Investment markets finish 2013 with a bang
Investment markets have barely missed a beat over the holiday period as the momentum created towards the end of the year continues into the first few weeks of 2014. Final quarter volumes exceeded expectations at US$198 billion, 41% higher than an already busy Q3 2013 and 22% ahead of a strong Q4 2012. The consistent quarter-on-quarter growth that was recorded throughout 2013 took final year volumes to US$563 billion, 21% higher than 2012 and the first time the market has broken above US$500 billion since 2007. The growth in transactional volumes is broadly based, with both large and small markets across all three regions seeing growth, a trend expected to continue in 2014.
Record year for Asia Pacific as Japan’s volumes double
Asia Pacific has now surpassed volumes recorded at the peak of the last cycle; the first region to do so. Final quarter transactions of US$37 billion helped push full-year volumes above the previous peak of US$121 billion in 2007 to US$127 billion. Investment activity has been buoyed by the ongoing improvements in both debt and equity markets, heightened liquidity across the asset class, and higher allocation to the real estate sector from multi-asset managers.
The standout market in 2013 was Japan, where volumes doubled in local currency terms and were 66% higher in US$ terms. The boom in Japan was accompanied by record-breaking years in Australia (US$22 billion), China (US$25 billion) and Singapore (US$12 billion). Momentum continues to build in Q1 2014, with a number of funds raising significant equity in line with strong acquisition plans for the year.
Resurgent smaller markets combine with the majors to take European volumes higher
While the major markets of the UK, France and Germany continued to grow during 2013 on the back of consistent demand for core product, the year also saw the return of the peripheral European markets; Ireland, Portugal and Italy all experiencing triple-digit percentage growth. Final quarter volumes of US$72 billion are well ahead of the final quarter of 2012, and the fact that the previous three quarters all exceeded their 2012 equivalents has seen the market move 21% higher to US$195 billion over the full-year. The wider spread of activity across the continent did raise fears that volumes in London, Paris and the German cities may contract, but demand for prime real estate is as strong as ever.
Lack of political problems and growing U.S. economy should benefit the Americas in 2014
In the Americas, sales transaction activity during 2013 has exceeded expectations, the region witnessing in the final quarter the highest investment volumes in the past six and a half years at US$88 billion. For the year, overall volumes totaled US$241 billion, representing an 18% increase on 2012, and easily the highest annual activity level since 2007. Investors in the U.S. market overwhelmingly brushed off any concerns regarding 2013 increases in interest rates, as well as the Federal Reserve’s late-quarter decision to begin tapering its asset purchase programme. For 2013 in its entirety, investment volumes in the U.S. reached US$215 billion, the greatest annual transaction activity since 2007.
Both Canada and Mexico experienced very robust investment trading in the closing months of 2013. Volumes in Canada at US$18 billion were at record levels, while in Mexico volumes were up 27% for the full-year, boosted by the activities of its REIT sector. Softer capital markets conditions were evident in Brazil, as still sluggish economic growth, higher interest rates and weak equity markets created a challenging environment.
Capital values accelerate; yields compress further
A re-energised investment market has provided a boost to capital value appreciation. Growth on prime office assets shifted up a gear during the second half of 2013, achieving 7.5% uplift by year-end (across 25 major markets); more than double the rate recorded in 2012. The weight of money has continued to push prime yields down to new lows, with more than half a dozen major office markets recording 20-30 basis point yield compression during Q4 2013 alone, including the U.S. gateway cities of New York, Washington DC and San Francisco, as well as Paris, Madrid and Stockholm.
Capital appreciation to continue into 2014
With more buyers than sellers, capital values are likely to continue to appreciate during 2014, at a rate in excess of 5% for prime office assets (across 25 major markets). Expectations of further yield compression are not widely anticipated, with most investors looking to rental growth. The gateway cities of Tokyo, San Francisco, New York and London are forecast to register the strongest uplift in values over the next 12 months.