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Report shows commercial real estate direct investment volume will more than double to US$1 trillion by 2030; Asia Pacific region leads investment growth since crisis
DAVOS-KLOSTERS, SWITZERLAND, Jan. 23, 2013 — As business and political leaders discuss global challenges at the World Economic Forum annual meeting in Davos-Klosters, Switzerland, a new report by Jones Lang LaSalle (NYSE:JLL) reveals that investors are already responding to shifting economic conditions by funnelling more capital into commercial real estate, particularly in the Asia Pacific region. In fact, the firm estimates that the direct commercial real estate transactional market will exceed US$1 trillion per annum by 2030, compared with 2012 volumes of nearly US$450 billion.
“Capital growth ambitions that dictated many investment decisions before the financial crisis have given way to a global hunt for secure income streams in a low-interest-rate environment,” said Colin Dyer, President and CEO of Jones Lang LaSalle. “While real estate asset values have shown no immunity to the financial shocks of recent years, real estate nevertheless is emerging as a preferred option for many investors.”
The report, “The Advancement of Real Estate as a Global Asset Class,” finds that:
Investors are targeting a limited number of super-prime assets, chiefly office and retail buildings in major gateway cities, that have emerged as the most desired assets for some institutional investors intent on owning the most stable, best-located assets, fully leased to the most desirable tenants. Competitive bidding has driven prices on many of these properties up to and beyond pre-crisis levels.
Investment portfolios shift toward real estateAcross eleven major global markets, spreads between real bond rates and prime-grade office market yields are on average 195 basis points wider now than in the fourth quarter of 2007, JLL found. Those higher returns are convincing many investors to increase exposure to real estate.
“With sovereign bond market yields at multi-decade, and in some cases multi-century, lows, and with the outlook for capital growth subdued, yield becomes a core driver of investment returns,” said Dyer. “The spread between real estate and sovereign debt yields remains high, offering generous compensation to investors for the additional risk associated with real estate.”
To a lesser extent, increased allocations to real estate also reflect investor efforts to reduce risk by diversifying away from the traditional portfolio mainstays of bonds and equities, JLL’s report concludes.
Asia Pacific real estate takes the leadThe Asia Pacific region is emerging as the long-term winner in the global contest for investment capital, boosted by the rise of domestic pension funds and private wealth. Since 2008, strong economic growth that contrasted with recessionary contraction in Europe and North America has fuelled real estate activity.
Operational challenges, low levels of liquidity and in some cases undeveloped capital markets currently constrain institutional investment in the region, which partly explains why most western institutions are underweighted in the Asia Pacific region relative to the size of its real estate markets. Over the long term, however, JLL expects relative portfolio weightings to move in favour of the region as high rates of saving, rapid urbanisation, the inexorable rise of the middle classes and evidence of improving transparency increase investor confidence and interest in the region.
More trends exploredJLL’s report identifies several other trends emerging around the globe, including efforts to increase transparency, the rapidly expanding practice of sale-leasebacks in Asia, and the increasing pace of renovations or replacement of aging real estate to better meet the needs of modern commercial tenants. Read first-hand, daily news from the World Economic Forum annual meeting on the Notes from Davos blog.
Visit Jones Lang LaSalle’s Media Center for the latest and most up-to-date news on the commercial real estate industry.About Jones Lang LaSalle Jones Lang LaSalle (NYSE: JLL) is a financial and professional services firm specializing in real estate. The firm offers integrated services delivered by expert teams worldwide to clients seeking increased value by owning, occupying or investing in real estate. With 2011 global revenue of $3.6 billion, Jones Lang LaSalle serves clients in 70 countries from more than 1,000 locations worldwide, including 200 corporate offices. The firm is an industry leader in property and corporate facility management services, with a portfolio of approximately 2.1 billion square feet worldwide. LaSalle Investment Management, the company’s investment management business, is one of the world’s largest and most diverse in real estate with $47 billion of assets under management. For further information, please visit www.joneslanglasalle.com.
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