Our latest quarterly reviews of global capital markets explore the appetite for deal-making across EMEA, North America, and APAC.
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Taking Stock
A review of global real estate capital markets, Q2 2024
An interest-rate driven downturn in real estate capital markets may soon give way to an interest-rate driven recovery. The eagerly anticipated pivot in monetary policy is finally upon on, with many global central banks now feeling more at ease with the outlook for inflation. Sentiment in the market has already noticeably improved, while various indicators across pricing and activity metrics would suggest that the bottom is either already behind us, or very close to being behind us.
Oliver Salmon
Director, World Research Global Capital Markets
Rasheed Hassan
Head of Global Cross Border Investment Global Capital Markets
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GLOBAL OUTLOOK
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A review of global real estate capital markets, Q1 2024
Real estate capital markets remained subdued in the first quarter of 2024. Investment turnover across all sectors fell by 18% on the year, registering the lowest quarterly outturn in over a decade. The economic environment, meanwhile, remains broadly unchanged. Growth has now likely bottomed out, with high frequency data showing some growing momentum at the beginning of this year, while risks to the outlook are evenly balanced. Yet ‘sticky’ inflation, particularly in the fiscally-charged US economy, is delaying expectations for a policy pivot from the major global central banks. This is feeding into investor behaviour; occupational markets, particularly in the office sector, broadly mirror the fortunes of the wider economy. But capital markets have detached from this reality, and investors are struggling to agree on what constitutes value in a high interest rate environment.
Our latest review of global real estate capital markets explores the appetite for deal-making across EMEA, North America, and APAC.
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regional OUTLOOK
Director, World Research, Global Capital Markets
Investors are clearly showing a preference for assets in the living sector as we look ahead to a wider recovery in real estate capital markets.
The IMF expects global GDP growth in 2024 to remain stable.
3.2%
Global investment across the living sectors rose by 14% y/y in Q2.
US$53bn
Single and multifamily housing attracted the majority of investment.
15bps
85%
While the monetary policy backdrop remains restrictive, we are now at the beginning of an easing cycle that will support growth in the coming years. Headline inflation is trending back to target, supported by disinflation in energy and goods prices. Services price inflation remains elevated in most economies, underpinned by strong nominal wage growth. But labour market dynamics are such that central banks are increasingly confident that the diminished risk of persistent inflation favours a more relaxed policy setting. In early June, the Bank of Canada became the first central bank of the G7 group of major economies to cut interest rates, swiftly followed by the ECB. Others are expected to follow; the Bank of England cut rates in August, while the US Fed is hinting at a September move. The PBoC in China has continued to ease policy rates, elongating an easing cycle that was trigged by the Covid-19 pandemic, and exacerbated by a property market downturn that will drag on the economy for years to come.
The global economy continues to track expectations
Elsewhere in Asia Pacific, central banks are likely to follow the US Fed, particularly in those markets sensitive to exchange rate volatility, such as South Korea. Japan, meanwhile, is looking to move in the opposite direction, while the Reserve Bank of Australia is keeping all options open, following a resurgence in inflation that may require another rate hike before the year end. We are, however, reminded that this is not a normal cycle, and the path back to neutral may take several years. The global economy has shown a remarkable resilience to a series of major shocks over the last few years, but with this resilience comes the monotony of an uninspiring recovery. The IMF is forecasting global growth to remain broadly unchanged at 2023 levels for the next three years, albeit there is some rotation across advanced economies; as we move in to 2025, a more concerted recovery in Europe will substitute a mild slowdown in the US.
Global LIVING investment turnover
Global investment of nearly US$53bn across the living sectors in the last quarter represented a 14% increase on the year, the first year-on-year rise in activity since Q2 2022. This compares to continued declines in investment of around 10-20% across the office, retail, and logistics sectors, with investors clearly showing a preference for assets in the living sector as we look ahead to a wider recovery in real estate capital markets. This outperformance represents a realisation of wider investor intentions, as reported in the various sentiment surveys of the last year or two, which highlight a clear rotation in allocations favouring the various living sectors. Single and multifamily housing attracted around 85% of total living investment this quarter, with large domestic institutional investors supporting a notable increase in investment in the US, particularly across larger portfolio deals. Global investment in Purpose Built Student Accommodation (PBSA) nearly doubled, underpinned by a single large deal in the UK – Mapletree’s US$1.3bn acquisition of platform from Cuscaden Peak Investments – which accounted for nearly 30% of global turnover. Activity in the senior living space was relatively muted by contrast, with the US$3.3bn of global investment representing the weakest quarterly outturn since Q2 2020.
The living sector in general continues to benefit from strong fundamentals amid robust labour market outcomes, including a recovery in real wage growth, as well as favourable demographics and a chronic shortage of suitable accommodation. But investors are nevertheless challenged by the same cyclical headwinds as other core sectors, including a sharp rise in interest rates, which is forcing many to be more selective in how and where they deploy capital. In the US, this narrative is further compounded by a glut of new supply, with new multifamily starts originated through the construction boom of 2022-23 now hitting the market, pushing vacancy rates higher and weighing on rental growth. Nevertheless, multifamily in particular is a relatively defensive sector which performs well in market downturns – given accommodation is a non-discretionary spend item for most households. It would therefore take a significant deterioration in the labour market to significantly disrupt the outlook for the sector, while high construction costs and elongated delivery times will provide for a more balanced supply and demand outlook in many markets from next year.
Investors show that life is for Living
Prime office yields, Q2 2024
Sydney 4.00%
Tokyo 3.40%
Paris 4.25%
Berlin 3.60%
Madrid 3.90%
London (City) 4.00%
Prime yield (multifamily)
Risk premium (multifamily)
Prime yield (Student)
Risk premium (Student)
Source: Savills Research and Macrobond. Note: Yields may be different to quoted values in markets where the convention is to use a gross rather than net value. Values based on end-of-quarter data.
Net initial yields are estimated by local Savills experts to represent the achievable yield, including transaction and non-recoverable costs, on a hypothetical Grade A asset of institutional scale, in a prime location, fully let. The risk premium is calculated by subtracting the end-of-period domestic ten-year government bond yield (as a proxy for the relevant risk-free rate of return) from the net initial yield. Data is end-of-quarter values.
(as at end-June)
Methodology
Key transactions
Building: Arc Place Tenant: Warner Brothers Entertainment, Dyson, eBay, ADA, Viva Republica, Lotte Capital, and others Lease Length (WAULT): Undisclosed Area: 675,000 sqft Price/NIY: US$588mn (KRW792bn) / 4.3% Vendor: Blackstone
Vendor Nationality: US Purchaser: Koramco Purchaser Nationality: South Korea Comments: Representing the largest deal in South Korea this year so far, Arc Place was sold at a 40% premium (in local currency terms) to the 2016 purchase price, following significant refurbishments, positioning Arc Place as a “premier, highly-coveted office asset in the heart of Seoul’s Gangnam district.”
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Seoul
Vendor Nationality: Australia Purchaser: Keppel REIT Purchaser Nationality: Singapore Comments: Keppel REIT purchased a 50% stake in the asset, with Mirvac retaining the remaining 50% interest. 255 George Street is located in the CBD and has good transport links, along with high ESG credentials. The office has an estimated 93% occupancy rate and with strong occupier covenants. The transaction provides a comparable from which to benchmark prime office pricing in Australia.
Building: 255 George Street Tenant: Australian Taxation Office, Bank of Queensland, and others Lease Length (WAULT): 6.8 years Area: 420,000 sqft Price/NIY: US$238mn (AUD364mn) / Above 6% Vendor: Mirvac
sydney
Vendor Nationality: Canada Purchaser: Olayan Group and Lunate Purchaser Nationality: Saudi Arabia, UAE Comments: This transactions is one of the largest single commercial real estate transactions in the Middle East, and could open the door for more institutional capital in the region, with Brookfield successfully exiting a 49% stake in the building. The joint venture between ICD and Brookfield was formed in 2011, with the building opening in 2020 and achieving a 98% occupancy in just 2 years.
Building: ICD Brookfield Place Tenant: Bank of America, BNP Paribas, UBS, JP Morgan, Clifford Chance, EY, and others Lease Length (WAULT): Undisclosed Area: 1.15mn sqft Price/NIY: (estimated)/undisclosed Vendor: Brookfield
Dubai
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Copenhagen 4.00%
Melbourne 4.50%
Berlin 4.70%
Paris 4.50%
London (City) 4.25%
Madrid 5.00%
Sydney 0.03%
Berlin 1.31%
Copenhagen 1.68%
Tokyo 2.67%
Paris 1.43%
London (City) 0.08%
Madrid 0.75%
Melbourne 0.45%
Stockholm 1.89%
Stockholm 4.25%
Berlin 2.34%
Paris 1.68%
London (City) 0.33%
Madrid 1.08%
Purchaser Nationality: Singapore Comments: Mapletree purchased 31 high quality PBSA assets (as well as the operating platform) across the UK and Germany, including Bristol, Cambridge, Durham, Edinburgh, Oxford and York, as well as in the German city of Bremen, from Cuscaden Peak Investments (of which Mapletree is a large shareholder and so familiar with the portfolio). This deal represented nearly one-tenth of total Q2 living investment across the EMEA region. With more than 17,000 beds, Mapletree is now one of the largest student landlords in the UK.
City: United Kingdom & Germany Sub-sector: Student (PBSA) Beds: 8,192 Price/NIY: £1.0bn(US$1.3bn)/Undisclosed Vendor: Cuscaden Peak Investments Vendor Nationality: Singapore Purchaser: Mapletree Investments
Purchaser: KKR Purchaser Nationality: United States Comments: One of the largest deals so far this year, and reportedly the largest for KKR ever in the multifamily sector, this transactions includeed 18 prime multifamily assets spread across the US, primarily located in coastal and sunbelt markets including California, Washington, Florida, Texas, Georgia and North Carolina, Colorado and New Jersey.
City: United States Sub-sector: Multifamily Units: 5,200 Price/NIY: US$2.1bn/Undisclosed Vendor: Quarterra Vendor Nationality: United States
key transactions
Vendor Nationality: Belgium Purchaser: Government of Belgium Purchaser Nationality: Belgium Comments: With the European Commission aiming to reduce its office footprint by 25% by 2030, the Government of Belgium, via its Sovereign Wealth Fund, will renovate the buildings and redevelop some to create more housing and social spaces, as part of a wider push to revitalise the area.
Director, World Research
We are expecting to see renewed investor appetite, with larger portfolios that had been put on hold being slowly brought back to the market through the end of 2024 into 2025
Across the EMEA region, investment in the living sectors rose by nearly 6% y/y to US$11.6bn in Q2, representing the most active quarter since Q4 2022. This was supported by a single large transaction in PBSA – accounting for over 10% of turnover in the quarter – the US$1.3bn acquisition by the Singaporean investment manager Mapletree of a student housing platform from Cuscaden Peak Investments, comprising over 8,000 beds across 19 cities in the UK and Germany. As a result of this deal, student accommodation accounted for over one-quarter of activity in Q2, up from a longer-term average of 10-15%. By contrast, investment in single and multifamily properties fell by more than 8% on the year, while very little transacted in senior living, with less than US$1bn of investment in the quarter, the first time this threshold has not been met since 2015. Yields have stabilised across the region, and investor sentiment is improving. This has been buoyed by the improving economic backdrop that has led to regional central banks initiated the rate cutting cycle. This important milestone has provided a signal to investors that the worst is likely in the past. As a result, we are expecting to see renewed investor appetite, with larger portfolios that had been put on hold being slowly brought back to the market through the end of 2024 and into 2025.
In the multifamily space, Germany was the largest regional market, attracting €1.9bn (US$2.0bn) of investment in the quarter. This was however 9% down on the year, with the first half of 2024 representing the quietest H1 in over a decade. Activity would be weaker if not for the public sector, which has underwritten around one-third of deals so far in 2024, including the largest transaction of this year, the €700mn (US$755mn) acquisition of a Vonovia sub-portfolio by the Berlin-based housing company Howoge. Given the limited financial scope of many local authorities, it is unlikely that the public sector will continue to be so active going forward. But private investors should become more active moving forward; the market looks to have bottomed out and we are already seeing some momentum in deal volumes, with an increase in sales processes initiated likely to feed into a better second half. In the UK, with around 30% fewer homes to rent vs. the 2018-19 average, investors continue to look favourably on fundamentals supporting the multifamily, or ‘build-to-rent’ sector. Total investment of £1.3bn (US$1.6bn) was also 9% down on the year however, reflecting wider caution related to the macroeconomic environment. The standout deal this quarter was struck between Leaf Living (backed by Blackstone and Regis Group) and Vistry, with the housebuilder selling 1,750 new homes across 36 sites, primarily in South East England, for £580mn (US$740mn). This deal alone makes up over one-third of UK investment year-to-date.
APAC
North America
EMEA
Prime multifamily yields
The recovery in US living investment is being driven by an increase in the number of larger portfolio acquisitions… a vote of confidence from the major institutional investors, who continue to back the longer-term fundamentals of the sector.
Domestic institutions have been active, accounting for around 40% of transactions this year.
40%
The national vacancy rate has increased by 80bps due to a glut of new supply.
5.7%
Investment of US$39bn in Q2 was more than one-quarter higher on the year.
25%
Cap rates across the living sectors [in Japan] have compressed in recent years, so investors are increasingly becoming more selective. Central locations are preferred in line with trends in occupancy and rental growth.
APAC investment in living sectors
Investment in the US living sector rose by more than 25% y/y to US$39bn in the second quarter, reversing a near two-year period of decline. The recovery is being driven by an increase in the number of larger portfolio acquisitions, including one of the largest transactions to complete so far this year, the purchase by KKR of a large multifamily portfolio from Quarterra for US$2.1bn, consisting of 18 prime multifamily assets located across the US, with more than 5,200 units. The recovery in portfolio activity is a vote of confidence from the major institutional investors, who continue to back the longer-term fundamentals of the sector, underpinned by a structural shortage of housing in the US, and affordability concerns in a higher for longer environment. Many are actively seeking opportunities to deploy in an effort to capitalise on an adjustment in valuations; the average cap rate for multifamily apartments in the US has moved out around 100bps since hitting a low in mid-2022, according to MSCI RCA, which equates to a decline in values of nearly 20%. As such, domestic institutions are large net buyers of single and multifamily housing so far this year, and account for nearly 40% of total buy-side activity, compared with a long-term average closer to 25%. Nevertheless, the cyclical dynamics are less encouraging, and investors need conviction in these structural dynamics to be comfortable deploying into the current market environment. A construction boom that peaked in the second half of 2022 and early 2023 is now leading to the onboarding of significant new stock.
The national vacancy rate of 5.7%, according to Moody’s, has risen by around 80bps from the pandemic-era lows, and is likely to continue rising in the short term, before this supply glut works through the system. A dearth of new starts would suggest that the market will come back into balance as we move through 2025. Total multifamily completions in Q2 were significantly higher than new starts, highlighting the challenge facing developers right now. Meanwhile the US economy is beginning to show some weakness after defying expectations of a more pronounced slowdown in recent years. This will support much anticipated pivot from the US Fed, but will also hit employment and household incomes, both key drivers of rental growth (rents have broadly stagnated in the last year). Institutions will be looking to capitalise on a rise in motivated sellers. Distress is limited, but has risen relatively quickly. According to Trepp, the delinquency rate on CMBS loans linked to multifamily assets was 2.6% in July, having risen from a low of 1.3% earlier this year. Debt levels in the form of LTVs are typically higher in the multifamily sector, and much of the debt originated through the recent market boom was short term and underpinned by floating rates. The Mortgage Bankers Association estimate that around 12% of all mortgages backed by multifamily will mature in 2024, much of which will need recapitalising following price falls and squeezed ICRs.
Total APAC investment in Q2 of US$2.2bn across the living sectors represented a near 50% decline on the same period last year, and the weakest quarter since Q3 2020. Around 60% of regional investment went into Japanese single and multifamily living, although it was the weakest quarterly outturn in Japan since 2018, with turnover falling by 27% to JPY191bn (US$1.2bn). This was underpinned by fewer portfolio deals, which can heavily distort the data when deal volumes are already low. Cross border investors have been particularly quiet this year, with the JPY66bn (US$440mn) of acquisitions underwritten by foreign investors year-to-date representing just 22% of the total for 2023, with already half the year gone. Instead, domestic investors, in particular J-REITs, are the most active investor group this year, accounting for over 37% of acquisitions by value so far this year, up from 29% last year. Cap rates across the living sectors have compressed in recent years, so investors are increasingly becoming more selective. Central locations are preferred in line with trends in occupancy and rental growth; average rents across the 5 central wards of Tokyo are up by 5.5% on the year, supported by internal migration flows, a return to the office, and a recovery in nominal earnings. The prime yield is likely to remain at 3.3%, but higher rates will squeeze the risk premium on offer, and so we could see some upward pressure if rate continue to rise.
The Australian market has broadly come to a standstill, with only 5 recorded deals in the first half of this year, compared with 27 last year, and investment turnover down by nearly 98% y/y. Base effects are important, following a very strong 2023 that saw Mirvac establish a new Build-to-Rent venture for AUD1.8bn (US$1.2bn), wrapping their existing portfolio and development pipeline into a single entity. Nevertheless, there remains a strong conviction in the market for scale investments, but limited opportunities to deploy. Proposed regulatory changes may also be weighing on the activity of cross border investors. The increased selectivity of investors is also apparent in China, where despite wider concerns around the oversupplied residential market, investors continue to deploy into the professionally managed living sector. Investment of around US$860mn in the multifamily space in H1 2024 made China the second largest market in the region behind Japan, and while this was around 20% down on the year, it is far greater than for any year prior to 2022, in what is a nascent but growing market.
market view
A singe PBSA transaction in the UK accounted for nearly 10% of turnover in Q2.
US$1.3bn
Germany was the largest regional market in Q2 in the multifamily sector.
US$2.0bn
Total investment across the living sectors rose by nearly 6% y/y in Q2.
US$11.6bn
The Australian market has broadly come to a standstill, with only 5 recorded deals in the first half of this year.
-98%
Around 60% of regional investment went into Japanese single and multifamily living.
60%
Investment fell by nearly 50% y/y in Q2 2024.
US$2.2bn
US multifamily apartment starts less completions
(as at end-March)
Head of Global Cross Border Investment
Rasheed Hassan shares his view on the market
regional outlook
An increasing number of markets globally are now unquestionably experiencing a tilt to the positive. In the major markets, with the exception of Japan, interest rates have largely peaked or are at the tail end of their journey, and we are now witnessing the start of eagerly anticipated rate cuts. We are also through a number of the major global elections. Whether investors support the outcomes or not, this provides a level of clarity that they all crave. Lastly we have been on a journey of price falls, pretty unanimously, across geographies and sectors. These now seem to be slowing and in some cases starting to turn. Given all of this, it is not surprising that we are seeing some investors looking at markets with more intent, and finding ways to be more positive in their underwriting. We have often reported that this has been an anomalous downturn, whereby rising rents for prime assets in core locations, including in offices, is set against a backdrop of falling values. This has given the market a strong conviction that this downturn is largely interest rate driven rather than fundamentals driven. Given where we are in monetary policy cycles, things should be looking up from here. There remains a shortage of committed vendors across all sectors, as the majority of owners want to wait until there are more datapoints to provide strong pricing comparables. However, this is coming and it gives us hope that the busy end of year trading season will give the markets what’s needed as a backdrop for greater activity in 2025.
The cap rate vs. cost of money conundrum remains a cause for reticence for some core investors. However, buyers with a long hold horizon are viewing today’s core market pricing as largely ‘fair value’ and those with shorter term strategies are focusing on total returns. The demonstrable and forecast rental growth is a key factor in decision making for the total return buyers, coupled with a belief that the most core assets in the best locations will always be considered scarce and therefore have a deep buyer pool that will keep yields as compressed as possible when it comes to exit. There is also a belief that the pricing disparity between truly prime assets and those with some sort of blemish (location, building quality, lease term, tenure) is too great and will narrow as the markets re-gain confidence. Lastly, I would note that the shortage of investment product is leading to greater buyer interest when something does actually come to the market. In many cases, this is supporting more aggressive underwriting, as those buyers who truly want to get invested know that they have limited choice. As a result, we are seeing a number of processes resulting in more positive pricing outcomes than expected. If owners are considering sales in the next 6 to 12 months, they may give consideration to bringing assets to the market sooner rather than later, taking advantage of the lack of choice that investors are having to grapple with.
