LASALLE MID-YEAR ISA UPDATE 2018 - LASALLE INVESTMENT MANAGEMENT
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
LaSalle Mid-Year ISA Update 2018
The Global Outlook at Mid-Year 2018
Each year after LaSalle’s global outlook has been This year, the biggest concern was the amount of capital queued up to get
into the most popular strategies (like infill logistics buildings and transit-served
published, we take the show on the road. The key properties in major urban areas), even as capital has started to dry up for low-
findings are summarized for clients in over 30 different productivity retail locations.
cities around the world. At each venue, we share a Of course, the capital markets, property markets and the business cycle
strategy matrix to illustrate our best picks for core never stand still. Our investment teams, including our strategists, must adapt
and non-core investing. We also highlight recent to whatever structural, secular or cyclical changes continue to roll through
the commercial real estate markets. This year was no exception. The period
investment examples to illustrate the various strategies from December to early June was loaded with abrupt changes, along with the
we recommend. Finally, we listen to our clients to hear steady accumulation of evidence for the secular trends and cyclical shifts we
what’s on their minds and to learn what pressures they follow most closely. We anticipated many macro-economic trends and market
movements relatively well, but the intersection of politics and international trade
might be under. created a number of surprises.
LaSalle Investment Management | Mid-Year ISA 2018 | 2
Overall, the portfolio strategies we recommended in early December have generally held up against both expected and unexpected market forces. Most importantly, real estate continues to perform as a “shock absorber” in a portfolio, especially since market volatility picked up in the fixed income and equity markets.
Three big macro surprises 1 The Tax Cuts and Jobs Act in the US, 2 New restrictions were placed on 3 The rumbles of an international trade
enacted in late 2017, was codified into law Chinese insurance companies investing war in January-April could have been
involve the world’s largest in 2018. This legislation was designed to abroad, followed by the subsequent ascribed to “posturing” right up until the
economies: boost the US economy by cutting personal tightening of credit terms, especially for G-7 summit in early June. Earlier in the
and corporate taxes, repatriating offshore the shadow banking sector. In some year, the Trump Administration directed
corporate profits, all while keeping cases, Chinese financial institutions most of its criticisms to the negative
government spending near a record were asked to divest recent purchases balance of trade (as measured by goods,
pace. So far, it appears to have had the and to drop out of the bidding for live not services) with China and within
desired effect of improving consumer/ transactions. Not all Chinese buyers were NAFTA. Even though the statements from
corporate confidence. The sponsors of the affected by the clampdown. Individuals the White House were not consistent, the
Bill will likely take credit for keeping the and family-owned companies continue overall protectionist direction was clear.
US economy on track for a record-long to invest in real estate outside of China. At the G-7 summit, the US position shifted
expansion. The longer-run impact of the But a clear message has been sent by in a material way to include placing tariffs
Act remains uncertain, as it balloons the the PBOC that insurance companies on imports from all G-7 countries that run
obligations of the Federal government and other financial institutions should “goods” trade surpluses with the US. The
and will likely burden future generations stay closer to home and not be making situation is fluid and unpredictable, and
with more expensive debt when interest risky investments in foreign currencies. the threat of a trade war is more serious
rates rise. Nevertheless, as we pointed Overseas investment by Chinese than at any point since President Trump
out in our February briefing note (click corporations across all industries is down took office. The impact of a multi-country
here to view), the short-term impact on trade war on real estate will be felt first by
nearly 30% in 2018 versus 2017. For real
commercial real estate as an asset class the US economy, which will have to adjust
estate, this drop is even higher (greater
in the US is mostly very positive. to higher pricing on steel, aluminum and
than 50%). The government takeover of
other capital goods like autos. US ports
Anbang Insurance in February is clear
and major trans-shipment points where
evidence of how seriously the PBOC
imports are broken down for distribution
takes the new restrictions and how it is
across the US will also likely see a drop
committed to financial de-leveraging.
in activity. Retaliation tariffs on US goods
The impact on real estate pricing around
will also act as a drag on targeted sectors
the world has been and will continue
of the US economy. As we discuss in the
to be negligible, as plentiful capital is
Asia Pacific section, China exports to the
available to replace the Chinese insurance
US will certainly be another immediate
companies.
impact starting on July 6th with steel
and aluminum, and perhaps growing to
electronics and other exports thereafter.
We do believe that the Chinese economy,
which has many diverse trading partners,
will eventually find other markets for its
Source: BBC
exports to replace lost trade with the US.
LaSalle Investment Management | Mid-Year ISA 2018 | 4
Other macro trends, which • Upward movement in interest rates occurred in nationalist, not pan-European, policies. This volatility tends to solidify real estate’s
in several G-20 countries, as economic Nationalist political parties hold a majority in contribution to a mixed-asset investment
we did anticipate, include growth was upgraded. The US has increased Hungary and a near-majority in Poland. The portfolio.
the following: the most, with the US Treasury up 60 basis Trump Administration did not spring from a
• Private real estate indices showed resilience
points since the beginning of the year. traditionally populist Republican party and
President Trump’s policies defy a simplistic and posted relatively steady values, in spite
• Technology spending by corporations characterization. Most political analysts of this volatility. Rising interest rates (or the
accelerated, as many were eager to plow would put the Trump administration’s policies threat of the same), have not reversed the
record profits into investments in “big data”, (America First, tighter immigration policies, pattern of steadily rising real estate capital
cloud computing, and data analytics. high tariffs) very firmly in the populist1 camp. values in most countries.
The impact on real estate is that cross-border
• The rise of Prop-Tech and Fin-Tech as • Listed real estate indices continued to
capital flows into real estate are under closer
dominant destinations for venture capital, show lackluster performance—held back
scrutiny in several countries and could be
with funding hitting record high levels and by concerns about the future of shopping
subject to cross-border taxation, if caught up
new products brought to market faster than center REITs as e-commerce continued to
in a trade war.
ever before. grab share from brick and mortar retailers.
• Political summits between North and South Our view is that this sell-off has not been
• An uptick in very large portfolio transactions especially discriminating and penalized
Korea and between North Korea and the
occurred, including several go-private high-productivity centers as much as low-
US were recurring headlines. For now,
or REIT M&A transactions. Dry powder productivity centers.
any interruption of Asian and Korean rapid
accumulated by private equity investment
growth seems like a lower probability than
managers is at record levels. REIT • Finally, fundamentals in most of our major
six months ago. The early results of the
balance sheets are healthy with relatively markets showed resilience. Construction
Singapore Summit between President Trump
low leverage levels. However, access volume ticked up in many markets we follow,
and Chairman Kim Jong-Un have not had
to the capital markets by many REITs is but net absorption generally kept up.
any immediate negative impact, which was
limited because they trade below the Net
a worry going into the Summit. It is too early
Asset Value of their holdings. Many are in
to know if enduring positive impacts from the
the relatively rare position that selling is
summit are assured—time will tell.
accretive, while buying is dilutive.
• As of mid-June, we now put an all-out trade
• The rise of populism and nationalism
war into a high-impact/medium-probability
continued in Europe and the US, as those
scenario, which has the real potential to
“left behind” by globalism made demands
wake up the Geopolitical Grizzly bear and to
on their governments to close borders and
damage positive momentum across the G-7
to adopt protectionist policies. The rising
and China.
political power of nationalist parties in
Austria, Hungary, Italy, Poland and Slovenia • Capital market volatility, which had been
1 In broad historical terms, Populism is a political
contrasts with the much weaker, minority mysteriously quiet in 2017, moved up several
philosophy supporting the rights and power of the
common people in their struggle against a privileged populist movements in France, Germany, the notches as international VIX indices spiked
elite. The recent book by Ian Bremmer, Us vs Them: Netherlands and the UK. Populist politicians in the first and second quarters of 2018. We
The Failure of Globalism, summarizes who and what
share tactics and common complaints, had anticipated this would happen eventually.
drives the rise of populism in many countries around
the world. even though they may remain firmly rooted
LaSalle Investment Management | Mid-Year ISA 2018 | 5
Outlook for the Second Half of 2018
The Goldilocks theme, picked back in October for the ISA, has GOLDILOCKS CONSENSUS
GDP GROWTH FORECAST: BLOOMBERG SURVEY
held up remarkably well. The global economy has been upgraded
by the World Bank and by the Bloomberg Consensus Survey
several times in the last nine months, so “just right” economic
conditions prevail.
The “three bears” we identified in 2017 of the richest countries (Germany, Japan,
have generally stayed in their caves Singapore, South Korea, the UK and
in 2018. At quarterly “House View” the US) are close to the length of their
discussions, led by LaSalle’s Research average expansion (between 6 and 9
and Strategy teams across all of our years). In particular, the US is closing in
investment committees, the odds of each on a record-length expansion. However,
bear scenario has been under continual an international comparison of the
revision, depending on the news cycle length of longest expansions (defined as
tracked by our monthly macro decks. growth uninterrupted by two quarters of
However, even though the odds of recession), shows that there is nothing LATE CYCLE MOMENTUM
various recession triggers-geopolitical sacred about a ten-year expansion. In CURRENT EXPANSION VS. AVERAGE EXPANSION
tension, monetary policy mistakes, or fact, many countries have experienced
unsustainable fiscal spending-rose and expansions that far exceed the upward
fell, the main storyline did not change. limit of eight to ten years found in
The odds of a financial crisis or a major Germany and the US. (see Late Cycle
global recession remain very low for the Momentum) So, we are not ruling out
rest of 2018, and a global expansion has the strong possibility that the US and
excellent odds of continuing well into Germany have the ability to break records
2019. in terms of the length of their current
expansions.
In many developed economies, the
length of the current expansion now
approaches or exceeds the average
length of an economic expansion. Many
LaSalle Investment Management | Mid-Year ISA 2018 | 6
Data-Tech, Fin-Tech and Prop-Tech
FINANCIAL MARKET SECULAR TRENDS
Another theme that we flagged in the 2018 ISA was the
continuing dominance of tech industries in urban economies,
the capital markets and also the real estate markets. We
continue to explore this trend and take a deeper dive into the
predictive data analytics used in LaSalle’s own investment
and asset management activities (click to view PDA paper).
The rapidly evolving data ecosystem that influences retailing
and consumer behavior has also made rapid strides in two
closely related industries—finance and real estate.
The secular trends of Finance can be computing and widely distributed
divided into two broad domains: Wealth ledgers. We summarized the
Management and Financial Transactions. implications for real estate in a recent
Both domains are adopting new white paper (click here to view the
technologies at a blistering pace. On the blockchain paper). Real estate sits
transaction side, technology is having several steps removed from the direct
a huge impact on the way that financial impact of the blockchain revolution.
institutions organize data for privacy, Derivative impacts include a
for speed and for efficiency. The rise of lessening of demand for “back-office”
blockchain technology has created an space housing financial clearing/
ever-increasing demand for data centers, accounting functions and a rising
computing power, and has led to a demand for high-speed connectivity
decentralized approach for data storage/ in buildings and for highly-specialized
retrieval based on the principle of cloud data centers.
LaSalle Investment Management | Mid-Year ISA 2018 | 7
One attribute common to all of the prop-tech The intersection of fin-tech and prop-tech start-ups have been accelerated
by the $6 billion in growth capital provided to firms that bring new
firms is their ability to generate terabytes of technologies to real estate. These firms range from well-known co-
data to an industry that has historically not working enterprises like WeWork, to lesser-known data/leasing/property
management systems (like CompStak, Corrigo, Leverton, ReMeter, and
been very data-rich. VTS) used for underwriting and running buildings more efficiently.
One attribute common to all of the prop-tech firms is their ability to generate
terabytes of data to an industry that has historically not been very data-
rich. The rising transparency of real estate operating and transaction data
will have implications for the way that large portfolios are underwritten,
leased and managed for years to come. The progress is especially fast in
semi-transparent markets which may leap to becoming transparent in a
much shorter length of time than it took developed markets to earn a high
transparency rating. Click to view the JLL GRETI.
Across the wealth management domain, real estate has been part of
several slower-moving, but important, secular trends for over a decade.
These include the rise of alternatives in a mixed-asset portfolio, the shift
from centrally-managed defined benefit to self-directed retirement portfolios,
and the rise of the passive approach to investing in securities via ETFs
(exchange-trade funds). More recently, Smart-Beta, Target Date, Interval
Funds and new regulatory regimes are pushing wealth management into
a faster-paced and tech-enabled industry. The ability to raise and manage
real estate capital via crowd-funding and on-line brokerage sites has already
started to have a meaningful impact for smaller, commercial properties.
A new class of tech-driven firms is also beginning to launch Artificial
Intelligence-based2 products for real estate investors.
2 Artificial Intelligence (AI) products in the real estate space are still very new. The rapid adoption of
digital investment platforms (also referred to as robo-advisors capable of developing customized
financial advice based on algorithms that load your personal data), will likely also pave the way for
real estate investment products that meet the needs for the next generation of investors.
LaSalle Investment Management | Mid-Year ISA 2018 | 8
Asia Pacific Outlook at Mid-Year
Steady performance in Asia Pacific during an eventful political backdrop
The first half of 2018 turned
out to be highly eventful
for geopolitics across Asia
Pacific. It is difficult to Looking back over the last six months,
trends that have played out as we
foresee how quickly the expected include: 1) the Chinese
trade and economic tensions economy stabilized; 2) Most central
between the US and China banks in the region maintain an
accommodative bias and are generally
could shift directions on slower in raising rates than the West;
a daily basis, although our 3) Regional economies continue to be
view on the near and long supported by favourable government
policies, particularly fiscal stimulus;
term impact of a potential 4) Asia Pacific real estate market
all-out US and China trade fundamentals have performed well,
and generally as we expected; and
war remains unchanged. 5) Real estate capital flows in the
Other headline risks are region remain strong. One area that
also lingering; however, surprised us on the upside was that
several logistics markets in the region
capital market volatility outperformed our projections. New
in Asia Pacific has stayed supply was leased up at a much faster
pace than anticipated, while strong
remarkably low. Capital investor demand continues to drive cap
markets generally believe rates lower.
that these idiosyncratic
risks will not build up to
create systematic risks.
Geopolitical events growth could be more negatively impacted
dominate headlines than that of the US in the short term.
The asymmetry of this short-term impact
Investors were largely unfazed before and comes from the fact that 18% of China’s
immediately after the historic Trump-Kim total exports go to the US, while only 8%
Summit in Singapore. The fact that this of US total exports go to China4. Other
meeting could potentially set the stage for major Asia Pacific countries that have
alleviating the North Korea threat over the relatively high exposure to exports to the
coming years takes the region (and the US include Hong Kong, South Korea,
world) several steps in a positive direction. and Australia. So many countries in
the region are vulnerable to the Trump
The on-and-off trade talks between Adminstration’s view that any country
Washington and Beijing reveal deep- running a goods trade surplus with the US
seated trade tensions between the US must submit to tariffs or some other trade
and China. Trade protectionism remains adjustment mechanism.
a threat to the region’s economic growth
in the near term. An all-out trade war Over the long term, a full-blown trade war,
between the US and China is not in if one occurs, will be a lose-lose situation Chairman Kim Jong-Un and President Donald Trump
LaSalle’s base case, but the odds are for all countries. Our view remains that the
rising. It is too early to determine the US is expected to be worse off than China
economic impact of China’s vague in the long term, as China has leverage
agreement3 to “substantially” reduce the including reducing the purchase of US
US trade deficit or to retaliate “in quantity Treasuries and influence over North Korea.
and quality” to the increasing amount Additionally, China and several southeast
of trade targeted by US tariffs and new Asian countries have been expanding
curbs on Chinese investments. Trade their list of trade partners beyond the
theory suggests that a country like the US and diversifying their export markets
US can run a trade deficit indefinitely as considerably since the Global Financial
long as the build-up of its currency in the Crisis. Most countries in Asia Pacific have
international financial system eventually grown more dependent on intra-regional
comes back into dollar-denominated trade (particularly with China) and have
investments such as stocks, bonds and reduced their reliance on trade with the
companies. Simply eliminating the trade West. When the cost of goods increases
deficit misses the big picture. If the US in the US, it will ultimately dampen
and China ultimately decide to impose bi- domestic demand and lead to slower global
lateral targeted tariffs, China’s economic economic growth and higher inflation.
3 The statement made on May 19th has no mention of the $200 billion trade deficit reduction target that the White Chairman Kim Jong-Un and President Moon Jae-In
House had touted earlier.
4 Source: Bloomberg, as of year-end 2016. Data as of year-end 2017 is not yet available.
LaSalle Investment Management | Mid-Year ISA 2018 | 10COLLATERAL IMPACT ON OTHER AP COUNTRIES
IF THERE IS AN ALL-OUT TRADE WAR
China and several
southeast Asian
countries have been So, an all-out trade war represents a
drag to the global economy. Escalation
expanding their list of by either the US or China could expand
trade partners beyond tensions into other important areas such
as intellectual property protection, data
the US and diversifying security, technology transfers and cross-
their export markets
border investments. We are seeing some
early signs of escalation with the Trump
considerably since the Administration’s recent announcement in
barring many Chinese companies from
Global Financial Crisis. investing in US technology firms, and
blocking additional technology exports to
Beijing. At the moment, it is still too early to
tell how the US-China trade tensions will
conclude and the impact on regional and
global economies. But there is no question
that the odds of a geopolitical “bear” event
are escalating fast.
Note: *The above ranking is based on the respective country’s total exports to China and the US (as a percentage of their total exports)
Source: Comtrade, as of 2016
LaSalle Investment Management | Mid-Year ISA 2018 | 11What to expect in the next six
to twelve months?
China and Japan continue to
anchor the regional macro
outlook
Looking ahead, our house view
remains that the relatively sanguine
macroeconomic and real estate market
outlook of the two largest economies in
Asia Pacific, China and Japan, continues
to anchor a positive regional outlook in
2018-19.
Recent economic indicators demonstrate
that the Chinese economy is growing in a
stabile manner. Credit growth continues
but at a manageable pace, as the
government’s deleveraging campaign
on corporate credit (including Chinese
companies’ speculative real estate
PBOC has kept market conditions stable— represents a warning to these companies In Japan, Spring negotiations between
investments globally) continues. For real
despite the potentially destabilizing run-up to reduce their debt loads. However, a unions and corporate management
estate, credit market conditions in China
in debt held by Chinese corporations. widespread credit crunch is unlikely over teams yielded broad-based wage growth.
continue to tighten. What is different
Furthermore, the recent suspension of the near term. Since capital controls and Furthermore, tax cuts for corporations
this time around is that the main tool for
offshore bond issuance among Chinese residential property cooling measures are that increase wages, if successfully
tightening financial conditions has been
developers is another measure of not expected to be fully lifted, refinancing executed, could further accelerate wage
regulatory actions, less so than monetary
maintaining currency stability through risk is increasing among weaker real growth. As a result, household disposable
measures. Monetary policy in China
capital controls. As a result, Chinese estate developers in China. Looking income is expected to increase and to
continues to shift slightly to a tightening
developers are facing increasing difficulty ahead, China is set to prioritize the quality drive consumer spending of goods and
mode. Monetary policy, like lower reserve
in obtaining credit from both onshore and of growth over quantity, and continue services. Fiscal policies targeting lower-
ratios at regulated banks, is being used
offshore capital markets. All of these, in to focus on financial market reforms. income households are also expected
to offset the stress created by tougher
turn, are expected to reduce oversupply Investors can expect an environment of to increase disposable income. Non-
regulations on borrowing and a crackdown
risk in China going forward. A few cases stable, long-term economic growth with discretionary retailers are expected
on shadow bank lending, especially at
of corporate debt issued by property occasional short-term volatility. to benefit the most as lower-income
usurious rates. This balancing act by the
households generally spend more on
companies and then trading at discount
LaSalle Investment Management | Mid-Year ISA 2018 | 12necessities. Over the next 12 to 18 Rates to start normalizing, Asia Pacific countries, and we are seeing Asia Pacific real estate
months, a broader-based increase in
while real estate yields to some tightening on lending measures in
market outlook & investment
retail sales is expected to drive occupier major countries. Our view remains that
remain low in 2018-19 recommendations
demand for shopping centers in Japan. central banks in the region will gradually
Historically, most central banks in Asia increase rates (with the exception of LaSalle’s base case scenario remains that
Overall, economic fundamentals are Japan and China), but keep interest rates
Pacific followed closely the pace of rate real estate fundamentals are expected
healthy in major Asia Pacific countries. in a range that is still accommodative in
hikes in the US. However, in this cycle, to be balanced in 2018-19. Beyond
Unemployment rates in China, Hong Kong the near term. Therefore, upward pressure
the first major central bank rate hike in 2019, uncertainties increase. Pockets of
and Japan are currently at historical lows. on real estate yields is expected in some
Asia Pacific was about two years after weaknesses are expected if a growing
Australia is reaching full employment. markets/sectors. In particular, cap rates
the Fed’s first rate hike5 . The Bank of real estate supply pipeline is coupled
As a result, we are seeing some wage in Australia, Hong Kong, South Korea,
South Korea was the first major central with downside risks from an all-out trade
growth, and inflation rates are trending and Singapore are expected to be under
bank in the region to raise interest rates war, faster-than-anticipated rate hikes,
up in recent quarters although still low by more upward pressure than cap rates in
in November 2017. The divergence of or geopolitical risks. As interest rates
historical standards. Corporate earnings Japan and China. The outlook for Japan
monetary policies is primarily driven by: increase, borrowing costs are edging up
are strong, and the trend is expected is more positive, as the Bank of Japan
1) Most Asia Pacific countries do not have and lending measures are tightening in
to continue in the near term. Corporate commits to yield curve control over the
the pressure of capital outflows. Although selected countries. At the current stage
earnings are expected to anchor office next 3-4 years. Cap rates in China are
China did experience outflows, the country of the cycle, consider de-levering where
demand in major Asia Pacific countries. expected to continue to compress or
takes the approach of deploying capital possible. Since capital market driven
Additionally, there are more stimulative remain low for a longer period of time
controls instead of rate hikes. 2) Policy appreciation is mostly behind us, our
government policies on the fiscal front in relative to other major countries in Asia
makers are mindful not to add a burden to key emphasis going forward is occupier
most Asia Pacific countries than in other Pacific as capital control measures will
household debt. Household debt primarily market fundamentals. Occupier markets
regions over the next few years. These keep capital onshore. Our view remains
consisting of housing loans has been in the region are currently at different
policies are designed to offset some that the probability of significant yield
growing much faster than household stages of the cycle, which still offers a
negative impact from trade protectionism, expansion in most Asia Pacific markets
income in the region (with the exception range of core, value-add and opportunistic
expected rate hikes and any capital over the next 12-18 months remains low.
of Japan). Increasing interest rates too opportunities. Back to basics remains
market volatility driven by geopolitical In the near term, the impact of interest
high or too fast could dampen household a key theme for LaSalle’s portfolio
risks. Emerging Asian countries are likely rate increases on cap rates could be partly
consumption, and ultimately domestic managers as we focus on quality assets
to be more susceptible to the US dollar offset by strong capital market demand,
economic growth. in developed and liquid markets and
strength, as interest rates increase in abundant liquidity, and property income retaining stable income streams for core
the US. We therefore favour developed Now that interest rates in several Asia growth. However, as rates gradually return strategies, and asset management to
over emerging Asian countries. In all, the Pacific countries, including South Korea, to normalized levels, investors, particularly create values for higher-return strategies.
economic growth outlook of Asia Pacific Australia, and Singapore, are close those with low risk appetites, shall expect
countries compares well in the global to the level of the US, it is reasonable lower total returns. Higher return investors
context. The macroeconomic environment to expect some rate increases among should look out for signs of changes in
is supportive of real estate demand and these countries to maintain their currency liquidity at this stage of the market cycle,
further rental growth in selected markets/ valuation and contain potential capital especially markets with low income growth
sectors in 2018-19. outflows. As a result, short-term rates have prospects.
increased from historical lows in most
5 in December 2015
LaSalle Investment Management | Mid-Year ISA 2018 | 13CHART: WHERE ARE WE IN THE OCCUPIER MARKET CYCLE? capital market cycle, it is important to be
cautious and to focus on fast execution in
taking on investment risks for higher return
strategies. We favor decentralized areas in
large or mature office markets of the region,
such as Hong Kong, Shanghai, Tokyo, and
Sydney for this strategy.
• Lastly, the increasing office demand from
small office users6 has not been met by most
new office developments which typically
have large floorplates. This demand gap has
been filled by co-working space. Therefore,
LaSalle favors redeveloping older office
buildings in large or mature office markets
with a focus on attracting small office tenants
or co-working strategies.
Logistics: Demand drivers for logistics
remain comparatively positive in most
parts of the region. Supply, however,
is increasing, which suggests close
monitoring at the local level. As a result,
rental prospects are expected to vary
greatly by market and submarket. LaSalle
believes in cautious market/submarket/
Office: Strong corporate earnings have such as Tokyo and Shanghai; tight market • LaSalle favors Tokyo, Sydney and Melbourne
Grade B offices through repositioning
asset selection to manage vacancy risk.
been one of the drivers in boosting office conditions continue to drive strong net
strategies, with a focus on short holding While occupier markets vary at the local
demand and reducing vacancy rates in effective rental growth in Sydney with
periods and well-defined exit strategies. level, capital market demand remains
major Asia Pacific markets. Other key the next development cycle delayed to
universally strong, with little differentiation
demand drivers are also expected to around 2020; and the Singapore office • Additionally, the lack of contiguous office based on local market dynamics. Market
remain strong, including domestic and market is at an early stage of recovery. space and the historically high rents in select yields for logistics remain much higher
cross-border tech companies and co- These unique occupier and capital market CBD areas are driving some tenants to look
than those of office properties in the same
working tenants. While pricing and capital characteristics of the Asia Pacific office for more affordable space in decentralized
markets. The attractive development yield
market demand remains strong, especially sector offer a range of opportunities office submarkets. Build-to-core or value-
spreads are also supportive of build-to-
for quality office assets, major regional for investors with different risk-return add-to-core strategies in highly selective
decentralized areas with good amenities
core strategies. In particular, LaSalle
office markets are currently at different appetites. For core strategies, LaSalle
and transport links could be attractive to favors development strategies in China,
stages of the rental cycle. Strong office continues to favor Australia offices,
higher return investors with flexible or long South Korea and Japan, where spreads
demand has led to new supply in markets particularly in Sydney and Melbourne. For
investment horizons. At this point of the between yields on cost and stabilized
higher return strategies:
6 Companies with less than 30 employees market yields are attractive.
LaSalle Investment Management | Mid-Year ISA 2018 | 14Another key logistics trend that we are retailing. As discussed in Investment ASIA PACIFIC INVESTMENT RECOMMENDATIONS
watching is how technology is changing Strategy Annual 2018, necessity-anchored MID-YEAR 2018
and driving occupier demand–and retail in Japan remains our top
ultimately investor demand–for logistics. pick for core and value-add
The rise of e-commerce calls for greater strategies in the region.
warehouse efficiency. As consumers
Another key retail trend that
of online retailing demand faster and
we are watching is some retail
cheaper delivery, robotics has been
markets in Asia Pacific are in a
introduced to reduce human labor and
unique position where the rise
enhance efficiency in supply chain
of e-commerce has and will
management, particularly in China and
continue to benefit the physical
Japan. While there are different drivers
retail sector. For example,
and challenges for robotic adoption in
some retailers in China have
each country, they generally require
been successful in leveraging
an upgrade of specification in logistics
their fast-growing distribution
properties. As the technology becomes
channels from online sales to
more mature, this may favor both build-
open brick-and-mortar stores.
to-suit and multi-tenant development
Investors should also look for
strategies.
opportunities where brick-and-
Retail: The threat of e-commerce impact mortar stores offers experiential
on retail malls varies by market and retail attractions that are impossible to
segment. Our analysis suggests that brick reproduce online.
and mortar centers in Australia will be Residential: For-sale residential Source: LaSalle Investment Management, June 2018
more negatively impacted by e-commerce prices have had strong run-ups from
than those in Japan and China. We in Australia or Hong Kong as rising Hotel: Across the region, the rise of
their respective troughs in most Asia
continue to favor non-discretionary retail interest rates eventually have an impact intraregional tourism and growth of
Pacific markets, with the exception of
malls with a high tenant mix in grocery, on affordability. In China and Singapore, middle-income households are expected
Singapore. In particular, home prices in
pharmacy, food and beverage, and limited for-sale residential opportunities to drive demand for hotels in the long
Hong Kong have tripled since the trough
services located in strong residential are expected for institutional investors. term. We remain positive in Japan and
in December 2008, while home prices in
catchment areas due to the defensive Sydney doubled during the same period. In Japan and South Korea, the changing Australia, as they are expected to benefit
position they offer. E-commerce will Home prices in these residential markets lifestyles of young households is driving the most over the next few years. The
also further contribute to the ongoing could be at risk, particularly when coupled the regeneration of urban neighborhoods. key strategy focus remains on location
bifurcation between dominant, better- with interest rate increases, but we do We favor urban rental apartments with selection, managing supply risk, and exit
located, and better-configured shopping not expect substantial corrections over excellent access to workplaces and timing.
centers vs. inferior locations and outdated the near term. For investors who are amenities in major cities. As discussed
shopping centers. A successful retail in a position to take on higher risks, it in Investment Strategy Annual 2018, we
leasing strategy going forward should will eventually be profitable to invest if continue to favor multifamily in Japan for
focus on tenants with multi-channel residential prices or land prices decline core investors.
LaSalle Investment Management | Mid-Year ISA 2018 | 15LaSalle’s 2018 Mid-Year ISA-European Outlook The three key themes in this Mid-year’s European Outlook are: • We reiterate our view that UK-EU Brexit negotiations will last longer than previous expectations, and we have upped our rental growth outlook for London real estate markets • The region’s economic growth rate probably peaked at the end of 2017. Momentum remains robust, but is not strong enough to lead to impactful interest rate hikes • Thanks to sustained demand and still-modest supply, Continental European office and logistics markets will post strong rental growth, and we are more risk-on in these markets than in the UK Our updated outlook and investment recommendation shifts for both the UK and Continental European markets are highlighted below.
The UK is on the way to a
longer Brexit-a positive for
London’s real estate outlook
The biggest change to our UK outlook
came about in March when Brexit
negotiations took an important (although
expected) step forward. The UK and EU
agreed to a 21-month transition period,
set to start after March 2019 (the initial
leave date). This move simply reflects
how difficult it is to reshape the EU/UK
future relationship and many questions
remain, notably around financial services The UK real estate market has exceeded supported by modest demand but also types, however, has increased so far
passporting rights, and whether the expectations in 2017 and the first half limited current and future supply. Over the in 2018. Low bond yields continue to
proposed “backstop” solution to the of 2018 despite economic fragility and medium term we are more positive about make income-producing real estate look
Irish border is politically palatable to ongoing geopolitical uncertainty. Property the UK for three reasons: attractive, and major global cities like
Eurosceptic MPs. values rose by 5.2% over 2017, having London with a deep stock, high liquidity
• The UK benefits from an independent
This latest development confirms our fallen by 1.3% in 2016 due to a post- and transparency, and deep human capital
monetary policy and does not have to
longstanding view that the key question referendum dip. Growth in 2017 was pools, will continue to appeal to investors
reverse quantitative easing (the ECB
regarding Brexit is less whether it will driven by the industrial sector (13.9%) and over the next few years. Inexpensive
situation) or proceed to a combination of
be a hard or a soft Brexit, but more how alternative property types (6.6%). Overall quantitative tightening and raising interest
sterling will remain a contributing positive
long the whole process will actually take. property market rental growth was 2.2% rates (the Fed situation) factor for foreign investors’ demand.
We reaffirm our opinion that it will quite in 2017, increasing marginally from 2.1% Looking ahead, we believe there will
in 2016. All sectors experienced positive • The country is gradually improving its fiscal continue to be an abundance of liquidity
likely take longer than most expect, and
rental growth over 2017, with industrial position (both equity and debt) targeting both ultra-
that we will have a further extension of
the transition period as the difficulties of again the standout performer, with rents secure as well as enhanced return real
• The labour market remains one of the
completing a reinvented comprehensive growing by 5.3%. As with capital values, deepest, most flexible, and highly-skilled
estate. The former stems from domestic
arrangement continue to emerge. rental growth also slowed slightly into Q1 in Europe. As an illustration, in virtually all pension funds seeking an alternative
2018. Both office and retail rental growth well-reputed surveys, London has remained to index-linked bonds, and the latter
What this means is that a protracted Brexit were flat over the quarter. Reflecting the consistently the top destination for financial, from global real estate funds sitting on
process is now the most likely scenario, slowdown in capital value growth, total business services, tech firms, and expanding a significant amount of dry powder and
in which case the relative importance of returns in the year to March 2018 edged global retailers looking for attractive opportunities. In
retaining financial passporting diminishes, down to 10.0%. the near term, core UK property values
as the City of London will have more time In terms of the capital markets, at
are expected to remain resilient due to
to adapt to any new set of rules. The other Looking ahead, with the wider economy £12.6bn, Q1 2018 real estate investment
property’s attractive pricing relative to
implication is that the risk of a Brexit shock providing no clear boost for rents over volumes are 4.1% lower than a year
in 2019 is receding fast. the next couple of years, rents will be earlier. Investment in alternative property
LaSalle Investment Management | Mid-Year ISA 2018 | 17EUROPEAN SHOPPING CENTRE PROVISION VARIES WIDELY IN EUROPE over the medium term if prices continue to negative to marginally positive over the next
grow faster than rents. We nevertheless few years. Public real estate capital markets
continue to expect above-inflation rental have begun pricing in these potential income
growth, if slower than previously forecast. We losses quite aggressively: UK large cap
see opportunities in converting edge of city REITs with significant retail exposure were
and edge of town retail into logistics. trading at deep discounts to NAV of -24% on
May 3rd, 2018, whereas UK Industrial REITs
• Retail: There is evident distress in the and Specialty REITs (such as self-storage
retail and leisure (mainly restaurant and and student housing) were trading at a 7%
department store) sectors in the UK. and 9% premium, respectively, at that time.
Retailers are facing increased import costs
due to a weak pound since 2016, rising • UK Residential: Private Rented Sector
labour costs resulting from increases to the (PRS) remains a long-term relative winner
minimum wage, and long-term structural despite a slowing housing market and easing
changes linked to evolving consumer demand from foreign workers. Over the full
spending habits (online sales in the UK year 2017, house prices in the UK increased
as a proportion of overall retail spending by 5.1%, but in March 2018, London house
is one of the highest in the developed prices recorded their first annual fall since
world). Restaurant operators are faced with September 2009, falling by 1%. As such,
Source: PMA (Q4 17), Credit Suisse for US figure (05/17), Green Street and
Centre for Retail Research (for online sales penetration) a marked undersupply of skilled labour, investors may be able to find good quality
increased business taxes and oversupply assets in London at a discount relative to
bonds and the weight of overseas capital serviced office operators that have been very of similar offerings. In 2017, a total of 118 recent prices. Our expectation is that given
seeking to invest in the UK. Finally, from a active over the last four years, and WeWork retailers collapsed, an increase of 28% over the profound supply-demand imbalance,
regional perspective, UK property pricing specifically. In 2017, City take-up amounted 2016 according to Deloitte. Recent high- PRS will continue to experience strong rental
looks attractive relative to other major to 6.2m sqft, ahead of the 10yr average, and profile failures include Toys R Us, Maplin, growth over the medium term, but at a slower
21% of this demand stemmed from serviced and Carpetright. This year is seeing a pace than previously forecast.
European peers (for example, London
office operators. WeWork currently operates marked return to CVAs (Company Voluntary
office offers 100-125 bps premium over
in 33 locations in London, second only to Arrangement), particularly in the restaurant
Paris and Munich yields).
New York at 49. With more than two million sector with Jamie’s Italian, Prezzo and Byron
sf of space occupation in London, WeWork is having already entered into CVAs. CVAs
Looking at the impact of the above on
now the second largest occupier in London now seem to also be the choice for retailer
individual sectors, our general guidance is
(behind only the Government). Looking groups seeking to restructure their debt and
as follows:
ahead, we expect positive rental growth in rationalise their leased property portfolio.
• Office: Supply reaction has been modest London from 2020 onwards. New Look, Select, and more recently House
with the exception of London City, but of Fraser (a department store operator) have
• Industrial: This is currently the standout
remarkably, the extra space that had worried entered restructuring negotiations to cut their
performer property type in the UK, as it
market City observers has found strong occupational costs, either through outright
is in other countries. Rental levels have
tenant demand. We would caution that the closures or a demand for deep discounts in
significantly increased over the last couple
type of space being actively taken up is new contracted rents. Overall, with the exception
of years, and although pricing is not an
or modernised, and has plenty of amenities. of the best shopping centres or high street
immediate concern, it could become one
This type of space is of particular appeal to pitches, rental growth is expected to be
LaSalle Investment Management | Mid-Year ISA 2018 | 18Changes to our investment The rest of our investment recommendations remain broadly similar to those
recommendations for UK depicted in Chapter 3 of the 2018 Investment Strategy Annual. They are
Real Estate in 2018
summarised in the table below:
Over the short to medium term, two
styles of property should outperform
the market: UK HOUSE VIEW: INVESTMENT RECOMMENDATIONS
2018-2019
• Income focused: Assets that are producing
an income stream where the anticipated
volatility of the net operating income stream
is either low because of the intrinsic location,
quality of building or where the covenant(s)
are likely to weather any volatility. Assets let
to strong covenants that have the benefit
of an above-inflation indexation are likely to
outperform.
• Enhanced return: Assets in value-add or
opportunistic space where the supply and
demand dynamics are compelling and are
in locations where any rise in bond yields
won’t dilute returns to an otherwise Core
return level. In the enhanced return category,
the assets we particularly like are Central
London with flexibility in the buildings to meet
the rapidly changing occupier market, and
logistics and multi-let industrial developments
that serve major urban locations.
* Predominantly Private Rented Sector (PRS) | DTU+E = Demographics; Technology; Urbanisation + Environmental
Change
Source: LaSalle (05/18)
LaSalle Investment Management | Mid-Year ISA 2018 | 19Continental Europe’s growth acceleration over-but • Germany has recorded significant inward migration (not only from migrant and
refugee flows, but also from the rest of Europe), and keeps on creating jobs. The main
momentum still strong implication is that an increasing number of forecasters have begun pushing back the
date of the population peak in Germany, some by as many as ten years
The end of 2017 was characterised by very positive signals as Eurozone
economies experienced accelerating growth and job creation. Most forward- • What’s more, 2014-2015 saw the end of the consumer deleveraging in Europe, and
looking indicators were at all-time highs, the macro picture was as good as consumer confidence in Continental Europe is now powering ahead
it could have been, and the backlog of orders was solid.
• Finally, after three months of political deadlock, Italy has a new coalition government
However, this rosy picture seemed to have hit a wall over the first few made up of Lega Nord and Five Star. Italy does not have the fiscal space to honour all
months of 2018: many things that could have gone wrong have indeed the coalition’s spending promises, but it does have limited scope to implement some
have done so. They include extreme weather episodes in most of Europe expansionary policies that could potentially boost GDP starting in 2019, albeit at the
affecting retail sales, significant increases in oil prices, a dip in German expense of deteriorating fiscal metrics. High levels of debt will continue to weigh on the
business confidence (quite probably in reaction to a much less cooperative Italian economy, in addition to concerns about an unstable ruling coalition. Although the
US trade policy), a strong Euro that has dampened Eurozone (EZ) exports coalition is manifestly anti-EU and will put pressure on the country’s debt burden, we do
(mainly Germany’s), and three months of political deadlock in Italy following not believe that the situation in the EZ’s third-largest economy is a threat to the region’s
a general election, resulting in an anti-EU, populist coalition government. stability.
Despite these recent setbacks, we remain reasonably optimistic on growth Eurozone unemployment was 8.5% in March, its lowest level since December
in our preferred markets for a number of reasons: 2008. With rising workforce participation rates in a number of countries, wage
• More than 60% of EZ trade happens within the block, so the EZ is relatively growth is expected to pick up modestly in 2018. As such, Eurozone headline
insulated from potential trade skirmishes with the US. inflation remained subdued at 1.2% in April, while core inflation fell to 0.7%,
indicating that the Eurozone is still far from showing signs of upward price
• Investment and capacity utilisation in the EZ are robust, providing a strong case
pressures.
for the recovery to continue
• German exports seem to have levelled again and the latest EZ macroeconomic As a result, 2018 is still anticipated to be another strong year with 2.2% GDP
performance indicators have picked up again (Q2 PMIs are expected to come in growth for the EZ, and real estate fundamentals continue to respond positively
stronger) to this economic environment with the office and industrial sectors especially
seeing lower vacancy rates and rental growth.
LaSalle Investment Management | Mid-Year ISA 2018 | 20In Q1 2018, prime office rents increased by STRENGTHENING OCCUPIER DEMAND HAS REDUCED VACANCY TO NEW LOWS
5.2% compared to Q1 2017. Compared to EUROPEAN ANNUAL OFFICE TAKE UP & VACANCY RATE
the previous quarter, prime rents increased
in Brussels, Berlin, Stuttgart, Milan, Rome,
Barcelona, Madrid and Edinburgh, but
fell modestly in Paris La Défense due to
new supply. For now, the supply response
has remained modest on the Continent.
Indeed, even if the office development
cycle is gradually accelerating, it is doing
so off low levels by historical standards.
Our forecast for rental growth has two
phases: a strong phase over next 18 to 24
months, and then a sharp slowdown (albeit
remaining in positive territory). Munich,
Berlin and Madrid are forecast to record
strongest rental growth.
Similarly, for shopping centres, we are not
seeing any meaningful pipeline build-up.
In Q1 2018, prime retail rents increased
by 1.3% year-on-year. Prime high street
rents are expected to record solid growth Source: LaSalle (05/18), JLL (Q1 18)
Based on 40 major office markets across Europe, excluding Moscow
despite ongoing structural changes. Prime CEE covers Prague, Warsaw and Budapest
rents from shopping centres increased in
Madrid and Barcelona but fell in Brussels.
Average shopping centre rents held near shoring (pulling production back
restrictions. However, some submarkets months in all sectors. Our view is that core
nominal rental value, but not real value to Europe from South East Asia) are
in the Netherlands, Germany and Poland German cities are forecast to record some
after concessions and weakening credit. expected to continue to be the primary
Dominant urban schemes will outperform. need closer monitoring given the potential of the strongest rental growth across all
drivers of strong logistics demand. Until
volume of speculative developments. sectors. Income returns will be robust and
recently, logistics rental growth was
Finally, the industrial and logistics sector Going forward, rental growth prospects help drive investment performance over
limited to a small number of submarkets
has been growing over the past decade, are strongest for France, Italy and Spain, the next two to three years. Further out,
in Germany. Even though logistics
with a structural component largely driven and are expected to exceed historic we are looking at scenarios encompassing
completions are rising, our view is that
by the rise of e-commerce, and a cyclical norms. a potential disconnect between the
oversupply risk is limited (only 17% of new
component driven by the economic occupier and capital markets in the
supply was speculative in Europe at end In all, robust occupier fundamentals
and industrial recovery. Changing second forecast phase (2020 onwards),
2017) in locations with limited land supply, across Europe should support rental
retail patterns and consumption growth with moderating rental growth and
either through geography or planning growth, especially over the next 18 to 24
facilitated by e- and m-commerce, and modestly rising yields.
LaSalle Investment Management | Mid-Year ISA 2018 | 21Capital markets: real estate
yields will start a gradual rise
by 2020
With a more politically-stabilized PRIME PRICING LOOKING (INCREASINGLY) EXPENSIVE IN HISTORICAL CONTEXT
Eurozone and far better fundamentals, PRIME ALL PROPERTY YIELDS VS 10 YEAR GOVERNMENT BONDS
European government bond yields have
been trending upwards since the latter
part of 2016 as the market has reacted
to the ECB’s expected plans to begin
tapering. European real estate investment
markets seem to ignore the movements
in the markets for government bonds as
competition for assets remained intense.
European quarterly investment volumes
totalled €46.6bn in Q1 2018, -8% y/y but
26% higher than the first-quarter average
over the last 10 years. Yields compressed
in the first half of 2018, albeit at a slower
pace relative to previous periods. The
weighted average prime property yield for
all markets edged down by 2bps to 4.07%
in Q1 (54bps below the previous low in
2007). Prime office yields in Paris and
Berlin now stand at 3%, 3.5% in Frankfurt,
and are approaching historical lows in an Source: LaSalle (05/18), JLL (Q1 18)
increasing number of markets. In the retail
sector most markets remained stable, with
the exception that shopping centre yields
in Stockholm fell by 25bps (to 4.0%).
LaSalle Investment Management | Mid-Year ISA 2018 | 22Interest rates dynamics are Changes to our investment Recommendations for The rest of our investment
unlikely to impact real estate Continental European Real Estate recommendations remain broadly similar
pricing in the medium term
The main changes to our investment recommendations to those depicted in Chapter 3 of the 2018
Looking ahead, Eurozone bond markets since December 2018 are threefold: Investment Strategy Annual. They are
suggest that the ECB will not raise policy
rates over the next two years. The market
• Offices are now a recommendation across the entire risk spectrum (German summarised in the table below:
centres look strong)
anticipates core inflation in the Eurozone
to approach the ECB’s 2% target well after • Rack-rented urban logistics are now viewed as a more defensive asset class
2021, and the central bank will only then and less yield-rich
begin very gradually raising interest rates. • Spain is looking relatively attractive as an investment location
In the short term, we expect investment
appetite for European real estate to CONTINENTAL EUROPE HOUSE VIEW: INVESTMENT RECOMMENDATIONS
remain robust, given the weight of capital, 2018-2019
improved demand fundamentals and the
spread property yields offer over risk-free
rates. Looking further ahead, we continue
to expect government bond yields to rise
but remain very low in a historic context,
suggesting that property yields will expand
in turn but remain relatively low as well.
Bond yields probably need to rise to
2.50% for investors to start meaningfully
re-pricing core real estate. In our view,
prime real estate yields should stabilize in
2020-2021 and then move out marginally
in the medium term as government bond
yields increase and normalise.
LaSalle Investment Management | Mid-Year ISA 2018 | 23You can also read
