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investors only – not for use by retail investors or advisers.
Global Real Estate
Market Outlook
Q1 2021
02
Global Real Estate Market Outlook
For professional investors only, in Switzerland for qualified
investors only – not for use by retail investors or advisers.
“As a result of increased lockdowns, ASIRI has lowered its forecasts for 2021.
The US is the exemption. Unified democratic control of the US presidency
and congress, and the expectation of increased stimulus spending,
should boost growth.”
Executive summary
• Despite several highly contagious new variants of
coronavirus and increased lockdown restrictions in many
major economies, unified democratic control of the US
presidency and congress implies further large-scale
stimulus, which will boost growth. Taking account of both
developments, the Aberdeen Standard Investments
Research Institute (ASIRI) has reduced its 2021 economic
growth forecasts down almost everywhere. In the US,
the forecasts for 2021 have been revised up as have the
global forecasts for 2022.
• The vaccine rollout is now underway. However, the early
pace of rollout has fallen short of government promises in
most economies. Take-up willingness is worryingly low in
much of continental Europe; while emerging markets other
than China, Russia and India are yet to secure meaningful
quantities of vaccine. The US, UK and Israel are exceptions,
where the initial rollout has been rapid, although still
plagued by hurdles. We still expect vaccines to allow a
meaningful easing in restrictions.
• Although energy base effects will push inflation higher in
the short-term, these will be short-lived. The global economy
has enormous spare capacity, which will take time to erode.
Inflation expectations are low and anchored and central
banks have plenty of room to contain inflation if needed.
The upshot is that both the short- and long-term
implications of this crisis are likely to be net disinflationary.
• Prices have started to correct on a global basis, particularly
in the parts of the market that have been most affected by
the impact of Covid-19. Our forecasts anticipate the decline
in values playing out further over the next six months.
We expect prices to recover thereafter as the occupier and
investment markets revive, and as lockdown measures are
eased in line with more of the population being vaccinated.
• Going into this crisis, the fundamentals supporting real
estate were relatively sound. Generally, there was an
absence of oversupply and vacancy rates were at modest
levels in most markets. Currently, there is also a large
amount of uninvested capital waiting to be deployed into
the asset class because of the attractive yield margin. All of
these factors should help accelerate the anticipated market
recovery further into 2021, assuming the Covid-19 crisis
stabilises. There are likely to be opportunities for
well-capitalised investors to pick up attractively priced
assets further on into the correction.
• We continue to prefer sectors of the market that are
benefiting from long-term structural trends: ageing
demographics, changes in technology, a focus on
sustainability and changes in the way we are shopping and
living. Sectors that continue to benefit from these trends
include industrials, residential, and selective assets that are
categorised as alternatives. These sectors remain more
resilient than the parts of the market that are vulnerable to
the secular changes. In our view, retail remains particularly
exposed to the changes, with the current crisis accentuating
structural transformation in the sector. We remain risk
averse and continue to pursue ‘sustainable’ income in our
target markets. Furthermore, we continue to maintain a
forensic approach to seeking value in our favoured markets.
Global economic overview
• The emergence of several highly contagious variants of
coronavirus has meant increased lockdown restrictions in many
major economies. This will send some into double-dip
recessions. But unified Democratic control of the US presidency
and congress implies further large-scale fiscal stimulus,
which will boost growth. Taking account of both developments,
ASIRI has revised its 2021 gross domestic product (GDP)
forecasts for almost everywhere outside the US down, but their
US forecasts for 2021 and global forecasts for 2022 have been
revised up.
• There have been several important developments lately.
First, data at the end of last year showed remarkable resilience in
the manufacturing sector, which is less affected by renewed
lockdowns relative to the spring. Admittedly, lengthening
supplier delivery times show up as a positive in purchasing
managers’ index (PMI) calculations, which gives a false
impression of strength, while retail sales and mobility measures
were weakening in the final months of 2020. But it means ASIRI
has revised up its 2020 GDP forecasts (pending fourth-quarter
data), particularly for the UK, Eurozone and Brazil.
• Second, more infectious strains of coronavirus have been
identified in the UK, South Africa and Brazil. Alongside
household mixing over the holidays, this is driving sharp
increases in Covid-19 cases and deaths in several economies –
and has necessitated tighter lockdowns in many more. In Europe,
school and hospitality closures are economically damaging, and
ASIRI now forecasts that the UK and most Eurozone economies
will contract in both the fourth quarter of 2020 and the first
quarter of 2021. In Japan, the state of emergency has spread
beyond Tokyo to more prefectures. All this could make Japanese
GDP growth negative in the first quarter.
• Third, the vaccine rollout has begun. The early pace of rollout has
fallen short of government promises in most economies.
Take-up willingness is worryingly low in much of continental
Europe; while emerging markets other than China, Russia and
India are yet to secure meaningful quantities of vaccine. The US,
UK and Israel are exceptions, where the initial rollout has been
rapid, although still plagued by hurdles. We still expect vaccines
to allow a meaningful easing in restrictions and a sharp
economic rebound from the second quarter of 2021 onwards.
But easing may have to be more cautious with more contagious
variants of coronavirus in circulation.
• Fourth, Democrat victories in the two Georgia run-off elections
for the senate mean unified control of the US presidency and
congress. While the razor-thin majority in the senate will
constrain some of President Biden’s legislative agenda, the ASIRI
US fiscal policy expectations have nonetheless shifted from a
sharp contraction to additional stimulus. ASIRI is factoring in at
least an extra $1 trillion Covid-19 relief package in the short term
Global Real Estate Market Outlook
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investors only – not for use by retail investors or advisers.
03
“Better value is beginning to emerge in some sectors as prices correct,
given the coronavirus-induced impact on rents and yields.”
(on top of the $900 billion bill passed last year), and a $500
billion-1 trillion broader fiscal package over subsequent years.
The effect of all this is to raise the level of US GDP by the end of
2022, some 3% relative to the ASIRI November forecasts.
• Bringing all this together, the ASIRI 2021 global growth forecast
of 5.1% is above-trend but below-consensus. The ASIRI forecasts
reflect a larger near-term hit from renewed lockdowns, which
the consensus is yet to properly incorporate. By contrast, the
ASIRI 2022 global growth forecast of 4.8% is both above-trend
and above-consensus, as re-opening continues to drive strong
global economic activity. ASIRI continues to think that the
Covid-19 crisis will inflict lasting damage to the level of global
GDP relative to the pre-crisis trend path. That damage will be
largest in Europe where the economy is heading into a
double-dip recession, and smallest in China where the recovery
has been rapid although it is now moderating.
• Turning to inflation, both the short- and long-term implications
of this crisis are likely to be net disinflationary. Admittedly,
over the next few months, energy base effects – as well as
idiosyncratic drivers, such as an expiring VAT cut in Germany and
the suspension of travel subsidies in Japan – are going to push
headline inflation much higher. But this will be temporary and
short-lived. The global economy has enormous spare capacity
that will take time to erode, inflation expectations are low and
anchored, and central banks have plenty of room to contain
inflation if needed. And while there has been much speculation
about ‘policy regime change’ driving inflation higher, the timidity
of central bank framework reviews and the reactivity of fiscal
policy are not pointing in that direction.
• Finally, there are very wide confidence intervals around the
ASIRI central forecasts. Indeed, in this interim forecast round,
ASIRI has lowered the probability weighting of its central case,
and increased the chance of alternative scenarios, while keeping
a small positive skew to the outlook. On the upside, there are
scenarios in which vaccine rollout boosts activity by more than
ASIRI anticipates and limits long-term economic scarring –
especially if governments decide to re-open economies as soon
as the most vulnerable share of the population has received
inoculations. But on the downside, if the faster-spreading
variants of the virus become embedded in the likes of the US,
Brazil or India, double-dip recessions will not be confined to
Europe. And in extremis, virus mutations could render the
current crop of vaccines dramatically less effective, meaning
endemic virus spread and rolling lockdowns until such time as
new vaccines can be developed.
Market prices versus long-term worth
• Pricing remains in a state of flux and limited transactional
evidence continues to hinder price discovery. Our subdued
expectations for rental growth continue because of the severe
impact of the drop-off in economic activity, particularly in
consumer-facing sectors and the acceleration of detrimental
structural factors in some sectors. Given the ongoing limited
transactional evidence, estimating yields is currently problematic.
However, the ability to assess the true level of yields continues to
improve as deal activity picks up globally. We expect pricing to
improve as the asset class corrects and the current high levels of
pricing moderate. This has already started to happen in the
Eurozone and Nordic regions where overpricing is reducing.
• The sector pricing trends that have been in place for some time
continue. As with last quarter, our pricing indicators suggest that
global residential and industrial markets offer the greatest
potential for better risk-adjusted returns at this point in the cycle.
By contrast, some parts of the retail and office sectors look to be
the most overpriced, particularly Hong Kong offices.
• Long-term worth should improve further as prices continue to
correct. Post-correction, it should be less challenging to find
good-quality attractively priced assets in our favoured sectors.
We maintain our overweight position in the North American real
estate market. We also favour certain sectors and segments in
the continental European markets from a global allocation
perspective.
Chart 1: Aberdeen Standard Investments’ global
pricing indicator
(Market price as a percentage of long-term worth)
60
50
40
30
20
10
0
-10
-20
Q4 10 Q4 11 Q4 12 Q4 13 Q4 14 Q4 15 Q4 16 Q4 17 Q4 18 Q4 19 Q4 20
Eurozone
Japan
UK
USA
Nordics
Canada
Global
Source: Aberdeen Standard Investments, January 2021
Note: Market pricing is scaled against the long-term worth for each market at the
same 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 capital market assumptions, independent of currency or stock
selection effects.
Market behaviour explained by
short-term indicators
• Given behavioural factors, market prices can, and often do,
deviate from fundamental value for indefinite periods. We aim to
monitor market behaviour via our global performance
indicators. These help us understand the drivers of prevailing
market prices (see Table 1).
04
Global Real Estate Market Outlook
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investors only – not for use by retail investors or advisers.
“Again this quarter, our proprietary performance signals have improved
modestly. Although the recent re-imposition of lockdowns in some areas
may temper the improvements, the signals are pointing to stronger
returns ahead.”
• Although global investment activity has picked up from low
levels, the re-imposition of restrictions and travel bans will
continue to hamper activity. Given the limited occupier activity
as a result of travel restrictions, sentiment is most negative
towards the hotel and lodging sector. Activity has also declined
significantly in the retail and office sectors. Investment activity
has been most resilient in the residential and industrial sectors.
• Global listed real estate remains a good barometer for what may
materialise in the direct markets. Encouragingly, the listed sector
is in positive territory year to date and also over the past month.
Some of the sectors that underperformed significantly last year
have rebounded modestly including US retail and hotels.
This isn’t the case for two of last year’s underperformers –
European retail and London developers – which continue to
underperform this year. From a global perspective, the listed real
estate markets were most resilient in the Netherlands, Norway
and France over the last quarter. The weakest markets were
Belgium, Finland and Sweden.
• The lending market remains constrained, with lenders
retrenching and continuing to adopt a risk-averse approach to
transactions. There is still lending available for the most resilient
assets that have secure income streams. Lenders continue to
seek a lower level of loan-to-value and higher margins for
lending. The volume of loans also remains low, in line with
lenders’ increased caution. Lending to the retail sector is very
constrained. Defaults continue to remain at a low level to date.
The non-bank lenders are likely to pick up further market
share this year as they are more willing to lend than the banks
at present.
Real estate
Macro
Table 1: Aberdeen Standard Investments’ Global Performance Signals
Performance signals
UK
Europe
North America
APAC
Global
Economic fundamentals





Margin over bonds





Monetary Policy





Supply





Flows of capital





Lending





Fund flows





360º view





Sources: MSCI, PMA, RCA, CBRE, Refinitiv, Aberdeen Standard Investments, January 2021.
Key
Performance Signal:
Supportive
Neutral
Unsupportive
Trend:
 Upward trend
 Stable
 Downward trend
Global overview
• As economies have started to revive, so too have the real estate
occupier and investment markets. But activity in both of these
areas of the market remains subdued and the current increase in
infections/restrictions has affected market activity once again.
With relatively subdued activity, price discovery is taking some
time. We continue to expect prices to fall further in the first half
of 2021, which reflects the challenging occupier markets.
The market continues to be polarised between sectors that were
already benefiting from long-term structural drivers (industrials
and residential) and those that were struggling because of
structural headwinds (retail and offices).
• Given the ongoing price dislocation, there may be opportunities
for investors with capital to re-enter the market further on into
the cycle at a more attractive price point. Our long-term worth
analysis suggests that pricing remains stretched, although this is
changing as prices correct and yields increase.
• The significant monetary and fiscal support that has been
extended to economies remains a key positive for real estate
markets, ensuring we avoid a financial crisis. It also helps to keep
occupiers in business and limits unemployment, which should
help moderate the expected increase in vacancy rates.
A proportion of the income real estate generates at present
is vulnerable to insolvencies and occupier distress.
For professional investors only, in Switzerland for qualified
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Global Real Estate Market Outlook
“Given the heightened uncertainty at present, we continue to maintain a
risk-averse approach to investing. With stronger returns expected in the
second half of the year, there should be more appetite to take on modest
levels of risk.”
Nevertheless, we anticipate that income will remain favourable
on a longer-term basis when compared with the yield from
government bonds. These are likely to be close to zero or at low
levels for a significant period. Presently, the margin between the
asset class and the risk-free rate has moved to elevated levels.
Undoubtedly, a higher risk premium is appropriate for
consumer-facing sectors that were already struggling with
longer-term secular trends. However, the increase in risk
premium for sectors that will benefit from long-term structural
drivers is likely to be relatively small. We expect the income from
these sectors to compare favourably with the low yields on offer
from other asset classes.
• We therefore favour the industrial sector, which is benefiting
from changes in technology and the way we are shopping.
We also like the private rented sector because of the increased
propensity to rent and the unaffordability of housing markets
generally. We favour the alternatives sectors that are benefiting
from population ageing, namely the senior living and healthcare
sectors. We also prefer prime sustainable well-located office
buildings. We continue to remain risk averse and a forensic
approach to underwriting is key at present given the heightened
market risk.
05
06
Global Real Estate Market Outlook
For professional investors only, in Switzerland for qualified
investors only – not for use by retail investors or advisers.
Regional outlooks
North America
• Recent democratic wins in the state of Georgia have shifted the
balance of power in the senate along with the US policy and
economic outlook. This increases the likelihood of additional
fiscal stimulus and other government spending measures.
Another relief package is expected to be passed by Congress in
the immediate future. This will include state and local government
funding, along with another round of stimulus checks.
Aberdeen Standard Investments Research Institute (ASIRI)
estimates the value of a bipartisan deal will total approximately
$1 trillion. Broader proposed spending and tax measures include
a green infrastructure plan, expansion of the Affordable Care Act
and funding for social programs, amounting to $1 trillion.
Increased fiscal policy spending would significantly boost the
economic recovery and has resulted in a large upward revision to
the economic growth forecast for 2021. These measures will
support stronger inflation, but a return to target will most likely be
a slow process with the Federal Reserve (Fed) maintaining its
stance. ASIRI has factored in a gradual tapering of its asset
purchases next year, with a rate hike not expected until the end
of 2023.
• Vacancies rose across property sectors in 2020. The sharpest rise
was in offices as leasing activity has plummeted. Rental losses
have been modest thus far, but they are expected to accelerate as
more leases expire. Gateway markets are likely to experience the
greatest near-term weakness as their rents have been more
volatile during recessionary periods. The net operating income
(NOI) for apartments declined significantly in 2020, driven by a
deterioration in fundamentals among urban core properties.
The central business district (CBD) net absorption in gateway
markets turned negative for the first time in the available 20-year
history from the CoStar Group. However, suburban submarket
demand continued to expand, supporting effective rental growth.
Malls have continued to underperform, while grocery-anchored
centres remained resilient in 2020. Simon Property Group,
the largest shopping mall operator in the US, reported a 24%
annual decline in NOI among comparable properties in the third
quarter. At the same time, vacancies for grocery-anchored centres
were stable. After slowing in the second quarter of the year,
leasing activity for industrials has returned to pre-pandemic
levels. Leasing activity in the fourth quarter of 2020 was 10%
higher than the historical average, as per CoStar data.
Demand growth remained strongest for bulk industrial assets.
• Transaction activity slowed significantly in 2020 but recovered
from pandemic lows at the end of the year, according to Real
Capital Analytics (RCA). Total sales volumes were down by 30% for
the year, with the steepest declines in hotels, retail and offices.
However, sales volumes rebounded to $145 billion in the final
quarter, driven by gains in apartments and industrials – nearly
triple the $50 billion mid-year low. Office sales volumes rose
substantially from recent lows. But sales volumes remained
weaker for the CBD compared with offices in the suburbs.
The average suburban office cap rate compressed modestly,
while it rose slightly for CBD offices. The suburban-to-CBD cap
rate spread fell just below its historical average (since 2002) of 100
basis points.
• The industrial sector is expected to remain a clear near-term
outperformer. It is the most resilient major sector with the
strongest demand for larger assets. Investors will continue to
increase exposure to the segment, which will support pricing
gains. Residential sectors offer a favourable return outlook,
but there are major areas of weakness. Apartment fundamentals
remain stable for suburban assets, but urban core property
performance has deteriorated. It is likely to experience continued
losses early this year. However, an improving labour market,
vaccine rollout and slowing supply growth should support an
urban recovery by the end of 2021. Retail performance will suffer
most, with record-level store closures leading to continued NOI
and value losses over the next year. Retail returns for centres
focused on essential goods will lead, while malls will lag.
Office sector fundamentals will continue to weaken, particularly
for primary CBD assets. NOI losses and reduced investor appetite
for the sector will weigh on capital values. Increased adoption of
flexible work arrangements is a major long-term risk for
the sector.
UK
• After November’s lockdown and the rapid tightening of
restrictions in mid-December, we expect the UK economy to
have contracted by 2-3% in the final quarter of 2020. A renewed
lockdown to combat the highly transmissible new variant of
Covid-19 is set to cause a further contraction in GDP in the first
quarter of 2021.
• Unfortunately, the rapid escalation of cases and hospitalisations
since mid-December has necessitated another national
lockdown akin to that of last spring, including school closures.
Measures to combat the new variant – and evidence that other
strains, such as that first detected in South Africa, may be even
more infectious – are set to cause a further contraction in GDP in
the first quarter of 2021. With vaccines now being rolled out, it is
a case of ‘the darkest hour just before the dawn’ and we continue
to expect a strong rebound in the second half of the year as the
vaccines start to deliver herd immunity.
• In mid-December, the furlough scheme was extended to the end
of April, which gives greater time for business planning and
decision-making around redundancies following the March
budget. But it also means all the main business support
measures are in place until at least the end of March,
which should shield much of the economy from the effects of
the renewed lockdown.
• Brexit negotiations went right to the wire but a chaotic no deal
was averted. As we have previously flagged, the ASIRI believes
the very narrow deal agreed will be a drag on UK economic
growth over the longer term. Trading for the consumer-facing
retail, leisure and hospitality sectors remains challenging in the
face of Covid-19 restrictions. The retail sector experienced a
further blow in the final quarter of the year with both
Debenhams and the Arcadia group entering into administration.
More than 550 Debenhams and Arcadia fascia stores are set to
close, removing the key anchor retailers from many towns.
• The Covid-19 impact on UK retail has not been homogenous
across retail sub-sectors as illustrated by the resilience of
supermarket trading. Kantar data showed that all UK
supermarket groups benefited from unprecedented Christmas
demand in 2020. Take home grocery sales rose 11.4%
Global Real Estate Market Outlook
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year-on-year over the 12 weeks to 27 December, despite higher
online penetration than the previous year.
• With a sizeable increase in demand, 2020 broke all previous
records for the UK logistics sector, with occupiers signing up to
50.1 million square feet (sq. ft.) of new space. The sector has
been a key beneficiary of shuttered shops and the marked
acceleration in online retailing. Although Amazon was by far the
largest single occupier, accounting for a quarter of all leased
space during 2020, take-up would have still broken new records
even if Amazon was removed from the numbers.
• Both the hierarchy and quantum of our new forecasts remain
largely unchanged. We are forecasting further capital declines
across discretionary retail in 2021, with greater declines in rental
values. The renewed lockdown, which is likely to last for most
of the first quarter, will put further pressure on retailers,
leisure operators and hospitality providers. This reinforces the
current problem.
• Conversely, industrials are set to be the best performing sector
in 2021 for a fifth successive year on the back of continued
strong sentiment towards the positive structural drivers of the
occupier market. In our view, those drivers are strongest for
logistics units in urban areas.
• In offices, the occupational fundamentals have weakened
further; availability has increased, notably, without any
meaningful impact on rents thus far. We do not believe that
situation is sustainable and we are forecasting rental declines in
central London this year, with more modest declines in the main
regional markets. We expect quality buildings in strong locations
to hold up better through this adjustment period.
• At close to £12.8 billion, the fourth quarter of 2020 saw a
noticeable pick-up in investment volumes when compared with
the previous two quarters. Despite the occupational
uncertainties, offices accounted for over 35% of total
investment. Positive industrial sentiment resulted in the sector
accounting for over 30% of total investment volumes in the final
quarter of the year.
• Despite a noticeable pick-up in investment volumes in the final
quarter, 2020 marked the weakest year since 2012.
• With a no-deal Brexit averted, a renewed sense of optimism in
2021 is likely to be tempered, at least initially, by the latest
national lockdown. Investors will assess the potential damage to
occupier markets. With liquidity likely to be impaired in the first
quarter, 2021 looks set to be a year of two halves for the
investment market. Provided vaccinations can be rolled out at
sufficient scale in the first half of the year to materially suppress
the virus, we expect to see a recovery in activity in the second
half of 2021.
• Multiple lockdowns have reinforced existing structural changes
and introduced new ones. While the investment market is rightly
demanding ever higher risk premia for most discretionary retail,
there are parts of the market where investors appear disinclined
to price in any material structural change. The greatest
opportunities may be found where there is greater liquidity and
structural change. Investment strategies will continue to favour
sectors with more defensive characteristics. Fundamentally,
we prefer investing in areas where the structural drivers of
demand are positively affected by or largely insulated from the
ongoing pandemic, including logistics and supermarkets.
07
Continental Europe
Economic outlook
• The Eurozone growth profile is now an upwardly sloping
“W shape”. The initial contraction and subsequent rebound has
been very sharp, but the Eurozone will have been through a
renewed contraction in the fourth quarter of 2020 and into the
first quarter of 2021. Moreover, lockdown stringency is unlikely
to be meaningfully lifted until we approach the second quarter
of 2021, which means we are forecasting no growth in the first
quarter. The risk of a full-blown double-dip recession
(consecutive quarterly contractions in both the fourth quarter
and the first quarter) is very likely.
• The eventual vaccine-driven recovery should be strong and drive
a “year of two halves” in 2021. But we incorporate long-term
damage to the level of GDP that will be about two years’ worth of
economic growth.
• This upward sloping ‘W-shaped’ profile, as well as low inflation
expectations, mean that even after the current deflationary
period ends in early-2021, inflation will remain well below the
European Central Bank’s (ECB) target. This, in turn, means that
we expect additional monetary policy stimulus, starting with the
€500 billion of asset purchases and subsidised bank loans in
December 2020. This probably won’t be the last easing move in
this cycle, and we have pencilled in further quantitative easing
in 2022.
• Fiscal policy, which has been highly expansionary so far in this
crisis, is now set to be a small drag. But this is on nothing like the
scale of the post-financial crisis retrenchment that set the scene
for the Eurozone sovereign debt crisis. In any case, the EU
Recovery Fund should now replace at least some of the waning
domestic fiscal stimulus.
Occupier market trends
• Contracted rent falling into arrears has crept up, but generally
remained surprisingly low, as have overall vacancy rates.
This owes much to the substantial stimulus packages put in place
and the ability of companies to adapt to operate remotely or
with increased online sales. In addition, landlords have extended
rent holidays and have generally been supportive of tenants
disrupted by the pandemic. We believe that conditions will get
harder before they get better through 2021, in what will be a year
of two halves.
• Office markets are starting to soften after a period of surprising
resilience. Vacancy rates edged up in the latter stages of 2020,
a trend that reflects the reticence of companies to sign new lease
agreements in preference of placing space requirements on ice.
These trends in softer demand and new supply pushed the
average vacancy rate up across Europe from 6.4% in the fourth
quarter of 2019 to 7.1% a year later. Despite a 40% quarterly
rebound in office take-up in the fourth quarter of 2020,
the volume reflected a 35% annual decline and the weakest
quarter since 2002. Overall, weaker office occupancy trends are
forcing landlords into reducing asking rents from peak levels,
and the market is slowly edging more in the tenants’ favour
on negotiations.
• Retailers have largely struggled under current conditions and
many have needed rent deferrals to avoid cash shortages.
Retail failures have increased, with the latest data to the second
quarter of 2020 showing 21 retailers in Europe with net revenues
over €50 million entered insolvency proceedings. We believe
that most in-store retail formats, aside from supermarkets,
will struggle over the short, medium and long term.
08
Global Real Estate Market Outlook
• Of the commercial sectors, the logistics market is a clear outlier.
Shocks like the current pandemic have challenged and put
pressure on all layers of supply chains. However, the strong
demand drivers established prior to the pandemic have been
accelerated through enforced changes to the way people source
goods. Ecommerce has grown sharply, with estimates putting
2020 retail sales via online platforms at 15-25% of total retail
sales, depending on the country in Europe. According to the
latest data available to the third quarter of 2020, total European
logistics take-up reached 21.8 million square metres in the first
three quarters of the year, representing a 10% uplift on the same
period of 2019.
Investment market trends
• The vast majority of material valuation uncertainty clauses
(MVUCs) have been removed in Europe. With the exception of
discretionary spending retail assets, hotels and leisure properties,
values have largely rebounded from their second-quarter of 2020
dip, following their knee-jerk downward adjustment at the onset of
the pandemic. Valuation methodology has reverted to normal,
even despite the second round of lockdowns.
• European transaction volumes experienced an acceleration in the
fourth quarter of 2020, rising 35% quarter on quarter (q-q) to reach
€63.3 billion. However, volumes in the fourth quarter were just half
the level of the fourth quarter of 2019, and the annual total slid to
3% below the previous year. However, in light of the strict
lockdowns and the barriers to movement, it is remarkable that
liquidity held up so well.
• In particular, we have seen an increasing share of capital flow into
residential and logistics assets. Residential and senior living
accounted for 25% of total investment at €66 billion in 2020,
an increase from 21% of the share in 2019. Logistics accounted for
14% of the total volume, a share that would have been higher had
there been more stock on the market. This volume matched retail
investment, also at 14%. In the context of the negative sentiment
towards offices, as a result of the largely successful enforced
remote working, it is surprising that investment in offices held up
well. Offices still accounted for the largest share of investment by
sector, representing 37% of the total, down from 42% in 2019.
Within the office sector, investors have adopted an increasingly
lower-risk approach – focusing mainly on large, efficient and
well-located buildings in the major cities with close proximity to
public transportation.
• Geographically, the lockdowns have had a specific impact on the
ability of some markets to close deals at the same rate as before
the pandemic. However, it has been particularly evident that
institutional investors have targeted core European markets like
Germany and France – with the idea that liquidity is stronger and
that the economic recovery is more sustainable.
• These investment market pressures have influenced pricing trends.
According to data from CBRE, Eurozone residential and industrial
real estate yields compressed over the fourth quarter of 2020 to
reach new lows. The inward yield shift in the logistics market was
most noticeable with a sharp step down of roughly 15 basis points
(bp), driven by the weight of capital in the market. For retail assets,
we have seen a (continued) repricing of assets across Europe where
yields have moved out further during lockdowns. They rose by five
bp in the fourth quarter of 2020 for all retail and by 17 bp in
secondary shopping centres.
• Overall, capital values have recovered sharply in the best assets
and sectors. It’s particularly evident where tenant revenues are
more resilient or where the demand drivers are structurally higher.
Assets and sectors are more at risk where bank finance conditions
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are tightening sharply. This implies more pain for hotels, retail and
leisure. Overall, we are less negative on capital values over the next
12 months than in the previous quarter, as the fundamentals have
remained more resilient than expected.
• Bank lending remains selective and polarised between good and
bad assets and sectors. Good-quality assets are less affected,
but lenders have started to price risk assets more cautiously.
However, with swap rates remaining negative, the all-in cost of debt
has not risen dramatically at this point. Furthermore, listed
property companies that are focused on retail have issued
substantial bonds at coupons below 1%. Loan-to-value (LTV) ratios
are stable overall, although investors are generally looking to trim
loan portfolios and reduce risk.
Performance outlook and risk tolerance
• It should be noted that any forecast assumptions in the current
environment remain uncertain. Our current base case suggests
All Property returns of 3.7% per annum (pa) over the first three
years and 4.7% pa over five years. Our view is that falling capital
values are front-loaded through 2021, before recovering from
year three onwards and contributing positively to total returns.
• Sector spreads between forecast returns remain large.
The biggest decline in values next year (fourth quarter of 2020 to
the fourth quarter of 2021) is expected for hotels followed
closely by the retail sector. Residential and logistics assets are
expected to demonstrate far stronger fundamentals under the
current base case with values continuing to rise unabated.
Offices have so far shown resilience. But there is an increasing
disparity between the strength of high-quality and sustainable
buildings (with solid tenants on long contracts and in
strong locations) clearly offering better prospects than
secondary offices.
• In the short-to-medium term, we are more concerned about
markets that experienced more pain in the global financial crisis
and Eurozone crisis as a result of stress in the debt markets and
sharp falls in liquidity. This would include Spain, Italy, Portugal
and Ireland, while Central and Eastern European markets also
look more vulnerable in a risk-off market environment.
• We continue to suggest a risk-averse approach in most aspects
of our investments, while market uncertainty is high. This means
reducing financial leverage, development exposure and focusing
on longer and more robust cash flows. However, the polarisation
of the real estate market does mean that there are pockets
where we have conviction that value-add strategies will pay off,
mainly in logistics and residential assets.
Asia-Pacific (APAC)
• The global economic outlook is dominated by two conflicting
forces: an intense second wave of Covid-19 in Europe and North
America that is already weighing on recoveries; and recent news
that highly effective vaccines are on the way, which raise the
likelihood of an eventual return to ‘normal’ life. The outlook has
become much more mixed, though. While new Covid-19 cases
have been contained at low levels in China and East Asia, and are
moving lower in other emerging markets, the US and Europe are
in renewed outbreaks that appear to be as large as the first
wave. We also think investors should temper some of the recent
vaccine optimism. Realistically, the manufacturing and
distribution timelines are not going to contain the current wave
of infection. The mass vaccination of the entire global population
will be a multi-year and sustained effort.
• We continue to think that both the short- and long-term global
implications of this crisis are likely to be net disinflationary.
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The scale of this disinflation is likely being exaggerated by the
inability of price indices to keep up with changes in the
composition of spending at the moment. That being said, the
global economy has enormous spare capacity, which will take a
long time to erode and thus put sustained downward pressure
on wage growth and firms’ pricing power.
• The average decline in net effective rents (NER) has accelerated
across the major office markets in APAC as vacancy continues to
climb. NER fell by an average 8.8% year-on-year (y-y) in the third
quarter of 2020 (from -6.9% y-y in the second quarter) while the
average vacancy rose to 11.2% (from 10.1%) during the same
period, according to Jones Lang LaSalle’s (JLL) estimates.
Hong Kong remains the worst performing office market in APAC,
with the average NER now 21.7% off its second quarter of 2019
peak and average vacancy is now at its highest since the fourth
quarter of 2004. There has also been a marked deterioration in
the Australian prime office market – average NER fell by 7.7% y-y
in the third quarter of 2020 (from +0.5% y-y in the second
quarter). Within the APAC context, we believe Australian central
business district (CBD) offices could be more vulnerable to
suburbanisation and remote working trends. On the other hand,
the prime office market in Seoul has outperformed year to date
(YTD), with the average gain in NER accelerating to 4.5%y-y in the
third quarter of 2020 (from +3.8% y-y in the second quarter).
This is in spite of an increase in vacancy to 14.3% (from 9.1%)
during the quarter, on account of the completion of Parc1 in
Yeouido. Technology companies appear to be one of the few
remaining bright spots in terms of office leasing demand. In
Singapore’s CBD, Amazon has taken up more than 90,000 square
feet (sq ft) at Asia Square Tower 1 and ByteDance has signed a
lease for 60,000 sq ft at One Raffles Quay. We forecast office
rents in APAC to fall by an average 0.6% per annum (pa) over the
next three years. We think the bulk of the potential near-term
downside in rents may already have been front-loaded given the
faster-than-expected decline year to date and that the worst of
the economic fallout is likely behind us.
• Similar to the office market in APAC, the average decline in prime
retail rents accelerated to -12.9% y-y in the third quarter of 2020
(from -8.9% y-y in the second quarter), while vacancy rose to
5.7% (from 5.5%) during the quarter. Hong Kong prime retail
remains the worst performing occupier market (-32.9% y-y in the
third quarter of 2020, from -25.8% y-y the previous quarter).
Regional centres in Perth fared relatively better during the last
quarter (-1.6% y-y, from -2.2% y-y), with the pandemic largely
under control in Western Australia. The pandemic has weighed
heavily on retailers and the concern is that the number of
retailers entering administration could increase once
government support ceases. Also, the crisis has accelerated the
adoption of online shopping. A case in point being Australia
where online retail penetration is estimated to have risen to
13.3% (from around 11% in 2019) – a number originally not
expected to be reached until 2024. Notwithstanding the positive
developments on the vaccine front and the potential for retail
spend to recover further as economies reopen, we maintain our
bearish stance on prime retail real estate. This is because of
structural challenges, such as the loss of market share to online
shopping, thinning retailers’ margins and already high
occupancy costs. Indeed, we forecast prime retail rents in APAC
to fall by 3.2% pa over the next three years.
• The pandemic has accelerated the adoption of ecommerce.
Potential changes to supply chain management (including the
maintenance of higher levels of inventory) are also expected to
increase the demand for logistics space over the longer term.
But the pandemic has had a negative impact on rents, even
Global Real Estate Market Outlook
09
though the sector still outperforms. The average rent for
logistics space in APAC fell by 0.6% y-y in the third quarter of
2020 (from -0.2% y-y in the second quarter), even as vacancy
tightened to an average 2.7% (from 2.9%) during the quarter.
Logistics properties in China’s tier one cities remain the best
performers in APAC, registering a gain of 3.8% y-y in rents during
the third quarter of 2020 (from +5.8% y-y in the second quarter).
The economic recovery in China has been stronger than
expected and this has released pent-up leasing demand from
express delivery firms and ecommerce platforms, as well as
traditional retailers and wholesalers. In Australia, the average
rental growth in logistics space slowed to 1.2% y-y in the third
quarter of 2020 (from 1.7% y-y), principally on account of the
lockdown in Victoria. But land-constrained urban locations
continue to outperform. We reiterate our bullish view on the
sector and forecast an average rental growth of 0.7% pa over the
next three years.
• The latest data from Real Capital Analytics (RCA) suggests the
total transaction value of investment properties in APAC
(excluding development sites) fell by 29.2% y-y to USD92.2 billion
during the first nine months of this year. South Korea was the
best performing investment market in APAC year to date, with a
total transaction value of USD15.9 billion in the first nine months
of 2020 (+1.9% y-y). Notwithstanding the pandemic, 2020 is
shaping up to be a record-breaking year for the Seoul office
market in terms of price per pyeong (3.3 square metres (sqm))
achieved, as domestic capital turned its focus back to its home
market during the year. On the other hand, transaction values
amounted to just USD2.7 billion (-72.5% y-y) in Singapore during
the first nine months of 2020, making it the worst-performing
investment market in APAC (though the high watermark
achieved in 2019 was an important factor). By sectors,
investment activity for industrials jumped to 21.4% during the
first nine months of 2020 (versus the average 11.1% over the
previous 10 years), while investment activity for apartments
increased to 8% during the same period (from an average 6%
over the previous 10 years). Unsurprisingly, activity in the retail
sector shrunk to 15.4% in the first nine months of 2020 (from
24.3%, on average, during the previous 10 years).
• The rebound in stock performance of APAC’s listed real estate
investment trusts (REITs) from its trough in late-March continues.
REITs are trading at an average 22% premium to book value as at
end-December (from 15% three months before). Unsurprisingly,
managers of listed REITs have capitalised on the buoyant
demand for listed real estate equity to raise new funds from
investors. As of end-December, the total amount of new equity
raised by REITs listed in Japan, Australia and Singapore during
the fourth quarter of 2020 was USD5.04 billion. This is 5.7% more
than the equity raised a year ago in the fourth quarter of 2019,
which in turn was twice the USD2.4 billion raised in the fourth
quarter of 2018. The most active market in the fourth quarter of
2020 was Japan where J-REITs raised a total of USD2.4 billion in
new equity (versus 1.3 billion a year ago). This includes the
JPY127 billion (USD1.2 billion) raised by Nippon Building Fund in
October to partially fund the purchase of two office properties in
Tokyo’s CBD from its sponsor Mitsui Fudosan. This represents
the largest equity raise by a J-REIT to date. The deal values the
Shinjuku Mitsui Building at JPY170 billion (USD1.6 billion; implied
net operating income (NOI) yield 4.2%) and the five floors at
Gran Tokyo South Tower in Marunouchi at JPY47 billion (USD445
million; implied NOI yield 3%). The vendor had bought the space
at Gran Tokyo South Tower for JPY35 billion (NOI yield 3.4%) in
the first quarter of 2013, which implies an appreciation of 34% in
capital value over the past seven years.
10
Global Real Estate Market Outlook
• The Asian Association for Investors in Non-Listed Real Estate
Vehicles (ANREV) published its quarterly index on 18 December
and the all-funds index returned +1.7% in the third quarter of
2020. This represents a reversal from the 2.3% loss registered in
the previous quarter and the first positive return since the
fourth quarter of 2019. Positive total returns from both core
strategies (+1%, from -3.1%) and value-added strategies (+5.6%,
from -0.3%) helped to lift the overall APAC performance during
the quarter. Value-added strategies, in particular, appear to have
been helped by robust performance reported by Chinese funds
in the third quarter of 2020 (+5.7%, from +1%). Core strategies
benefited from the first positive capital growth in three quarters
(+0.3%, from -3.7%) as well as an improved income return in the
third quarter of 2020 (+0.8%, from +0.6%).
• We expect total returns for non-listed real estate in APAC to
remain under pressure in the near term. We forecast an average
total return of 1.8% pa for the region over the next three years
and we expect greater divergence in performance among the
sectors. We continue to expect outperformance in industrial
properties (6.5% pa) and rental apartments in Tokyo (6.8% pa) to
be offset by underperformance in the prime retail (-1.8% pa) and
office (2.2% pa) markets. On a risk-adjusted basis, we believe the
real estate markets of South Korea and Japan remain relatively
attractive within the APAC context (total returns over the next
three years of 6.4% pa and 4.5% pa, respectively, on our
estimates). Specifically in the Seoul office market –
notwithstanding its outperformance in 2020 and near-term
vacancy risk – we expect investment demand to remain robust
especially in the CBD and Gangnam. The above-average yield
gap relative to rental outlook should remain attractive to
investors within the APAC context, in our view.
• In the near term, the balance of risks is skewed to the downside
in our view, as second waves of the pandemic threaten to
overwhelm healthcare systems and shut down economies.
Fiscal policy mistakes are also looming. However, from around
mid-2021 onwards, we think the risk is actually of more positive
outcomes than we are forecasting, particularly because global
vaccine coverage and its effects on activity could be greater than
we have factored in. This would mean a faster 2021-onwards
recovery and less long-term damage to the level of global GDP,
relative to the pre-pandemic path. In fact, we attach only a
slightly lower probability to this upside scenario than we do to
our baseline scenario.
• Since bond yields are likely to remain lower for longer, the
macroeconomic risk is skewed to the upside from mid-2021.
Given the weight of capital that is still chasing yields, we think
investors who are still holding out for materially higher yields in
the short term may be disappointed. This is particularly the case
for core assets and in sectors that are deemed to have benefited
from the pandemic, such as industrial properties and data
centres. Unless investors are willing to settle for a lower target
return (even though the proposition might be the same or even
better if we adjust for risk and opportunity cost), it appears
investors have little choice but to move up the risk curve to
generate the required returns.
• For investors looking for higher returns in sectors that are
deemed to have benefited from the crisis – such as industrial
and logistics properties – a higher risk strategy, such as
converting the use or a build-to-suit (BTS) development might
make sense. Industrial properties close to population centres
currently owned and occupied by small manufacturers could be
converted into last-mile delivery facilities. This is particularly the
case if the rollback of government support were to prompt the
smaller enterprises to raise cash via the real estate market.
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Also, BTS development projects further from urban locations
could leverage on cheaper land costs and demand from
companies that are planning to hold more inventory in the
longer term.
• For investors looking to capitalise on potential bargains in
sectors that are deemed to be challenged by the crisis, such as
prime retail and hotels, converting the use would also make
sense. This is assuming the entry price has adequately
discounted the potential costs and risks involved. That is far
from certain, though, especially if the pace at which economies
reopen were to surprise on the upside from mid-2021. A case in
point is the sale of the Sheraton Palace Gangnam Hotel in Seoul
during the fourth quarter of 2020. A developer has bought the
site for KRW350 billion and the plan is reportedly to redevelop it
into either a new commercial building or a residential project on
account of the prime location. Compared with the expected sale
price of around KRW400 billion when the hotel was first put up
for sale in the third quarter of 2020, the transaction price
represents a discount of just 12.5%. This is hardly ‘distressed’, in
our view.
Summary
Renewed lockdowns and the more virulent strains of the
coronavirus have led to reduced activity once again in the
commercial real estate sectors that rely on consumer facing
interaction – hotels, retail and leisure. Despite this, our view is that
the year ahead will be made up of two halves with improvement
materialising in the second half of the year as mass vaccinations
ensue and restrictions are lifted and the occupier and investment
markets start to get back to their normal functioning. Although we
have not seen much in the way of distressed selling this could
pick-up as the year progresses and banks start to work through
non-performing assets. We continue to expect the capital value
declines that are already in train to continue as the year
progresses. As these declines fall-out of our three year projections
for total returns, stronger returns are anticipated as we move into
the second half of the year.
As a result of Covid-19, we continue to expect an acceleration of the
longer-term structural trends that were already underway in
certain sectors. For example, more on-line activity is benefiting the
industrial sector to the detriment of the retail sector. In the office
sector, we are very selective in terms of asset attributes.
The increase in home working will lead to less demand in the
sector and more occupier desire for value-add attributes, such as
flexible workspace solutions. Asset-specific qualities, such as good
connectivity, a core location and positive ESG (environmental,
social and governance) factors are also important. Already we are
seeing the office fundamentals deteriorate globally and investors
are increasingly more selective when it comes to the attributes
associated with offices. They favour large, efficient and
well-located buildings, with close proximity to public transport
nodes. We remain very cautious towards poorly located older
assets that are most vulnerable to the changing dynamics in the
sector. We expect there to be more opportunities to source
attractively priced assets that can be repositioned or repurposed
later on in 2021. Given the expected further price declines,
we continue to adopt a conservative approach to risk in positioning
and continue to focus on resilient income in our favoured sectors.
Simon Kinnie
Head of Real Estate Forecasting
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