recent market
“
downside risks are numerous, it is easy telephone service. For most of the volatility could encourage investors
to overlook the fact that there are always world, roll-out is expected to occur in to rethink, as index-trackers follow
upside opportunities. In 2008-2009, 2019 and 2020. 5G will deliver much the markets lower and algorithms
the banking crisis was reaching its faster broadband speeds, provide struggle with volatility.
peak, which dominated our attention. the means by which autonomous Another wave of Consequently, we may see the
However, the digital revolution, sharing vehicles communicate with each the digital revolution financial sector bring more people
economy and the emergence of the other, and facilitate the ‘internet of will maintain growth back into the process, to sense
Chinese consumer, which have led things’ where devices around a home, check the decisions of machines,
economic growth in the last decade, were momentum for office
office or factory interact. and decide when it is time to deviate
also there as overlooked trends. Another wave of the digital
demand in the tech- from index tracking. A movement
This beckons the question: what are revolution will maintain growth oriented Global back to managed funds could see
the germinating opportunities today momentum for office demand in Cities, like Amsterdam, increased demand for office space
that deserve more analysis from the tech-oriented Global Cities, like Berlin, Bengaluru in key financial districts around the
investors? Here are four we believe Amsterdam, Berlin, Bengaluru, and world, like New York City, London
deserve your attention. San Francisco.
and San Francisco.” and Hong Kong.
24 25GLOBAL OUTLOOK 2019
Contacts
Knight Frank Global Newmark Knight Frank
Research Research
Liam Bailey Jonathan Mazur
Global Head of Research Senior Managing Director
liam.bailey@knightfrank.com National Research
jmazur@ngkf.com
James Roberts
Chief Economist Alexander Paul
james.roberts@knightfrank.com Senior Managing Director
National Research
Sherin Gooi
apaul@ngkf.com
Assistant Economist
sherin.gooi@knightfrank.com
Global Property Services
William Matthews
Andrew Sim
Head of Commercial Research
Capital Markets
william.matthews@knightfrank.com
andrew.sim@knightfrank.com
Dr Lee Elliott
William Beardmore-Gray
Head of Occupier Research
Occupier Services & Commercial Agency
lee.elliott@knighfrank.com
william.beardmore@knightfrank.com
Nicholas Holt
Lord Andrew Hay
Head of Asia-Pacific Research
Residential
nicholas.holt@asia.knightfrank.com
andrew.hay@knightfrank.com
Kate Everett-Allen
Rupert Johnson
Partner Residential Research
Valuation & Advisory
kate.everett-allen@knightfrank.com
rupert.johnson@knightfrank.com
Anthony Duggan
Consultancy
anthony.duggan@knightfrank.com
Important Notice
© Knight Frank LLP 2019 – This report is published for general information only and not to be relied upon in any way. Although high standards have been used in the preparation of the
information, analysis, views and projections presented in this report, no responsibility or liability whatsoever can be accepted by Knight Frank LLP for any loss or damage resultant from
any use of, reliance on or reference to the contents of this document. As a general report, this material does not necessarily represent the view of Knight Frank LLP in relation to particular
properties or projects. Reproduction of this report in whole or in part is not allowed without prior written approval of Knight Frank LLP to the form and content within which it appears. Knight
Frank LLP is a limited liability partnership registered in England with registered number OC305934. Our registered office is 55 Baker Street, London, W1U 8AN, where you may look at a
list of members’ names. This report was compiled and written during November and early December of 2018, based on data and evidence available to Knight Frank LLP at the time. Rents
and investment transaction volumes are in US dollars, but growth rates are at constant exchange rates. Americas rents are grade A average asking, whereas rents in other geographies
are quoted normal prime achieved.
Please note that this report has been published at a time of heightened geo-political and financial markets risks. These risks include the trade confrontation between the US and China,
evidence that the Chinese economy may be slowing, the move towards Brexit in the UK, the Italian government’s budget, volatile equity markets, and the expectation that many leading
developed economies could see rate hikes in the future. A future deterioration in any of these factors could adversely impact the forecasts published in this report.
26 27www.knightfrank.com www.ngkf.com
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