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Sector Prospects
Hotels
 A strong global rebound
2010 was characterised by a strong rebound in global hotel investment activity, which has continued into 2011. In Q1, volumes were up over 110% and the average deal size has nearly doubled compared to Q1 2010, driven by several big-ticket sales in the Americas and portfolio deals in Europe.
Volumes up threefold in the Americas
The Americas saw volumes rise threefold and the region remains the most liquid globally. Activity was primarily driven by acquisitive REITs, which accounted for approximately two-thirds of transaction volumes. On the sell-side, investment funds, hotel operators and developer /property companies were most active. The hotel transactions market in Latin America is still in its infancy, although Q1 trading volumes in Brazil totalled US$94.5 million, which already exceeds the country’s full-year 2010 volume.
Outlook for China and India improving in Asia Pacific
As a result of slowing activity in Australia (after two strong years) and events in Japan weighing on the region, Q1 deal volume in Asia Pacific decreased by 21% compared to Q1 2010. Portfolio sales totalling US$109 million were recorded in secondary markets such as Darwin (Australia) and Vietnam, while single-asset activity mostly took place in Singapore, Japan and China. Three hotel investment deals were recorded in China, totalling US$299 million, representing a threefold rise year-on-year, albeit from a low base. The outlook for investment activity in China and India is improving although deals require intricate local knowledge and significant time to complete.
Portfolio sales dominate EMEA
In EMEA, momentum continued to build in Q1 2011 with volumes up 157% compared to Q1 2010 with the UK, France Germany and Spain largely driving the increase. Various hotel operators such as NH Hoteles, Louvre Hotels and Accor divested assets through portfolio sales, representing 41% of total Q1 volumes (versus 22% on a global basis). On the buy-side, institutional investors and investment funds still feature prominently, focusing particularly on leased investments. Average deal size in EMEA showed a significant increase year-on-year as a result of the various portfolios trading in the first quarter.
Investment Volumes and Deals – Hotels, Q1 2011 v Q1 2010
Source: Jones Lang LaSalle, April 2011
Retail
 Positive consumer confidence in Asia Pacific
Consumer confidence remains generally positive in most Asia Pacific countries, underpinned by improving labour market conditions, though is more mixed than a few quarters earlier, due to factors such as rising food prices and the recent earthquakes in Japan and New Zealand.
Net absorption was positive in almost all major retail markets in Q1 2011. Rents and capital values continued to grow fastest in Greater China, followed by South East Asia. Rental and capital value movements were varied across India’s Tier I cities, with a widening rental gap between prime and secondary malls. In Australia, slower retail turnover growth in late-2010 and early-2011 resulted in a subdued market in Q1.
Europe – a ‘flight to prime’
Annual retail sales posted relatively healthy growth in most European markets during Q1 2011. Russia and most CEE countries are expected to show a robust uplift this year, while France, Germany and the Nordics should see retail sales growth of around 3%.
Prime high street rents remained stable over Q1 in most markets. Modest increases were recorded in cities such as Amsterdam, Prague and Istanbul. The economic strength of Germany should result in a very solid retail market this year and we expect to see rental uplift in key locations, such as Berlin and Stuttgart. Financially strong retailers continue to seek opportunities to expand their presence on the best high streets and shopping centres. Most locations with healthy fundamentals throughout Europe are being considered by retailers.
Urbanisation of US retailing
A key issue facing the US retail sector is the move towards urbanisation that is pushing both consumers and retailers back to urban areas. Higher transportation costs, ‘baby boomer’ migration, and a growing preference for mixed-use, ‘walkable’ communities have led this change. There has also been a growing realisation among a number of national retailers that many densely-populated urban markets remain significantly undersupplied, particularly when compared with much more saturated suburban and ex-urban trading areas. Many retailers – especially ‘big box’ – have already responded by opening scaled-down facilities in these areas in an attempt to boost sales. Looming issues, which could negatively impact retail, are the still-floundering housing market, sharply rising fuel prices and governmental budget cuts.
Prime Retail – Rental Clock, Q1 2011
Source: Jones Lang LaSalle IP, April 2011
Industrial / Warehousing
 Singapore tops the rental growth league Strong exports and retail sales continue to underpin demand for logistics space in Asia Pacific, particularly China and Hong Kong, though net absorption in Q1 2011 was lower than Q4 2010 due to limited supply. In Singapore, demand for high-tech industrial space was mainly the result of consolidations and the back-office requirements of financial institutions. Rents across the region’s major industrial markets continue to grow steadily with the largest quarter-on-quarter increase in conventional industrial space recorded in Singapore (+14.3%).
US market stabilising
Much of the recent spate of leasing activity in the US industrial sector has centred on large corporate users, either expanding their supply chain networks (while costs are at historical lows) or via consolidations into higher-quality, prime locations that offer more functional warehouse or distribution space. Recovery in the industrial sector, which began on the coasts – led by the Inland Empire (in Southern California) in the west and Philadelphia / Central Pennsylvania in the east – is now extending to key inland distribution hubs such as Dallas, Indianapolis and Memphis.
Average asking rents have been on a continual decline since early 2008. However, the rate of decrease has been slowing in recent quarters, and preliminary figures for Q1 2011 suggest that rents are beginning to stabilise. As demand fundamentals continue to firm and vacancy rates (which currently stand at c.10%) decline further, we expect an imminent bottom to ‘asking rents’. However, rental spikes will be limited to those few markets, like the Inland Empire, where shortages of large blocks of available space are creating a supply vacuum. In general, rents are not anticipated to experience a significant uptick in 2011.
Shortages of modern space across Europe
In Europe, demand is being driven by ongoing logistics network optimisation as well as an expanding and changing retail landscape. The lack of speculative development since mid-2008 is expected to lead to a shortage of modern floorspace by mid-2011. Prime rents appear to have reached a bottom in the majority of European markets, with a few markets, notably in the CEE region, recording growth during the quarter – e.g. Moscow (8.7%) and Warsaw (5.5%). A lack of supply is expected to result in rental growth in most major warehousing markets over the remainder of the year.
Prime Industrial Warehousing – Rental Clock, Q1 2011
Source: Jones Lang LaSalle IP, April 2011
Residential
 A robust recovery in US rental apartments
In the US, the rental apartment sector continues to enjoy a remarkably robust recovery not yet experienced by the other major US real estate sectors. National vacancy rates have moved sharply downwards, declining by a further 40 basis points during Q1 2011 and are now approaching the 6% level. A combination of an improving labour market, the spectre of a renewed fall in home prices and tight home-lending standards is increasing the propensity to rent, particularly among new generation households. The US home ownership rate has declined from a record 69% at the peak of the housing market to 66.4% in Q1 2011, and further modest declines through 2012 are possible.
Occupancy rates and rents will also continue to be buoyed over the next year by low levels of new construction being delivered to the market. However, this will begin to change in the latter half of 2012 and into early 2013, as active searching for construction financing for apartment communities – which is available in meaningful quantities – has surged over the last few months. A significant amount of groundbreakings is beginning in Q2, and will be increasing in Q3 and Q4 2011.
Asian buyers become more cautious
The residential sales market in Asia was generally quiet in Q1 2011, as buyers became more cautious about further tightening measures by governments. Sales activity generally declined in Hong Kong, Singapore and China Tier I markets, though prices have, and are likely to remain, largely stable for 2011.
Across Asia, leasing activity was mixed during Q1 2011. Demand in the luxury and high-end residential markets in Singapore and China Tier I cities was generally steady, while demand was stronger in Hong Kong, partly due to more short-term leases associated with temporary relocations from Japan. Effective rents generally increased in most Asian cities, albeit at a slowing rate, with the largest quarter-on-quarter increases recorded in Manila (+3.6%) and Jakarta (+2.4%).
European markets finely balanced
The European residential markets remain finely balanced. With little additional lending and tightening ECB policy, the potential for price growth will continue to be limited. Annualised capital growth is broadly strongest across the Nordic markets, with the core continental European economies showing marginal yet positive returns. In the UK, the recent government budget may yet provide a spark for new residential construction. Consultations are ongoing into facilitating investment in residential REITs and boosting housing supply via easing change-of-use restrictions from commercial to residential space.
Although the UK residential market continues to perform in a polarised manner, average house prices are broadly flat year-on-year. Recent research suggests that more than £7.5 billion (US$12 billion) from domestic and international funds is aimed at residential development or investment in the UK. Around 70% of this capital is targeted at London, where values and rental prices are rising. |
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