Real estate investors reinforce focus towards living and logistics sectors across EMEA
Early indications point to the third quarter being an inflection point in global real estate investment, with markets improving from what was the sharpest decline in recent history.
According to newly released data by JLL, direct commercial real estate investment declined 44 per cent year-on-year to USD149 billion in the third quarter, an improvement from the 51 per cent contraction experienced in the second quarter. Global activity remains considerably below pre-Covid levels as investors continued to react cautiously to the ongoing uncertainty caused by the Covid-19 pandemic and the disparity of recovery across markets.
Across Europe, regional transaction activity exceeded expectations in the third quarter reaching USD60 billion, down 24 per cent year-over-year but up 32 per cent on the previous quarter. Year-to-date volumes declined by a muted 17 per cent largely due to a strong Q1 2020, with rising allocations to the logistics and living sectors driving the recovery, accounted for a combined 39 per cent of quarterly transactions.
“As we approach the end of an uncertain year, transaction pipelines are rebuilding globally and are offering a sense of optimism. Real estate investors will remain cautious and calculated in their approach while opportunistic and private/high-net-worth investors are poised to capitalise on market fragmentation while institutions remain critical of pricing,” says Sean Coghlan, Global Head of Capital Markets Research, JLL.
While activity has picked up, investors are being forced to pivot their strategies. Ongoing travel restrictions continued to hamper plans for cross-regional deployment, accounting for just 8 percent of global activity in the third quarter; the lowest level since the Global Financial Crisis. On the other hand, domestic and intra-regional investments are accounting for a greater share of activity with the share of intra-regional activity climbing to 14 percent, the highest rate in more than a decade.
Sectors that are playing key roles in society’s adaption to the new normal continue to outperform the market as investors shift strategies to focus on resilient supply-demand fundamentals and income stability. Leading beneficiaries to-date have been logistics, multifamily and select alternative sectors.
Widespread stay at home mandates throughout the pandemic have accelerated reliance on ecommerce and supply chains which have, in turn, bolstered demand in the logistics sector. Global logistics investment increased 47 percent from the second quarter, declining by a relatively moderate 21 percent year-to-date. Investment into the sector now accounts for up to a third of overall activity in each region. In Europe, the logistics sector saw volumes rise 19 per cent y-o-y with the sector benefitting from an increased reliance on delivery platforms and online retail. Living remains popular with investors given favorable demographics, the increased role of the home and highly diversified income streams. In aggregate, YTD residential volumes outperformed the overall market, increasing 5 per cent y-o-y.
Varying Covid-19 responses and recovery from the virus across markets is leading to the continued disparate pricing of real estate assets.
“With mobility steadily rising and transactional pipelines rebuilding, global markets are firmly in price discovery, and we expect value transparency to rise as transactional activities steadily increase in the coming quarters,” says Coghlan.
The availability and low cost of debt is an important contributor to price stability and the operationally-critical, defensive sectors are seeing firm pricing, particularly for core assets.
“The road ahead is not straight. Recent upticks in Covid-19 case numbers, the tapering of government stimulus and the psychological response to market conditions will continue to influence consumption patterns and economic performance. Markets’ abilities to mitigate economic scarring will be critical to the continued recovery of activity,” says Coghlan.