Global Real Estate Market Outlook - Q1 2020 - Aberdeen Standard ...
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For professional investors only, in Switzerland for qualified investors only – not for use by retail investors or advisers Global Real Estate Market Outlook Q1 2020
02 Global Real Estate Market Outlook For professional investors only, in Switzerland for qualified
investors only – not for use by retail investors or advisers
“Although the anticipated real estate returns over the next few years are
likely to be lower than earlier in the cycle, the yield on real estate looks
compelling compared with the low yields that are expected across a broad
range of markets. With the expectation that interest rates are likely to
remain at low levels and that uncertainty will continue at higher than
normal levels, real estate assets with a reasonably dependable yield are
likely to be highly sought after in this environment.”
Global economic overview
• The global economy is showing early signs of stabilisation.
Central bank easing measures have loosened financial
conditions and given a tentative pause in the US-China trade war,
which have lowered global policy uncertainty. However, while
downside risks have subsided at the margin, the Aberdeen
Standard Investments Research Institute (ASIRI) view is that we
are not expecting a strong rebound in global activity. Across the
major economies, there is either limited scope for, or limited
Executive summary
willingness to use, additional monetary and fiscal stimulus.
• Our economic forecasts envisage a broadly flat path from
And while the most acute stage of global trade uncertainty may
here for global growth. Downside risks have subsided at the
have passed, absolute tariff levels remain high. Our forecasts
margin as trade tensions pause. Our view is that growth will
therefore envisage a broadly flat path for global growth
be largely flat from here at levels that are disappointingly
from here, at levels that are disappointingly low and indeed well
low and well below consensus.
below consensus.
• Although pricing is looking stretched compared with earlier
• Our forecasts envisage a further stabilisation in global economic
in the cycle, we expect pricing to remain resilient as demand
activity because the policy environment is turning slightly more
for real estate continues to be high in the current
supportive. For a start, central banks have delivered
environment. Investors still value the relatively high yield
considerable monetary policy easing, which has already seen
from the asset class, along with the positive fundamentals
interest-sensitive parts of the global economy tick higher.
and the diversification benefits when compared with
They have also signalled that they are prepared to do more.
other assets.
But we are also mindful that the transmission of monetary
• In line with less economic uncertainty, concerns about the easing is likely to be weaker than at earlier points in the
real estate market have also moderated. But given the late expansion. This is especially the case in those economies where
stage of the cycle, the current levels of pricing, and the policy space is very low (the Eurozone and Japan), capacity
potential for a flare-up in economic uncertainty, we continue constraints are becoming more binding (the US), excess leverage
to adopt a low-risk approach to finding value. Having is inhibiting credit demand and supply (India, Australia, Canada,
conviction in an asset’s worth is absolutely key for fund Sweden), or where financial stability concerns are preventing
managers in this environment. more aggressive policy easing (China).
• Our preference is for sectors of the market that continue to • In addition, the most acute phase of global political uncertainty
benefit from long-term structural trends. These include may be over. The US and China seem to be pulling back from
industrial, residential and selective assets that are their rapidly escalating trade war and the risk of a no deal Brexit
categorised as alternatives. Industrials remain in favour is receding. But we are also mindful that trade barriers between
because of the long-term trend for changes in the way we the US and China remain very high. And the 2020 US presidential
are shopping. We expect residential to be resilient as the election is likely to see a face-off between candidates with very
propensity to rent continues to rise. We also anticipate different visions for regulation.
pricing for alternative assets remaining firm as it becomes
• Regionally, we have modestly upgraded our growth forecasts for
more favoured by institutions.
developed markets. The trade détente and the removal of no deal
Brexit from our baseline mean slightly higher forecasts for the
US, UK and Eurozone – albeit the picture is still of subdued
growth. Our forecasts for emerging markets are a fraction lower
than before, but we still expect an improvement in emerging
market (ex-China) growth in 2020, as several economies emerge
from a very weak 2019.For professional investors only, in Switzerland for qualified Global Real Estate Market Outlook 03
investors only – not for use by retail investors or advisers
“At this late stage of the cycle, real estate pricing is understandably
stretched relative to pricing at the start of the cycle. However, we
don’t see any immediate catalyst for a reversal in pricing. On a relative
basis, referencing proxies for the risk free rate, such as long-term
bonds, are not quite as stretched.”
• We also envisage a relatively subdued global inflation
Chart 1: Aberdeen Standard Investments’ global
environment. Underlying inflation is expected to undershoot
pricing indicator
target in most economies, as activity is generally growing around
(Market price as a percentage of long-term worth)
or below trend. Where wage pressures are present, it is being
50
absorbed into increasingly compressed corporate margins,
rather than passed through into core inflation. Finally, oil base 40
effects are soon set to become a modest drag on 30
headline inflation.
20
• There are upside and downside risks around our view of the 10
future economic environment. To the upside, a widespread fiscal
easing would make us more positive about the outlook, 0
although fiscal policy remains reactive rather than proactive at -10
present. And a lasting roll-back of tariff levels would be a cause -20
for upward revisions to our forecasts. On the downside, there is Q4 10 Q4 11 Q4 12 Q4 13 Q4 14 Q4 15 Q4 16 Q4 17 Q4 18 Q4 19
still a considerable risk of trade tensions re-escalating, given the Australia Canada Eurozone Germany Japan UK USA
unpredictable nature of the protagonists and the strategic Source: Aberdeen Standard Investments, January 2020.
Note: Market price is scaled against the long-term worth for each market at the same
drivers of the conflict. A more severe downturn in labour date. Long-term worth is a proprietary estimate for Aberdeen Standard Investments. It is
defined as the discounted cash flows provided by that market and is based on long-term
markets and the global services sector could see economies capital market assumptions, independent of currency or stock selection effects.
slide towards end-cycle, especially given the sobering message
from our recession risk models. Market behaviour explained by short-term indicators
Market prices versus long-term worth • Given behavioural factors, market prices can, and often do,
• Following more than nine years of robust growth, pricing in real deviate from fundamental value for indefinite periods. We aim to
estate markets is understandably stretched and is ahead of our monitor market behaviour via our global performance
expectations for long-term worth. In line with last quarter, indicators. These help us understand the drivers of prevailing
core assets in Asia-Pacific look to be the most overpriced market prices (see Table 1).
globally, particularly in the Hong Kong and Japanese markets. • Global investment activity fell year-on-year, with activity
• In terms of sectors, our pricing indicators suggest that global subdued in most regions. Global uncertainty and a lack of
residential and industrial markets offer the greatest potential for suitable products are holding back activity, despite there still
risk-adjusted returns at this point in the cycle. The office sector being a high level of ‘dry powder’ on the sidelines. The lack of
continues to be the most overpriced, particularly in the entity-level (merger and acquisition) activity continues to subdue
Hong Kong and Japanese office markets. the comparative statistics with previous periods where there
was a high level of entity-level activity.
• Long-term worth remains hard to find in global core real
estate markets. For existing owners, opportunities exist for • The key trends in volumes have not changed significantly.
profit-taking in overpriced markets as investor demand remains Pessimism and negative sentiment towards the retail sector
favourable. We maintain our overweight position in the remain high as a result of the ongoing problems in the sector.
North American real estate market. We also favour certain Investment activity is subdued and sentiment towards the
sectors and segments in the continental European markets from sector’s prospects is gloomy. The unrest in Hong Kong and the
a global allocation perspective, given regional pricing versus ongoing Brexit uncertainty have suppressed activity levels in
long-term worth. Hong Kong and the UK. Investment activity remained firm in
the US, France and Australia.04 Global Real Estate Market Outlook For professional investors only, in Switzerland for qualified
investors only – not for use by retail investors or advisers
“The global performance signals remain relatively positive. Apart from the UK,
where Brexit related uncertainty and the ongoing problems in the retail
sector continue to affect the region, the indications are encouraging in all
the other regions. This suggests that the current positive performance
will continue.”
• Apart from Hong Kong and the UK, investor sentiment remains conditions over the quarter. Lending terms tightened in Austria,
favourable on a global basis. The most positive sentiment the US and South Korea, and terms were looser in Ireland and Italy.
continues to be in the European region, particularly for Hungary,
• In line with last quarter, we continue to expect relatively robust
Germany and Austria.
rental growth across most regions over the next three years on
• Global share prices rose by 0.5% in the fourth quarter, which is a an annualised basis. The strongest rental growth is expected to
modest deterioration on the 8.1% increase in the third quarter. be in the Americas region followed by Europe. We anticipate
Most markets ended up in positive territory for the quarter, modest rental growth in the UK market as it continues to be held
despite the slowdown in returns. The US and Canada declined back by political uncertainty and also by the ongoing problems in
over the quarter, while Japan and Australia inched into negative the retail sector. We expect the polarisation between retail and
territory. The UK rebounded following the election result and, industrials to continue. Retail rents are likely to continue
similarly, Hong Kong recorded positive gains as tensions in the declining, while industrial rents should remain robust as
region moderated. long-term structural changes in shopping habits continue to play
out. With bond yields continuing to moderate in most regions,
• Lending terms have continued on the recent loosening trend,
the global spread to real estate remains compelling.
although some countries witnessed a tightening in lending
Table 1: Aberdeen Standard Investments’ Global Performance Signals
Performance signals UK Europe APAC North America Global
Economic fundamentals
Macro
Margin over bonds
Monetary Policy
Supply
Real estate
Flows of capital
Lending
Fund flows
360º view
Source: Aberdeen Standard Investments, December 2019.
Key
Performance Signal: Trend:
Supportive Stable
Neutral Upward trend
Unsupportive Downward trend
Global overview • In the occupier markets, supply pipelines continue to be subdued
• Global investment volumes remain subdued and continue to and well below the peaks of the last cycle across most core
be affected by uncertainty and a lack of suitable product. developed markets. The risk of a supply induced correction
With a pause in trade tensions between China and the US, remains relatively low. At a local level, some supply risks are
more certainty around the Brexit process and an easing of the materialising. This means that local knowledge and bottom-up
confrontation in Hong Kong, global uncertainty has moderated. asset selection are as critical as ever for strategy implementation.
It is likely that there could be a slight pick-up in investment Positive global growth should continue to support occupier
activity over the year ahead. There continues to be a significant demand as the real estate cycle moves to a period of lower
amount of ‘dry powder’ on the sidelines, which is targeting real total returns. Net income growth, rather than falling yields, will be
estate, with the expectation that interest rates are likely to stay the main driver of future return expectations.
at low levels for some time yet. On a relative basis, the yield on
• At this point in the cycle, core prices appear stretched relative to
real estate continues to look attractive. In line with previous
estimates of long-term worth. Where market prices are above
quarters, we don’t anticipate there being a near-term catalyst in
long-term worth, this implies that investors are not being
the absence of a global recession that will lead to global real
adequately compensated for risk. In turn, this suggests investors
estate pricing weakening significantly at present. Signs of price
may want to adopt a lower-risk profile at this stage and make
declines continue to be limited, apart from the UK market and
selective sales to re-position portfolios accordingly. In this
specifically the UK retail sector.
environment, seeking out value opportunities has become
more challenging.For professional investors only, in Switzerland for qualified Global Real Estate Market Outlook 05
investors only – not for use by retail investors or advisers
“Although global uncertainty has moderated, it still remains at relatively
elevated levels. With this in mind, we advocate a relatively low risk approach
to seeking out value opportunities. We remain focused on an asset
fundamentals and our conviction in an asset’s ability to deliver positive
performance will be key for success.”
Regional outlooks estate demand. This has led to the tightest vacancies and rental
North America growth in North America for apartment, industrial and office
• Gross Domestic Product (GDP) growth in both the US and property types. However, the Calgary office market continues to
Canada slowed in 2019. The services sector has continued to suffer from the beleaguered energy sector.
expand; however, the trade war with China has disrupted global
• Healthy occupier fundamentals have continued to attract strong
supply chains, which has negatively impacted the manufacturing
investor demand. Transaction volumes moderated in the final
sector. The manufacturing index from the Institute for Supply
half of 2019, but remained well above historical levels. Industrials
Management (ISM) in the US dropped sharply in 2019, signalling
continued to experience rapid growth in sales and pricing during
the sector’s deepest contraction since the global financial crisis.
this period. Institutional capital is flowing into the industrial
Canadian sector trends were more positive, but Purchasing
sector as a result of robust performance and a positive outlook.
Managers’ Index (PMI) readings suggest that activity remains
However, retail annual transaction volumes fell by nearly
sluggish. Activity is expected to decrease further next year, with
one-third and pricing remained below 2015–16 levels.
GDP forecasts of less than 2%. That said, reduced trade tensions
Sales trends were stable among apartments and offices,
offers some upside potential. The phase-one trade deal with
but pricing continued to rise at a moderate pace.
China includes cuts in certain tariffs on Chinese imports and
increased Chinese purchases of US goods and services. • With the significant appreciation in prices over the past few years,
The services segment of the US economy has strengthened overpricing risks remain evident in the North American market.
recently, with the non-manufacturing ISM index rebounding in This is particularly the case in the office sector where yields have
the final quarter of last year. Private-services sectors continued fallen to low levels and an increase in construction levels is likely
to produce solid job gains. The unemployment rate fell to a new to dampen rental demand in the future. Market pricing suggests
50-year low, supporting broad-based wage and consumption that the US residential and industrial sectors continue to be more
growth. Hiring in Canada accelerated last year, outpacing the US, attractively priced than the office and retail sectors, and are likely
particularly among office-using sectors Weaker global growth, to offer better prospects for locating value opportunities.
disruptive trade policies and muted inflationary pressures led to The retail sector, particularly secondary malls, continues to
an additional 25 basis point (bps) rate cut by the US Federal experience issues with structural demand that are unlikely to
Reserve (the Fed) in October. The Fed has signalled a pause, abate. In Canada, our indicators suggest that the office sector is
suggesting stable policy rates in the near term. not as overpriced as some of the other global office sectors.
We remain positive on the forecast outlook for the
• Vacancies across all sectors remain tight relative to history, but
North American markets. We continue to expect the market to
we have also seen decelerating demand and rental growth.
deliver an income-type return in the medium term, although the
In 2019, industrial vacancies rose for the first time since the last
downside risks have risen with yields hovering around new lows.
recession. This was due to a slowdown in demand and
accelerating supply. Leasing activity has likely been restrained by UK
weak industrial production and imports, coupled with a tight • While there is low conviction in its base case, the ASI Research
labour market that has limited hiring. Rental growth has Institute (ASIRI) expects a sluggish, but positive growth outlook
moderated, but the sector continues to strongly outperform to persist. It has revised upwards its expectations for GDP
from very low vacancy rates. Although the national office growth in 2020 to 1.4% although risks remain of a “cliff edge”
vacancy rate is stable, it is at its lowest level since 2001. Brexit at the end of the transition period in December 2020.
Net absorption persisted at a steady pace, while supply was
• A notable development in the December 2019 election was the
measured. Rental growth was tepid but secondary and tech
demolition of the so-called “red wall” of Labour seats across the
markets with outsized job growth, such as Charlotte and Seattle,
Midlands and the north of England. With Conservatives
posted robust gains. The retail sector is still under significant
representing some constituencies for the first time in decades
pressure. Demand growth reached its lowest level since the last
the focus of increased fiscal spending and capital could be tilted
recession, as store-closure announcements rose to a record level
more towards the regions. We expect fiscal stimulus to come
in 2019 (according to Coresight Research). Neighbourhood
through and steadily feed into growth, with a boost to consumer
centres are performing relatively well – buoyed by
spending. However, as the UK looks set to drift further from EU
grocery-anchored centres – as they have been resilient to
economic and regulatory alignment, we do not envisage a
e-commerce. Vacancies have steadily improved in the apartment
material pick-up in investment.
sector. Development activity remains high, but supply has
begun to moderate. This has led to a drop in concession rates, • Occupational markets have, so far, largely been unfazed by
supporting effective rental growth. Canadian real estate markets prevailing uncertainty and a lack of clarity on the UK’s future
are benefiting from attractive demand drivers and subdued trading relationships. Take-up in the office sector remains
supply. Outsized population and job growth have buoyed real strong, with Central London leasing volumes now marginally06 Global Real Estate Market Outlook For professional investors only, in Switzerland for qualified
investors only – not for use by retail investors or advisers
above the five-year quarterly average. Regionally, headline rents speaking with one voice. Measures of industrial activity, business
have been steadily rising and vacancy rates falling across the big confidence and trade volumes are extremely depressed, but
six office markets, boosted by large corporate occupier may have stopped getting worse. On the other hand, measures
consolidation programmes. With supply pipelines generally of consumer confidence, spending and the labour market are
modest, the economic backdrop will be the key determinant of more elevated, but starting to turn lower.
demand and the rental tone in these markets. Meanwhile,
• Helpfully, the policy environment is set to turn slightly
industrials continue to report healthy take-up, especially for
more supportive. European fiscal policy is loosening–
well-connected areas in core markets and supply-constrained
the change in the Eurozone structural budget deficit is likely to
urban areas. Retail, however, continues to suffer severe
add up to 0.5% to GDP in 2020. We therefore think that the bulk
structural headwinds.
of the Eurozone growth slowdown is in the past, and expect a
• The fourth quarter saw the highest quarterly volume of relatively flat profile for GDP growth over our forecast horizon.
transactions in 2019, with the office and alternative sectors However, even with growth stabilising, the economy is set to
together contributing to over two-thirds of the £12.7bn total expand around or just below trend – which means that inflation
quarterly volume. A number of large portfolio deals in pressures should remain subdued. We therefore expect modest
alternative property types underscored the very healthy additional easing from the ECB, and have pencilled in a single 10
demand for secure income and repeatable cash flows. Despite a basis point rate cut in each of 2020 and 2021.There are two-way
number of large Central London office deals towards the end of risks to our forecasts. Additional fiscal expansion represents a
the quarter, the pool of overseas buyers has been shrinking. rare upside risk. But given the low starting point for growth, and
Some confidence may return in the short -term with a Labour the uncertain global trade policy environment, most risks are to
government avoided and, in the listed space, share prices have the downside.
moved very aggressively in response to October’s value rotation
• Occupational Market Trends Modest economic conditions
and an encouraging December 2019 election result for real
provide a level of support across occupier markets in Europe. In
estate. We are concerned this may be short-lived, however, if
addition, over the last few years we have not seen an
there is negative news flow regarding the UK’s negotiations with
over-exuberant supply reaction across sectors. Indeed, we
the EU.
continue to believe that structural disruption through
• ASIRI has revised up its GDP growth forecasts for the UK demographic shifts, technology, governance and threats to the
economy and, as such, we have made some modest upward environment will be equally as influential as cyclical trends from
revisions to our numbers. Nonetheless, our real estate forecasts this point forwards.
still sit towards the lower end of the market consensus. For the
• In office markets, leasing tension remains positive as stubbornly
calendar years 2020-2022, annualised returns are expected to be
low supply extends the rental cycle and we have upgraded our
marginally positive at just under 2% p.a. Retail expectations
forecasts in this sector accordingly. 2019 saw the highest level of
remain negative over the forecast period, given the challenging
take up recorded at almost 14 million square metres. New
operating environment for retailers in the UK, and continue to
development remains constrained and only 2 of the top 30 major
pull down our all property total return expectations. The notable
European office markets experienced a rise in vacancy in 2019.
exception is the supermarket segment where we expect long-let
The unweighted average vacancy has fallen to a new record low
assets, let off affordable rents to outperform.
of 6.6%. In Paris’s central business district, vacancy is only 1.7%
• The election result does not materially alter our outlook for UK of total stock. In Berlin, it is 1.9%, and in Amsterdam Zuidas it has
real estate and we maintain our approach to risk. As we enter a also fallen to 2%.
critical period for Brexit negotiations, there are a number of
• Office rents across the major European markets increased by
potential outcomes which hinge on the UK’s transition period
1.2% in Q4 and by 4.1% year-on-year to Q4 2019, but we
and future trading arrangements with the EU. Given this
anticipate this rate will continue slowing as we approach peak
backdrop we see very little justification to be taking on additional
levels. Rome (12%), Berlin (10%), Oslo (10%), Amsterdam (8%),
risk at this stage in the UK real estate cycle, with pricing of the
Hamburg (7%), Barcelona (6%), Prague (6%) and Stockholm (5%)
market well ahead of its long-term worth.
have been the best performers over the last 12 months.
Continental Europe
• The retail market is now seeing risk to income translate into
• Economic Outlook Eurozone economic activity remains weak,
capital value declines on the continent. With roughly 10% of
but may be finding a trough. Indeed, with Germany and the
retail sales now sourced through ecommerce in continental
Netherlands set to use some of their fiscal headroom, we made
Europe, and with a growth rate of 9% per annum, pressures are
modest upward revisions to our growth forecasts. Nevertheless,
mounting. Prime high street rents have topped out and are now
the outlook is still for weak growth and sub-target inflation,
falling in most markets. The rate of decline has reached -0.4%
which means that the ECB will probably have to ease policy again
over the 12 months to Q3 2019. The strongest falls have been in
in 2020. The cyclical growth data in the Eurozone are not
Benelux (-3.9%), the Nordics (-3.3%) and Germany (-1.5%).For professional investors only, in Switzerland for qualified Global Real Estate Market Outlook 07
investors only – not for use by retail investors or advisers
With exception of the very best shopping centres, this retail to expect large differences in sector performance, with retail
segment is considered to be experiencing more pain than other significantly underperforming. In 2019, prices generally
retail formats. continued to rise and economic risks increased. As such, we are
gradually decreasing the risk in our portfolios by limiting
• Logistics remains the star sector, with annual take-up volumes
leverage and by selling riskier assets and locations. In the future,
roughly 50% above the long-term average. Demand remains
we are focused on durable income streams for new acquisitions
broad-based, but e-commerce fulfilment now represents
and risk strategies should be carefully considered in the context
roughly 20% of total take-up per annum. Logistics vacancy rates
of the target sectors. While the cost of debt is low on the
remain around 5% on an aggregate level. Rental growth is now
continent – in many cases the ‘all in’ cost can be less than 100
becoming more broadly evident, with build costs rising and
basis points (bps) – it is important to resist the temptation to
tenants forced to compete for what new space there is coming
increase leverage. If leverage is implemented, target
through in the best locations. Prime logistics rents increased by
loan-to-value (LTV) ratios should be low to avoid adding
3.5% over the year to Q3 2019, but when a reduction in
too much volatility and downside risk.
incentives is taken into account, net effective rents have
increased by 4.5% over this period. • There are a few areas where we have been willing to take
greater risks. One is asset management risk (short leases and
• Capital Market Trends Investment in Continental European
vacancies) in well-located office and logistics properties in cities
commercial real estate reached €70 billion in the fourth quarter
with low vacancy and strong rental markets. The other is
of 2019, taking the annual total to €208 billion – down 2%
value-added activities that are less linked to the economic cycle.
year-on-year. The volume invested in retail property has fallen
These include conversions from commercial use to residential,
sharply in recent quarters, with the total down roughly 18% in
or investment in diversifying alternatives where leases can also
2019. By contrast, offices have seen a 14% increase in
be longer.
investment. Investment in residential property increased to
€40 billion in 2019, rising by 18% to become the second most Asia-Pacific
active sector behind offices. Alternative sectors continue to • The economic slowdown in Asia during 2019 was worse than
receive an increasing share of total investment. Hotel investment initially expected. The Asia-Pacific region is on track to register an
increased by 30% in 2019, in part reflecting strong appetite for average real gross domestic product (GDP) growth of just 4.4%
long term cash flows in a sector less exposed to domestic in 2019. This compares with 5.2% the year before and the
economic growth. Industrial investment increased by 7% in 2019 forecasted 5% at the start of the year. This would mark the
to €25 billion and we believe this number would have been slowest growth since 2010. A sharper-than-expected fall in
higher if there was sufficient product to meet demand. exports and manufacturing was the key drag on economic
growth last year, largely as a result of the trade dispute between
• According to the latest CBRE valuation monitor in Q3 2019,
the US and China.
12-month all property values in continental Europe increased by
4.0%, logistics by 10.1% and offices by 6.3%. Retail values fell by • Social unrest in Hong Kong was a negative surprise in 2019.
2.1%. By country, Germany (5.6%) and the Netherlands (5.7%) Coupled with the negative impact from the US-China trade war,
saw values continue to increase at the fastest rates. Caution which had already weighed on exports prior to the social unrest,
towards the future of physical retail is leading to an increase in Hong Kong is now on track to report a full year real GDP
yields in this sector as investors pull back. Office yields contraction of 1.1% for 2019 (from +3.8% in 2018). We believe
compressed further in the latter stages of 2019 to stand at 4.3% political uncertainty will likely remain an overhang on investment
on average. Logistics yields continue to fall and stand at 5.6%, in 2020, considering the legislative council election is scheduled to
having fallen by 30 basis points over the year. Prime levels are at be held in September this year.
3.9% in Germany, 4.3% in France and 4.7% in the Netherlands.
• In our base case, we expect growth to stabilise at a low rate in
Supporting the liquidity in the market, lending to real estate
2020. We expect the slowdown in manufacturing to stabilise with
remains abundant and very cost effective for borrowers. On
a small rebound in exports in 2020. Coupled with the delayed
good quality institutional-grade assets, the all in cost of debt can
impact from tax and interest rate cuts in Australia and India, we
be below 100 basis points in some jurisdictions.
expect real GDP in Asia-Pacific to grow an average of 4.5% in 2020
• Performance Outlook and Risk In the short-to-medium term, (from 4.4% in 2019). The upside risks to this forecast include a
we have slightly upgraded our forecasts and continue to expect faster-than-expected turnaround in the global tech cycle,
Europe will perform well in a global context. The cycle has which will likely benefit markets such as Taiwan, Korea and
become more advanced, implying that less upside is expected Singapore. The downside risks include ramifications from
from falling yields, but low interest rates support our notion that potential geopolitical conflicts, a faster-than-expected pick-up in
yields will be as low, or lower, in 5 years’ time than they are today. inflation (and by extension, the implication for monetary policy),
Stable income returns and modest income growth are expected and a significant deterioration in the situation in Hong Kong.
to be the key components of performance. Critically, we continue08 Global Real Estate Market Outlook For professional investors only, in Switzerland for qualified
investors only – not for use by retail investors or advisers
• Net rents in Asia-Pacific are on track to register an average • Recent data suggests Asia-Pacific real estate’s access to credit
growth of 0.8% in 2019, compared with 2.5% in 2018. The slower has improved on the margin, but we expect lenders to remain
growth in 2019 was principally on account of weaker office rental selective in 2020. While high yield spreads in Asia were lower by
growth (1.1% versus 3.7% in 2018), with Hong Kong (prime rents an average 141 bps last year, the gap between investment grade
-2.5% versus +5.9% in 2018) and China’s tier 1 cities (-6.2% versus and high yield spreads remains at a high of 372 bps (versus the
+1.1% in 2018) being the main drag. In spite of slower growth in average 312 bps in the last three years). The lending attitude of
net rents, vacancies remain relatively tight overall with the banks towards real estate in Japan is also still relatively cautious
exception of office properties in emerging Asia. As at the end of compared with two years ago.
the third quarter of 2019, vacancy rates in developed Asia for
• The slide in 10-year yields during the second half of 2019 has
office, retail, industrial and residential properties are all narrower
widened the gap between cap rates/yields and 10-year sovereign
than their respective mean over the past 10 years.
yields/risk-free rates in Asia-Pacific, especially in the case of
• Overall, our near-term rental Asia-Pacific forecasts are: office properties in developed Asia. Taking into account the still
conducive environment for listed real estate to raise new equity
–– Offices: net rents are likely to be flat overall in the near term
for acquisitions and the slightly improved access to credit,
(+0.4% per annum (p.a.) over the next three years, with any
we believe the wider yield gap is likely to attract more capital to
potential upside in Australia (+3.2% p.a.), Japan (+2.7% p.a.) and
be deployed into Asia-Pacific real estate in 2020, despite slower
Singapore (+2.4% p.a.) mainly offset by downside in Hong Kong
rental growth.
(-3.8% p.a.).
• We expect core returns for Asia-Pacific to trend lower,
–– Retail: net rents are expected to fall by an average 2.5% p.a.
given increased challenges in retail assets and in Hong Kong.
over the next three years. We expect structural challenges to
We forecast an average total return of just 2.8% p.a. over the
continue for retail properties in Asia-Pacific. There is pressure
next three years for core assets in Asia-Pacific, compared with an
on rents to be sustained as a result of a further loss in market
average 8.7% p.a. over the past two years. We expect the biggest
share from offline shopping to online shopping, a greater
drag on returns to come from retail assets and we forecast total
supply of new retail space, and lower retailer margins.
returns to be essentially flat over the next three years (from an
–– Industrial: net rents are expected to grow by a slower 1.1% p.a. average 5.4% p.a. over the last two years). In addition to negative
over the next three years as we expect growth in China to rental growth of 2.5% p.a. over the next three years, we expect
decelerate from its current pace. But rental growth in yields to expand by an average 37 bps to reflect both structural
Singapore could pick up pace as new supply moderates amid a challenges and heightened investors’ aversion towards the
mild recovery in exports. asset class.
• According to data from Real Capital Analytics, transaction • In Hong Kong, we forecast an average total return of just
volumes for investment properties (excluding development sites) 1.8% p.a. over the next three years (from 6.2% p.a. over the last
in Asia-Pacific are on track to register at least a 10% fall in 2019, two years) and we are especially cautious about prime office
compared with an increase of 5.3% the year before. This would returns (-3.5% p.a. over the next three years). We expect leasing
represent the lowest level of investment activity in the region demand from Chinese firms and financial institutions to remain
since 2013. It appears investors adopted a more defensive weak and we forecast prime office rents to fall an average
stance in 2019. Transactions for residential properties 6.1% p.a. in 2020-22. As a cross-check, this would narrow the
(including rental apartments and senior housing) saw the biggest discount between prime office rents in Singapore and
gain during the year (+37.4% to USD5.8 billion). Singapore also Hong Kong to 12% by the end of 2022 (from 34% as at the third
saw the biggest gain in investment activity last year among quarter of 2019), in line with the +one standard deviation
major Asia-Pacific markets, with transactions for investment discount between the two markets since 2000.
properties up 27.5% in 2019 to USD9.5 billion.
• In terms of downside risks, apart from a slower-than-expected
• Listed real estate investment trusts (REITs) in Japan, Australia stabilisation in economic activity, recent events since the start of
and Singapore raised a combined USD17 billion in new equity in 2020 have also raised the risk of geo-political conflicts and the
2019. This represents a jump of 55.2% from the year before and potential implication on energy prices. More relevant to the real
the highest amount since 2013. Despite the marked jump in the estate market would be the implications for inflation and
supply of new securities, valuations remains robust with these monetary policy. While it is unlikely interest rates would be
three REIT markets trading at an average 1.4x book as at the end raised to counter cost-push inflation, we think higher headline
of 2019 – from 1.2x at the start of the year and above the +one inflation numbers could restrict the room for policy makers to
standard deviation level of 1.3x since 2009. This suggests introduce further monetary easing.
investors’ demand for listed real estate remains strong and we
believe the environment to raise funds for acquisitions remains
conducive in 2020.For professional investors only, in Switzerland for qualified Global Real Estate Market Outlook 09
investors only – not for use by retail investors or advisers
• Our preferred long-term investment theme remains Summary
urbanisation and population growth in the major cities of Asia. Encouragingly, the global economic backdrop that provides the
We continue to believe skilled labour will be drawn to cities that underlying support for the real estate occupier and investment
are ranked highly in terms of quality of living, infrastructure, markets looks to have stabilised this quarter. Global uncertainty
education and healthcare. We believe this will underpin has reduced with the pause in the US-China trade war and central
long-term housing demand in these cities, which should in turn bank easing measures have loosened financial conditions.
translate into above-average long-term returns for residential However, global growth remains lacklustre and our expectations
properties in these markets. We remain positive on residential are for growth to be below the consensus of economic
properties in Japan, specifically rental apartments in Tokyo and expectations. Furthermore, the real estate cycle is at a late stage
senior housing. and pricing remains stretched compared with earlier in the cycle.
Despite this, the fundamentals for the asset class are encouraging
• We think there are still value-add opportunities to be found in
with future supply significantly below the level it reached at similar
office and industrial properties, but we would avoid Hong Kong
points in previous cycles. Occupier markets remain well supported
for now. Markets where we still see value-add opportunities
and vacancy rates are below average in a range of different
include office and industrial properties in Australia and Japan;
markets. Additionally, there is an expectation in the current
office properties in Singapore, India, Seoul and Taipei; and
environment that interest rates are likely to remain at historically
logistic properties in China’s tier 1 cities.
low levels for a significant period of time yet. The margin that real
• On the other hand, distressed opportunities could start to estate provides over the risk-free rate is at elevated levels.
emerge for retail properties, especially in Australia. While we are Investors do need to be cautious with this metric as the risk
cautious on the overall structural challenges faced by retail premium associated with real estate should arguably be higher
properties, we think there could be an investment case for now as lease lengths get shorter and as the propensity to break
selected properties as the fall in capital values accelerates, leases is higher than it was in the past. In the current and forecast
especially in Australia. These include retail properties with low-yielding environment, we expect demand for real estate to
defensive characteristics (location with good catchment and continue to be robust and we think that pricing will remain
traffic; relatively low occupancy cost) as well as those with the resilient. In terms of our sector and structural preferences, we
potential for repositioning. continue to like specific sectors and segments in our favoured
markets that are continuing to benefit from long-term structural
• Above all, we believe investors need to stay nimble. All else being
trends. These include industrial assets that are benefiting from
equal, we prefer an investment that could be turned around and
changes in shopping habits. The private rented sector is also
sold within 36 months, as we approach what looks likely to be
expanding on the back of the growing propensity to rent and a lack
the latter part of this real estate upcycle.
of future supply to meet projected population growth. We also like
long-duration income, which has seen significant demand, offering
investors a safe haven amid wider market volatility. With the cycle
being elongated and in the context of the heightened geo-political
and economic uncertainty at present, we remain risk averse and
continue to pursue ‘sustainable’ income in our target markets
and we maintain a forensic approach to seeking value in our
favoured markets.
Simon Kinnie
Head of Real Estate PricingThe value of investments and the income from them can go down as well as up and your investor may get back less than the amount invested. Real estate is a relatively illiquid asset class, the valuation of which is a matter of opinion. There is no recognised market for real estate and there can be delays in realising the value of real estate assets Important information For professional investors only, in Switzerland for Qualified investors only – not for use by retail investors or advisers. Contact us To find out more, please speak to your usual contact or visit our website aberdeenstandard.com. Other important information This document is strictly for information purposes and should not be considered as an offer, investment recommendation or solicitation to deal in any of the investments mentioned herein. This document does not constitute investment research. 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