Global real estate investment volumes declined by 28% year-on-year from a record amount of capital markets activity in 2019. According to JLL’s recently published Global Real Estate Perspective, full-year transaction volumes totalled $762 billion in 2020. In EMEA, investment volumes reached $282 billion, marking a 17% decrease year-on-year.
Global investment volumes were buoyed by strong performance during the fourth quarter, which totalled $267 billion, an increase of 65% from Q3 2020. Fourth quarter global investment activity continued the trend of decelerating quarterly declines throughout 2020 -21% year-on-year in Q4 2020 compared to -41% in Q3 2020 and -50% in Q2 2020.
Established markets with sector diversity, transparency and scale fuelledthe fourth quarter rebound.France, Germany and the U.S. totalled an aggregate of $150 billion, representing an increase of 81% on Q3 2020, during the final quarter. Gateway marketsin Europe and Asia Pacific saw interest pick up in the quarter, where investor demand is improving for centrally-located, larger-ticket assets– particularly core offices.
“As 2020 progressed and the pandemic matured in markets, investors have learned to better navigate the uncertainty.This confidence was reflected in higher levels of capital deployment in the latter part of the year,” says Sean Coghlan, Global Director, Capital Markets Research & Strategy, JLL.
According to JLL, the improvement in activity was most evident in select segments of the markets.
- Capital targeting income and operational stability: The logistics and multifamily sectors continue to exhibit strength globally, with rent collections holding steady and secular tailwinds intact. This dynamic is resulting in more resilient pricing, with winning transaction bids hovering near expectations. The office sector experienced a moderate recovery in investor sentiment in the fourth quarter, with activity expanding in global gateway markets. Private capital has seized on the opportunity to acquire quality office product, representing a near all-time high of 29% of acquisitions valued above US$100 million since the onset of the pandemic. Institutional investors are returning to the market but remain cautious.
- Core product seeing expanded liquidity: Desirable long-let, core product represented the largest share of closed transactions in 2020. Prime, high-quality assets have experienced relatively marginal price adjustments since COVID. Pricing for core logistics product continues to hit highs, andhigh-quality, core multifamily and office product also marked relatively modest, single-digit pricing adjustments since the onset of the pandemic. Opportunistic capital remains active and is building conviction for higher-risk opportunities. As pricing discovery continues, we expect this will drive volume gains in this segment of the market and bring needed liquidity to the hotels and retail sectors.
- Debt market benefitting from favourable rate environment: The appetite for debt risk favours sectors and markets benefitting from secular and cyclical shifts. The depth of lender pools continues to expand and loan-to-value ratios are favourable in the logistics and multifamily sectors. Lender appetite is dependent on the country and region. In the U.S., markets boasting more supportive cost-of-living, corporate relocations and expanding industries are experiencing spread compression. Conversely, lending markets in Europe favour the major markets – such as London, Paris and Berlin.
Bid-ask gaps remain in markets, with varied pricing impacts and spreads. Sectors facing more significant income uncertainty – primarilythe retail and hotel sectors – are experiencing greater price adjustments. The disparity between risk profiles is also evident with all-in pricing impacts most significant in value-add and opportunistic segments of the market.
“Despite the divergence in many parts of the market, optimism continues to improve on the heels of recovering liquidity, and the low cost of debt is supporting cap rate compression in sectors with growth and favourable demand outlooks. In 2021, we expect this to translate into a broadening of the capital markets recovery,” says Coghlan.
According to JLL’s interactions with investors, optimism continues to improve on the back of deeper liquidity and as measured by increased bidding activity globally. However, signs of improvement in the capital markets could be impacted by the ongoing wave of lockdowns and depressed economic conditions.