Our latest review of global real estate capital markets explores the appetite for deal-making across EMEA, North America, and APAC.
Welcome
Taking Stock
Regional outlook
A review of global real estate capital markets, Q1 2024
Real estate capital markets remained subdued in the first quarter of 2024. The economic environment is broadly unchanged; growth has 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 investment turnover in Q1 across all sectors globally fell by 18% on the year, registering the lowest quarterly outturn in over a decade.
‘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, including in the much-maligned 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. As a consequence, wait-and-see remains the dominant strategy in play.
Oliver Salmon
Director, World Research Global Capital Markets
Rasheed Hassan
Head of Global Cross Border Investment Global Capital Markets
download the full report
Market view
Global outlook
We hope you enjoy our latest review of global real estate capital markets.
EXPLORE THE REPORT
GLOBAL OUTLOOK
Savills 2024
Back to the top
view the webinar
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.
next page
Annual Review
Offices
Logistics
regional OUTLOOK
Head of Global Cross Border Investment
Turnover stats for Q1 are disappointing and one could read this as a sign of a lack of intent from buyers, but this would be a mistake in my view.
Global office investment in Q1 was the lowest for 14 years.
US$36.0bn
Markets expect just one rate cut from the US Fed this year.
1
The largest outward shift in yields this quarter, in a sign that prime office values are stabilising.
15bps
The IMF forecasts global economic growth to continue at the same pace as last year.
3.2%
The global economy remains resilient, with PMI data providing evidence of a momentum shift in the first quarter, suggesting the economy has now bottomed out. But there is little expectation of a rapid about-turn; 2024 is likely to remain subdued, although slowing inflation and falling interest rates will provide some impetus as we move through the year. The US economy remains the exception to the rule, roaring ahead of its peers. Some attribute this to ‘American exceptionalism,’ while others point to the large fiscal deficit. There is some truth to both arguments. But strong demand is prompting concerns over inflation, which has come in stronger than anticipated in recent months. This has underpinned a sharp reversal in rate expectations; markets are now pricing just one rate cut in 2024 from the Fed, down from more than six at the beginning of the year. US Treasury yields have pushed above 4.5% again, putting the brakes on the AI-fuelled bull market run, and supporting a general strengthening in the US dollar.
A resilient yet subdued economy
In Europe, the economic outlook is more receptive to rate cuts, as stagnant growth provides little risk of a demand-driven inflation rebound. The German economy in particular is struggling to find a spark, still reeling from the energy price shock, and a slowdown in global trade. Policymakers at both the ECB and Bank of England are signalling a June pivot in policy rates, with 75-100bps in rate cuts expected through the second half of this year. Inflation remains a relatively positive phenomenon in Japan, where the Bank of Japan ended its long experiment of negative interest rates in March. Chinese growth surprised on upside in Q1 2024, supported by the manufacturing sector. However, Chinese domestic demand remains weak, prompting growing concerns over where that output is being sold (even though China is effectively exporting deflation). Given it is an election year in US, tensions will rumble throughout 2024, which combined with the ongoing conflicts in Ukraine and the Middle East, will keep geopolitical events in the headlines, and on investors' minds.
Global office investment turnover
Higher-for-longer is compounding a period of malaise in real estate capital markets. Global office turnover of US$36.0bn in Q1 represented the lowest quarterly outturn since 2009, and would be lower, if not for the merger of two large medical office REITs in the US. Considering that the size of the institutionally managed real estate market has doubled in size in the last decade or so, based on the MSCI data, it could be argued that activity is much weaker today, when benchmarking turnover relative to the aggregate market size. Investors are largely waiting for the pivot. Rate cuts in-and-of-themselves will do little to ease the burden of higher borrowing costs, assuming that markets are well priced in respect to the path of policy easing, which is a fair assumption to make (swap rates already reflect the policy pivot). But the signal is important, as it will mean that central bankers are satisfied that the inflation genie is well and truly back in the bottle, and that better times are ahead. Certainly, fundamentals across occupational markets, outside the US and China, cannot explain the current reticence of investors.
In the interim, while turnover is sharply down, there are some signs that the market is stabilising – at least at the prime end. Benchmark prime yields were mostly unchanged this quarter, with only Madrid, Seoul, and Sydney seeing a further outward shift, and all by less than 15bps. The outlook for the next 12 months is also more balanced, with the City of London now expected to see some yield compression in line with lower interest rates. Liquidity remains largely concentrated at the smaller end of the market, where private buyers remain active, together with both local and global investment managers. It remains our expectation that activity will accelerate as we move through the year. Encouragingly, institutions are net buyers at the beginning of this year. However, there remains a risk that the “de-institutionalisation” of offices – that has seen many larger institutional buyers retreat from the market in recent years – reflects a permanent structural shift in allocations, implying a significant weight of capital may not return even after the cyclical environment improves.
Playing the waiting game
Prime office yields, Q1 2024
Los Angeles 8.00%
Sydney 5.60%
Shanghai (Lujiazui) 4.50%
Hong Kong 1.68%
Tokyo 2.60%
Singapore 3.50%
Seoul 4.25%
New York 5.00%
Paris 4.25%
Frankfurt 4.50%
Madrid 4.90%
London (City) 5.25%
Dubai 6.75%
Sydney
Shanghai (Lujiazui)
Frankfurt
Tokyo
Hong Kong
Singapore
Los Angeles
Paris
London (City)
Madrid
Dubai
New York
Seoul
Prime yield
Outlook for yields, next 12 months
Typical LTV
All-in cost of debt
Cash-on-cash yield
Risk premium (over gov bonds)
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 building located in the CBD, over 50,000 sq ft in size, fully let to a single good profile tenant on a long lease. The typical LTV and cost of debt represent the anticipated competitive lending terms available in each market. Cash-on-cash returns illustrate the initial yield on equity, assuming the aforementioned LTV and debt costs. 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-March)
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.”
welcome
Mumbai 8.25%
Mumbai
Sydney 50%
Shanghai (Lujiazui) 50%
Frankfurt 55%
Tokyo 60%
Hong Kong 40%
Singapore 50%
Los Angeles 50%
Paris 55%
London (City) 55%
Madrid 50%
Dubai 50%
Mumbai 60%
New York 50%
Seoul 60%
Prime net initial yield
Sydney 6.35%
Shanghai (Lujiazui) 4.00%
Frankfurt 4.37%
Tokyo 1.00%
Hong Kong 6.50%
Singapore 5.00%
Paris 4.37%
London (City) 5.91%
Madrid 4.77%
Dubai 8.00%
Mumbai 9.50%
New York 8.00%
Seoul 5.00%
Sydney 4.85%
Shanghai (Lujiazui) 5.00%
Frankfurt 4.66%
Tokyo 5.00%
Hong Kong -1.53%
Singapore 2.00%
Paris 4.10%
London (City) 4.44%
Madrid 5.03%
Dubai 5.50%
Mumbai 6.38%
New York 1.68%
Seoul 3.13%
Sydney 1.63%
Shanghai (Lujiazui) 2.21%
Frankfurt 2.21%
Tokyo 1.87%
Hong Kong -2.03%
Singapore 0.39%
Los Angeles 3.80%
Paris 1.43%
London (City) 1.33%
Madrid 1.75%
Dubai 2.55%
Mumbai 1.19%
New York 0.80%
Seoul 0.84%
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
previous page
Director, World Research
Pricing continues to inhibit activity in core markets across mainland Europe... vendors remain reticent to bring stock to the market, much to the frustration of those buyers still active.
Investment of US$8.4bn across Europe represented a fall of 45% on Q1 2023. For context, this was 18% below the weakest quarter seen during the global financial crisis. Steep declines in the UK and France dragged the region down this quarter, although volatility across markets is a function of the low turnover, overweighting the impact of large transactions (or their absence) on the annual growth rate. Pricing continues to inhibit activity in core markets across mainland Europe, including in France and Germany. There is little appetite to bid on larger lot sizes, and vendors remain reticent to bring stock to the market, much to the frustration of those buyers still active. The German market is showing some promise from a supply perspective, following an increase in sale processes initiated. But the sale of a prime office in Munich for €700mn provided a notable outlier in a market with very little liquidity for deals above €50mn. Prime yields are stable this quarter, but the direction of travel is still upwards, despite the prospect of imminent interest rates cuts. Rental growth will likely offset any further increase in yields on the capital values of best-in-class buildings, while a recession in the construction sector will ensure that a landlord-friendly environment prevails.
UK investment of £1.6bn (US$2.1bn) was 50% down on the year, with turnover in the City of London hitting a 28-year low in the first quarter. This is in part underpinned by a lack of available stock; pricing in the UK is perceived to be much closer to fair value compared with the rest of Europe, particularly outside of London. The largest transaction in the quarter is indicative of a wider trend across office markets, with British Land selling a 50% stake in 1 Triton Square, a building vacated by Meta last year, to raise capital in support of repurposing the building to accommodate life sciences and lab operations. Outside of Europe, Brookfield’s divestment of a partial stake in ICD Brookfield Place in Dubai valued the property at a reported US$1.5bn, making it one of the largest global office transactions in the post-pandemic era. This is potentially a defining moment in a region where assets rarely trade, providing a template for other institutional investors. The fundamentals provide for a compelling narrative; leasing demand remains strong, particular for supply-constrained Grade A stock, driving double digit rental growth. Average rents in the Dubai International Financial Centre, where ICD Brookfield Place is located, rose by 22% last year.
APAC
North America
EMEA
EMEA investment by sector
The rate environment has continued to move against landlords at the beginning of this year… and the market is likely to see further capital value degradation.
Average peak-to-trough decline in office capital values since the Covid-19 pandemic, according to MSCI data.
-30%
Reported transaction price of a 29% stake in 360 Park Avenue South in New York, with more evidence of motivated sales coming through this quarter.
US$1
Average availability rate across US office markets, rising another 30bps from Q4 2023.
25.1%
The Japanese market was relatively more resilient, a theme consistent throughout this cycle… The occupational market is solid; a large influx of new supply in 2023 was well absorbed, and rents and vacancy are trending in the right direction.
APAC office investment by market
In the US, total investment of US$10.7bn in Q1 was 12% down on the year, and the weakest start to a year since 2010. Private buyers continue to dominate the market, however there was an increase in acquisitions backed by institutional and cross border capital (albeit that both investor types were net sellers). User-buyers accounted for 17% of turnover – more than double the long-term average – potentially a sign of things to come as occupiers look to capitalise on reduced valuations. This was typified by CoStar’s “financially strategic acquisition” of a new office for their HQ activities in Arlington, Virginia, at a reported 27% discount from the previous sale in 2019. Distressed sales represented less than 2% of investment in 2023 (based on MSCI analysis). But it is beginning to build, with some transactions completing at significant discounts this quarter, including the sale of Market Square in Washington, DC, at a 50% discount to the purchase price 10 years prior, and the sale of 360 Park Avenue South in New York for a symbolic US$1. Not all investors are walking away; the latter deal was backed by one of the largest landlords in the US, Boston Properties, highlighting their very open commitment to the sector, but they are an exception to the rule.
The rate environment has continued to move against landlords at the beginning of this year, and banks around the world are setting aside reserves against future losses on US office loan portfolios, which will feed into tighter credit conditions and exacerbate a significant debt-financing gap. In aggregate, the market is likely to see further capital value degradation this year, on top of the near 30% peak-to-trough decline in valuations since the pandemic (according to MSCI data). This is underpinned by the continued weakness in occupational markets. Leasing activity remains anaemic and primarily expiration-driven, with very few sectors looking to expand. This is at odds with the underlying health of the economy, as well as some steady improvement in utilisation rates, which have hit a post-pandemic high. The good news is that available sublease space is peaking out in some markets. But fundamentally, the market is over-supplied; availability in New York pushed past 20% in this quarter, while in Los Angeles it rose to 27.6%. This will continue to dictate market dynamics, albeit that office quality remains a key differentiator, and benchmark prime yields look to have stabilised in both New York and Los Angeles.
Investment turnover of US$12.1bn across the APAC was nearly 21% down on Q1 2023, although there was significant dispersion across the region. In China, investment fell by 63% y/y, from CNY35.6bn (US$5.2bn) to less than CNY13.7bn (US$1.9bn). Buyer interest is tempered by the weak occupational backdrop, with many markets awash with empty office space; the vacancy rate in Shanghai currently stands at 21.7% and rising. Rents are falling as a consequence, and tenant-friendly conditions are likely to remain for several years. Foreign investors continue to look for an exit, but domestic capital is unwilling to pay the asking price in a falling market. We expect yields to move out further over the next 12 months. Office investment declined by around 50% y/y in each of Australia, Hong Kong, and Singapore. In Australia, there remains a wide bid-ask spread, or more appropriately, a bid-valuation spread, with regulators launching a ‘deep dive review on asset valuation’ practises in January amid concerns that values have not adjusted to the realities of the market. If valuers were waiting for transactional evidence, then the partial sale of 255 George Street in Sydney for a reported initial yield of over 6% may help to mark-the-market. Our benchmark prime yield of 5.6% is expected to rise over the next 12 months.
The Japanese market was relatively more resilient, a theme consistent throughout this cycle, with investment falling by 1.6% y/y in local currency terms. The occupational market is solid; a large influx of new supply in 2023 was well absorbed, and rents and vacancy are trending in the right direction. Activity has been held back by a lack of suitable stock, but more supply will likely come to the market as investors look to exit before interest rates rise (and the rate differential with the US narrows). Investment in South Korea more than doubled on the year, although Q1 2023 was a low base for comparison. Nevertheless, the pick-up in activity was supported by marquee deals, including Arc Place, the largest transaction in Seoul since 2022, sold by Blackstone to Koramco at a 40% premium to the purchase price from 2016 (following an extensive refurbishment). The deal completed at a price in line with our benchmark prime yield, which rose by 10bps to 4.25% this quarter. This is where they are likely to remain; a very tight occupational market continues to support strong rental growth, with the vacancy rate expected to remain below 3% across major districts in the capital.
market view
Reported value of ICD Brookfield Place in Dubai, following Brookfield’s divestment of a partial stake in the building.
US$1.5bn
Markets anticipate the ECB to cut policy rates 3-4 times in 2024, helping to support a more stable outlook for prime office yields.
75-100bps
The share of office in total investment in Q1, the lowest on record spanning 15 years.
23%
Annual increase in investment in the South Korea office market, supported by robust occupational dynamics.
154%
Decline in average Grade A office rents in Shanghai over the last three years, in a tenant-friendly market.
-9.1%
The market share of institutional buyers in Q1 2024, up from a pre-Covid average of 22%.
37%
Rasheed Hassan shares his view on the market
regional outlook
Turnover stats for Q1 are disappointing and one could read this as a sign of a lack of intent from buyers, but this would be a mistake in my view. One of the key features of the year to date has been a reticence from vendors to part with assets at today’s best bid. This marks a shift in sentiment, as it is not just well capitalised groups who can ‘weather the storm’ taking this view. We have seen examples where there have been impending refinances (where the reset terms will be significantly inferior and where equity injections are required), where assets have been in receivership, where groups are under some general liquidity pressure, yet despite being well progressed in sales processes, at the ‘eleventh hour’ vendors have had a change of heart. Despite the acknowledgement that rates may be higher for longer, the prevailing view is that pricing seems to be stabilising and that today we are at or near the bottom and things will get better. Time will tell whether these calls from vendors were right.
Buyers are becoming increasingly frustrated by the lack of opportunities and are we are seeing those that want to participate in this moment of dislocation having to make increasingly positive assumptions in their underwriting to justify increasing their bids to meet vendor aspirations. We are witnessing a gentle increase in the number of assets being put in to receivership, but it is still very much a trickle rather than a flood and the accompanying message, where these assets are being market tested, is that ‘this is not a sale at any price.’ There are of course many investors that are cautious around investing today, some because they think offices are challenging, some who have a view that core yields remain too low (this is across sectors, not just for offices) and that there are lower risk alternatives showing similar or better returns. However, the market is showing a greater resilience and optimism than many would expect given the turmoil we have experienced. A lack of clear direction, up or down, is stagnating markets, which may be a key theme of this year.
