Preliminary data indicate that global sales of significant commercial property will exceed $110.0 billion in the third quarter, a modest increase over both the prior quarter and the same quarter a year ago. While the headline figure reflects a relatively stable, if slightly improving, investment climate a number of trends are taking shape. Among the global zones, EMEA volume has slowed consistently across markets while the slowing in Asia Pac is largely in Japan and China. The Americas are emerging as a steadying factor in the rolling global recovery from recession with a third quarter spike in activity. The quarter is expected to be the most active for property sales in two years in the US, which will double its share of the global property market from a year ago. China, which has accounted for almost half of all transactions over the past year, is starting to see its market share normalize as government tightening early in the year has had a significant impact. Surprisingly, though, after a large drop in Q2, investment in property and development rights in Q3 are expected to rise 15% to 20% above Q2 levels.

Overall, transactions this quarter could fall some 5% to 10% below the average volume of the first two quarters of 2010, reflecting an uptick in global economic anxiety that has characterized much of the period. Among the property types, hotel transactions are showing the only significant quarterly improvement, with growth across all global zones. Sales of apartments are also improving in Q3, but modestly. Significant gains in the US have been offset by a slowing of apartment deals in Europe after an active first half of the year. With an eye toward shorter-term lease rollovers and the potential for greater near-term rent appreciation, investors appear to be favoring apartments and hotels, which should benefit in tandem with economic recovery. However, investors still appear circumspect regarding the lag for revenue growth tied to longer-term leases of commercial assets. Office transactions in the third quarter are flat compared to the first two quarters this year and adjusting for two large portfolio transactions, retail volume is down slightly. Both portfolios involved US mall REIT Simon Property Group, including a $2.3 billion acquisition in the US and a $900 million disposition in Europe, both of which were long anticipated. In addition, Simon’s disposition in Europe drove a spike in activity in the Netherlands, the only country with a material gain in Europe so far in Q3. Overall transaction volume in Europe for the quarter is likely to dip 20% below the average volume for the first two quarters. Along with Holland, only Poland, where volume has been relatively flat, will likely not see a decline. Sales in most Asia Pac countries are running contrary to the slowing overall volume trend and recording increased activity. But the largest markets, China and Japan, are the exceptions. Malaysia and South Korea are the stand-out markets, and Hong Kong continues to defy gravity with transactions growing at a good clip. Australia is also experiencing an upward trend in property sales. Gains in th Americas are largely due to the upswing in US activity, although Brazil is also seeing strong investment.

Focusing only on the commercial property types – office, retail and industrial – illustrates remarkably stable global investment volumes this year despite the divergent trends across markets. It strongly suggests that 2009’s year-end investment patterns will likely be repeated. In both years, transaction volume was relatively equal in each of the first three quarters; that was followed last year by a spike of activity in the fourth quarter. This seasonality was muted in 2007 and 2008 due to the financial crisis, but sales in the fourth quarter of 2009 were 70% higher than the average of the first three. Now, with nearly $20.0 billion in deals already in contract in Europe alone, a spike in the coming quarter of a similar magnitude is expected.

Despite the relatively stable investment volumes for commercial property, prices are improving and yields are continuing to compress across all zones. Asia Pac is experiencing the most significant drop in yields, driven primarily by Hong Kong’s heated market, although cap rates on commercial properties in Australia have also begun to drop. Yields are rising in Japan, but top properties there can still get premium pricing, such as Frontier’s acquisition of a prime retail property on the Ginza at a reported cap rate of 4.0%. And, top assets in Hong Kong, such as Matheson Centre and 22 Russell Street, commanded acquisition yields in the low 2.0% range. In London, Paris, New York and Washington, DC, greater parity in asset pricing has been achieved with prime properties commanding yields of 5.5%, or better in some cases. Commercial yields in the UK are accounting for much of the decline averaged in Europe, and London will easily be the most active market globally in Q3.

Cross-border Investment Rebounding

While EMEA transaction activity may have tempered in Q3, cross-border transactions, there as a percentage of overall activity, continues to climb. Now at 46%, it is the highest since early 2008 and the financial crisis. In the Americas, cross-border activity remains low as a percentage of deals but foreign investors continue to explore opportunities at an increasing rate. Cross-border activity also increased materially in Asia Pac in the third quarter, comprising only 18% of all transactions, well off cycle highs of more than 30% recorded in 2007. A more comprehensive analysis of global cross-border investment will be available in the upcoming release of the Global Capital Trends.

Upcoming Publications

Final results for Q3'10 will be published in Global Capital Trends (GCT) at the end of October. Global Capital Trends is Real Capital Analytics' premier report on the worldwide commercial real estate industry featuring quarterly analyses of the Americas, Asia Pac, and EMEA. These analyses include volume and pricing, investor composition and leading buyers, transaction structures, niche property types, and troubled assets.

Our next GCT report will feature: