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Back on track: promising year to come for commercial property

Commercial property was the ultimate winner among property markets in 2015

It’s been a chaotic year for real estate and foreign property investments but markets weakened by the 2008 financial crisis are finally back on the map. Others, however, remain subdued and some have simply crashed and failed over the last 365 days. Residential markets are on the road to recovery and commercial property investments have reached levels last seen in 2007. Here’s the Tranio round-up of major events that will influence the markets this year.

– Chinese become the world’s most prominent buyers

– America’s Federal Reserve takes the plunge and raises the interest rate

– Spain has clawed its way back to top property destination

– Global commercial property activity reaching pre-crisis levels

Commercial property charges ahead

Commercial property investments are finally on track to meet or potentially exceed the pre-crisis levels of 2007. During the first half of 2015, global real estate investments were just 8% lower than in 2007, reaching $407 billion in H1 2015 vs. $442 billion in H1 2007.

Market overview

The situation on U.S. commercial property markets confirms solid growth. Investment volumes there will total $435 billion by the end of 2015 and, by Q3 2015, America’s commercial transaction volume already composed 51.8% of the global market year-to-date according to JLL. In fact, the price index has already exceeded the pre-crisis peak of 2007.

Key figures

€237.8 billion in Europe

highest rolling investment volume ever recorded

$435.0 billion in the U.S.

total investment volume forecast for 2015

85.0% in UK and Germany

Q3 capital inflow from

non-European sources

300 cities

72% of real estate investment activity

Total real estate investment activity in Europe is also back on track. By the close of Q3 2015, rolling annual volumes hit their highest point on record at €237.8 billion (about $264 billion) according to Cushman Wakefield, an international real estate services firm.

Foreign investment activity spiked in the UK and Germany between July and September as 85% of capital inflow came from non-European sources.

Office, retail and other commercial property segments remained most popular throughout the year, with investments topping $54.6 billion in Britain and $24.0 billion in Germany during the first six months of 2015.

-> High yields and growing demand for student property in the UK and Germany

However, suppressed yields in the office segment have pushed foreign investors to diversify away into more niche segments such as retirement homes and student property where yields are higher, occupancy is over 90% and future demand is high.

Niche commercial segments in the UK

Student residences Retirement homes
Average yields 4.25–6.25% 5.0–7.5%
Occupancy 99%+ in Purpose Built Student Accommodation (PBSA) 90.0% + occupancy rates in all facility types
Demand High High
Forecast Number of enrolled students to double by 2025 Over 65s to compose 23% of total population in 2035
Sources: ONS, Lasalle Investment Management, Tranio

Cities in demand

Commercial investments are flowing straight into a limited number of cities, the majority of are located in the Western Hemisphere. 72% of all commercial real estate transactions and 69% of cross-border transactions went to 300 leading urban hubs according to the Globe300 report published in December 2015.

In fact, 53% of all cross-border investments in the Globe300 cities go to New York, Paris, London and Tokyo, a fact confirmed by Chinese investment trends this year. Capital from the Middle Kingdom’s slowing economy flowed steadily towards dominant world markets like New York and London.

-> Did the Fed just break the real estate market?

Rumours of a bubble on hot markets, particularly in New York, have died down and the Federal Reserve’s decision to raise the interest rate to 0.5% is not expected to affect investment activity there in the near future.

In Europe, Germany's «Big Seven» cities distinguish themselves in terms of commercial investments into all segments. By October, €38.1 billion had already been invested compared to €39.8 billion for the whole of 2014 according to CBRE.

World’s Top 10 real estate markets, H1 2015

Rank Country Total investments,
USD bln
1 USA 222.4
2 UK 54.6
3 Germany 24.0
4 Japan 13.0
5 Australia 10.3
6 Spain 9.3
7 France 8.8
8 Norway 6.8
9 Sweden 6.5
10 Hong Kong 5.5
Source: CBRE

Germany’s seven leading cities — Berlin, Frankfurt, Hamburg, Dusseldorf, Cologne, Munich and Stuttgart — attracted much attention in 2015. Overseas buyers concluded 53% of all commercial property transactions there during the first nine months of the year. There is enormous pressure on the housing market, leading to occupancy rates over 90% and annual price dynamics of +9.5% on average.

-> Profits to rise with occupancy for Germany's commercial accommodation

Foreign investors are now, more than ever, reliant on the economic and political stability of the West’s leading economies.

Tranio’s managers offer advice on buying real estate overseas
Anna Boyarchukova
Anna Boyarchukova
Real Estate Expert Tranio overseas
+44 17 4822 0039
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