In Uncertain Environment Investors Turning to Prime Properties as Core Investment

CBRE releases Global Real Estate Investment Market Outlook for 2012

2012/02/09

CBRE released today its “Global Real Estate Market Outlook 2012” report, discussing the prospects of heightened performance in the year ahead. Some believe that with the proliferation of concern over destabilization of worldwide macroeconomic and political conditions, investors can only be expected to maintain their cautious stance. However, this is not necessarily the case given the existence of high-quality buildings in prime locations, where investors capable of maintaining extremely high levels of competitiveness are concentrating, relative to other locations.

Noteworthy Trends

• In an uncertain economic climate, global investors will take a more cautious stance, adopting core strategies
• Global economic repercussions will extend to Asian growth markets
• Global investors will focus attention on Japan as a source of top-quality core investment targets

Core Investment Strategies

One effect of Europe’s severe debt problems is a continuing state of future uncertainty in advanced industrial nations. With economic activity stagnating, the first thought among tenant companies is to be cautious in making decisions on where to relocate in the future. As a result, demand is forecast to stop short of exceeding last year’s levels.

Amid these circumstances, European and U.S. investors are concentrating in core markets comprising high-quality buildings in prime locations within the most liquid and transparent markets. The trend toward this defensive strategy, aimed at securing the safest investments, is expected to grow. In addition, development has been limited in many markets by an ongoing trend toward constriction of financing. Given that new supply is also insufficient, this will be a factor for even further elevated performance at such high-quality buildings in prime locations.

“Amid this global environment of persistent political and economic uncertainty, the outlook for investment can only be unclear,” said Raymond Torto, CBRE Global Research Chief Economist. “As a result, investors sense the appeal of the strong inflation hedging capabilities of core investment assets. This is why core real estate investments will continue to be the focus of interest in 2012 as components of an investment strategy taking advantage of their superior risk-adjusted yields compared to other asset classes.”

He added that, “Value-add strategies are more directly dependent on the economy’s growth or recovery, and are therefore likely to be less popular in this environment. Properties on the secondary real estate market will therefore decline in value from the perspective of investors. A polarization will thus develop in the global real estate investment market between core investments and everything else.”

Note: Real estate investments are generally divided into the broad categories of core, value-add and opportunistic, with the former entailing the lowest risk, and the latter categories entailing successively higher risk. Core investments are associated with low-risk, low return strategies promising stable income gain from prime properties. Value-add strategies aim for middle-risk, middle-return by adding value to existing properties in order to boost return.

Global Economic Impact on Asian Growth Markets

In Asian markets, the proactive stance of local investors has promoted continued strong economic performance in sharp contrast to economies in advanced industrial nations. Even in these Asian markets however, concern is rising over economic slowdown in China and the repercussions of economic risk from Europe and the United States. Investors in the region are thus adopting attitudes that are more cautious.

Asia's accustomed status as a growth market relative to Europe and the United States has not changed, nor has its bright future. However, the familiar scenario of autonomous Asian growth relying on Chinese economic expansion will soon wear thin. Asia is not expected to be immune to increasing vulnerability to global movements originating with advanced industrial nations.

“Asian markets benefit from the advantage of strong intraregional links beginning with China, and this will continue to serve as a strength for them,” said CBRE Asia Pacific Research Head Nick Axford. “However, while investors may be keeping an eye on the long-term potential of such developments, they have no choice but to take a cautious stance for the time being. So they are turning to the primary market rather than the secondary.”

With regard to Japan's investment market in 2012, he added that, “The sheer scale and liquidity of the Japanese market are great enough that there are top-quality investment assets from which high yield at low interest can be anticipated. As such, it is now the focus of intensive interest by global investors. Another plus is the fact that the market is in an active phase in the midst of recovery from last year’s earthquake.”

For details on the report, please review the "Global Real Estate Market Outlook 2012".

About CBRE Gro​up, Inc.

CBRE Group, Inc. (NYSE:CBG), a Fortune 500 and S&P 500 company headquartered in Los Angeles, is the world’s largest commercial real estate services and investment firm (in terms of 2014 revenue). The Company has more than 70,000 employees (excluding affiliates), and serves real estate owners, investors and occupiers through more than 400 offices (excluding affiliates) worldwide. CBRE offers strategic advice and execution for property sales and leasing; corporate services; property, facilities and project management; mortgage banking; appraisal and valuation; development services; investment management; and research and consulting. Please visit our website at www.cbre.com.​