2014 – What Should the Real Estate Market Expect?
The global real estate remains an attractive investment sector. While yields from the sector have reduced due to the recent economic crisis, lenders are increasingly returning to provide financing for investors in the real estate market. This has resulted into a higher demand and a rise in transaction volume.
While the sector continues to improve fast in Mexico and Brazil, the market is improving at a slower rate in Pacific Asia, the US and Europe. Reduced global trade, severity in the developed world and the harsh economic conditions in Europe could reduce the amount of investment opportunities. However, Europe will likely have a lower economic growth compared to Pacific Asia¬†and the US.
The real estate market in the USA is expected to provide attractive returns on real estate properties because of increasing economic activity and better employment conditions which have resulted into a stronger tenant demand. Finally, the CMBS market is expanding thus supporting a larger liquidity. On the other hand, economic growth in Pacific Asia, expect Japan, is expected to exceed the growth in the US and China.
¬†In 2014, it is expected that there will be higher tenant demand for retail and industrial space in the Pacific Asia¬†region and the returns from these sectors are expected to be higher than that from the office market sector.
Recovery in Europe remains on the low end. Nonetheless, the real estate market in Germany, Sweden and the United Kingdom is expected to recover at a faster rate than other countries in the region. There is a high likelihood that property values could reduce further in Europe due to the slow economy recovery. The retail and industrial segments of the real estate are expected to outshine the office segment, just like in Asia. If Europe‚Äôs economy stabilizes in 2014, investors are likely to move to the real estate markets outside Germany, UK and Sweden.
At the other end of the spectrum, Asia‚Äôs economy is expected to grow rapidly, thus providing higher returns than other real estate markets. Notably, the lease terms are shorter in most Asian countries. This will result into a high tenant turnover rate which means property owners can re-price their lease rates.
Additionally, the income streams from these properties will be unpredictable. In the UK, lease terms are usually longer (about 5-10 years though can even be 25 years), and property prices are tied to the bond market. Consequently, if the interest rates change, property values will also be affected.
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In 2014 and other subsequent years, there are high chances that property returns will surpass their long-term average value. The amount of construction of real estate properties in the world is expected to remain below average in 2014 because of the reduced financing available for development. Investors are also expected to divert their capital from real estate ventures into other sectors of the economy.
However, those who invest in real estate properties will get more returns because there will be higher occupancy rates because of the reduced unemployment and increased income. Returns from properties in North America and Asia Pacific regions are likely to outperform returns from properties in Europe.
In early 2014, the real estate markets in Poland, Germany, Ireland and the UK are likely to perform better than markets in other parts of Europe. However, the real estate market in Southern Europe, Benelux and France is expected to bring good returns than in 2013 because the effects of the Euro crisis will have reduced significantly. The performance of the real estate market in Southern Europe is likely to be strong, but it will vary from property to property.
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In 2014 and the next few years, the industry sector will outshine the retail properties and apartments sectors. Currently, industrial properties in the US have higher income returns than properties in the apartments and retail sectors. In addition, the properties in the industrial sector have other possible sources of income growth namely increased rents, higher passing rents and reduced vacancy rates.
Consequently, properties in the industrial sector will appreciate at a great rate. The same effects are likely to be experienced in the office market.
Global Real Estate Stats
- Rental growth and office occupancy is expected to reduce to 2.1% and 15.2% respectively in 2014, from 3% and 15.8% respectively in 2013.
- In the retail sub-sector, vacancy is expected to reduce by 0.3% in 2014 compared to 1.2% in 2013. Retailers are shifting from brick-and-mortar retailing to online retailing.
- Rent growth for industrial growth is expected to increase from 2.6% in 2013 to 2.9% in 2014, and vacancy is likely from 12% to 12.7%. The increase is because of online retailers who will probably lease more warehouse space.
- In the apartment/multi- family sector, rent growth and vacancy will probably near historical levels. In 2013, effective vacancy and rent growth is expected to hit 4.6% and 3% respectively.
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The demand for office space in Pacific Asia has gone down and is declining in some major centers. On the other hand, supply has remained moderate because of tighter lending requirements from financial institutions such as banks, and will remain below historic averages during the next 3 to 5 years.
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While key retail is susceptible to consumer sentiment, non discretionary retail continues to be essential and hence provides steady cash flow. This includes suburban retail centers that serve the immediate residential catchment, supermarkets, and neighborhood centers. These centers are less exposed to the impact of online retailing and can give potential real estate investors a cushion against fluctuations in discretionary spending. Even though China has in recent times had the regions strongest development, investors should be careful due to large amounts of fresh supply and a new slowdown in customer spending.
Investors and tenants have made a tactical move away from the historic warehouses, turning instead to more incorporated distribution centers that have developed with the spread of e-commerce. The longer leases of distribution centers provide stable income returns for investors and capital expenditures are usually lower compared to other commercial properties.
A persistent scarcity of this commercial asset class has led to built-to-suit or conversion products even in the more advanced economies of Japan, South Korea, and Australia. In China and Australia, the rising populations of some key cities have resulted in higher demand for specialized warehousing including food distribution centers. Potential investors should look at the more mature real estate markets of Volatile Asia, Mature Asia and Australia although opportunistic commercial property investors may want to consider investing in major cities within South East Asia and China.
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Commercial property performance will continue to be polarized all over Europe as the slow and muted recovery begins from 2014.
Reflecting the fiscal environment, office demand is bound to stay weak across the Europe from 2014. Beyond this, a gradual progress in business sentiment and economic conditions should support a return to functional office rental growth. At first, this is expected to be limited to the key cities within Northern Europe, especially the most important German cities, War-Saw, Central London and to a lesser extent the Paris Central Business District (CBD).
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European retail commercial real estate is going through an extensive period of transformation. The retail real estate sector is faced with household deleveraging, low consumer confidence, and the continued development of online sales is redirecting expenditure from physical stores. Real estate potential investors continue to be thrilled about prime locations, infill, but secondary locations are stressed with rents and occupancy. Just like in the office sector, the economic cycle is expected to favor investment in central part Europe in the short run.
Sharp declines in demand across the Euro zone and lower intro European trade has led logistics workers to focus space demand upon a lesser geographic region. During 2013, demand will stay focused upon transportation corridors in Poland and Germany, and Northern European ports.
As economic activities gain strength from 2014-2015 onwards, space demand is likely to spread to secondary Northern European ports prior to picking up along the North south distribution corridor in Western Europe, running through Milan to France, Madrid to Barcelona. With a divergent and gradual economic recovery anticipated, structural trends, such as the supply chain efficiencies and the growth of e-commerce will also continue to be the key drivers of demand for industrial real estate.
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Commercial real estate markets continue to edge further into recovery in the US. Apartments are at peak rents in several major markets and empty rooms are below their long term averages. However, for office, retail properties, and industrial, development has been more elusive with rents still below peaks and vacancies significantly above traditional averages.
2013 is another period of moderate improvement, followed by more robust development in 2014. During this time, the outlook for the industrial and office real estate sector will improve relatively to the apartment market, and it is expected that the retail sector will maintain a stable position. Apartment properties are likely to continue to perform well during the coming year (2014), but will weaken as fresh supply enters the real estate market.
For the past three years it has been an energy involving venture for the sector owing to the dismal markets performance. Only a few markets had a performance that can be cited as pleasing. However, 2014 is expected to confirm the firmness of the recovery phase and its expected payoffs. Office space consumption began accelerating in 2012 and increased in 2013 by surpassing 2012‚Äôs net absorption by 40%. Offices markets that recovered early are expected to continue performing the strong technology, education, energy and healthcare mechanisms.
Owing to that, the markets are expected to enjoy high rent gains from 2014 throughout to 2017 include Boston, Austin, San Jose and San Francisco. Currently, investors are focused strongly on Central Business Districts in key submarkets, but will after all move to the secondary and sub-urban markets where recommended alternatives are Orange County, Seattle, Los Angeles and San Diego.
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In 2014 superior markets will continue to thrive while the inferior ones are expected to continue struggling or even fail because the sector is improving slowly with moderate leasing.
Markets with highly disposable income are expected to perform their best. In most recent past, prosperous and active coastal markets were the favorites, but Texas markets continue to surge while those of Southern California lag.
These markets are finishing the year on a high note after the vacancy rate went 70 basis points down at the beginning of the year which was the highest in property sector of the United States. Demand has gone up as well. Overall trends indicate the ware house segment leading tendency and will continue leading in 2014.
There are good prospects that the traditional demand drivers will continually support a widening demand base in 2014 and in future as real estate market recovery gathers momentum. Investors should take caution as high markets continually outperform low markets in vacancy rates in existing and new markets. In comparison with low barrier markets, high barrier markets will tend to achieve higher and sustained rent growth.
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Construction is expected to be mostly concentrated in top market where of the total one-third will be in Washington, Seattle, Houston, Austin, New York and Dallas. Also, owing to increase in rents and houses affordability, more tenants will become homeowners. The apartment market will be in equilibrium at the end of 2014 or early 2015 as supply and demand balance out returning the vacancy rate to its historic average.