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When will the tide turn
on UK commercial property?
MIPIM | March 2018
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€ When will the tide turn on commercial proper ty? MIPIM 2018 | Colliers International 1
£Contents
Page 4 When will the tide turn on commercial property?
Page 6 A financial pivot point - 2017
Page 9 Transition to the ‘new normal’ and global capital
Page 10 The ‘new normal’
Page 12 The outlook for UK property
Page 14 The long-term outlook for global property
2 When will the tide turn on commercial proper ty? MIPIM 2018 | Colliers International When will the tide turn on commercial proper ty? MIPIM 2018 | Colliers International 3When will the tide turn on THE ECONOMY -
World
ANNUALISED GDP GROWTH 2017 TO 2022
“The global economy has been
UK commercial property? Developing Economies
BRICs
going through a synchronised
expansionary phase which is
set to continue over the next
This depends, of course, on
Advanced Economies
United Kingdom five years.”
Eurozone
what you mean by the tide.
United States
0% 1% 2% 3% 4% 5% 6%
Source: Oxford Economics
CAPITAL AVAILABILITY - GLOBAL FUND ASSETS UNDER MANAGEMENT
Institutional Private Equity Sovereign Wealth
100 “Global capital remains at
The Economy? arithmetic shows that a 1% increase equals $700 billion, or 80 staggering heights, partly the
roughly half of the $1.4tn annual property investment market. 60 result of increased asset value,
£trilion
If by tide, you mean the economy, then the answer is: “not 40 partly the result of demographic
The allocation tide may not yet be turning, but the rise may be
anytime soon”. The global economy in general is going 20 pressure.”
slowing.
through an expansionary phase. Forecasts show that this is
0
likely to continue for some time. Given the ongoing impacts of 2013 2014 2015 2016 2017
The Financial Environment?
quantitative easing and the new phenomenal fiscal stimulus that Source: IPE (Top 400 instituional funds), PERE, SWFI
is being undertaken in the US, the forecasts may understate the If by tide, however, you mean a sea change in the financial
eventual outcome. World growth is expected to average 2.8% environment, then recent events suggest an emphatic:
FUND ALLOCATION TO PROPERTY - % OF AUM & VALUE
pa over the next five years, with the BRICs economies averaging “probably”; and if you think this environment can change and not
5.1% pa and the advanced economies at 1.8% pa. impact global property investment, think again!
Global interest rates and bond yields may have reached the “Capital fund allocations
Capital Availability? 10.3% $7.5tn
end of a 36-year bull market that has seen phenomenal yield to property continue to
10.1% $7.2tn
If by tide, you mean the availability of global capital to support compression. Real ten-year yield percentages have been increase in percent terms and
9.9% $6.2tn
property investment, then the answer is also: “not anytime negative in several countries. absolute terms.”
9.6% $5.4tn
soon”. Global capital remains at staggering heights, partly
These low yields have supported asset prices across all asset 9.3% $5.3tn
the result of increased asset values, but also the result of
classes, including equities and real estate, through its impact on
demographically driven net inflows of new funds. In 2017, assets 2014 2015 2016 2017 2018f
fund investment allocations. Likewise, the cost of debt has been
under management by the top 400 global institutions topped the Source: Hodes Weill & Associates, 2017. AUM = assets under management
driven to very low levels. Consequently, real estate yields have
$70tn mark (IPE). Global demographics data shows that global
been driven down to extremely low levels globally. Given the
retirees will continue to contribute to a global savings glut for
recent financial market movements, the question is, perhaps, not ‘REAL’ 10-YEAR BOND YIELDS
another generation and certainly to the end of the next decade.
so much when will the financial tide turn, but what will the ‘new
UK EZ US Japan UK Property
normal’ look like, when will it arrive and what will the transition 10%
“Increasingly, it looks as though
Fund allocations to property? the 36-year bull market in
be like? As far as the tides turning on commercial property,
5% global bonds has run its course.”
If by tide, you mean fund allocations to commercial property, the question has to do with whether a long period of yield
then the answer is a more modest: “not yet”. Allocations have compression has come to an end given the shift in the financial 0%
risen from 8.9% in 2013 to 10.1% in 2017 and are forecast environment.
-5%
to reach 10.3% in 2018 (Hodes Weill & Associates). Simple
1984
1989
1994
1999
2004
2009
2014
2017
Source: Oxford Economics (January 2018). Real yields = nominal yields - CPI inflation.
4 When will the tide turn on commercial proper ty? MIPIM 2018 | Colliers International When will the tide turn on commercial proper ty? MIPIM 2018 | Colliers International 5A financial pivot point - 2017
The US contribution. Many historical turning points in the global same period, the benchmark 10-year Treasury yield rose from This had the intended effect of lowering bond yields globally,
financial cycle are related to steps, or missteps, in US regulatory a record low of 1.5% in mid-2016 to 2.4% by the end of 2017. staving off deflation and providing an economic stimulus. The
policy, whether fiscal, monetary or prudential. The US economy In the first months of 2018, the yield has risen by a further 50 great unwinding is now beginning outside the US:
accounts for almost 30% of global gross domestic product and, bps to 2.9%, driven by expectations of stronger US growth and
»» The European Central Bank tapered bond-buying from
despite the rise of China and the consolidation of the Eurozone, inflation, higher base rates, new and substantial unfunded fiscal
€60bn to €30bn per month in January 2018. The €2.3tn
£450bn
the US dollar remains the international reserve currency. Hence, stimuli and major tax reforms.
bond-buying programme is scheduled to end in September
events in the US continue to define the global economic and
The global contribution. The US may have started the ‘ball 2018, with the first rate rises anticipated in mid-2019.
financial operating environment.
rolling’, but central banks in other advanced economies have
»» The Bank of Japan began reducing its massive QE
In 2015, the US was the first advanced post-Great Recession joined in normalising monetary policy by raising base rates,
programme (equivalent to 80% of GDP) through
economy to raise interest rates. Nevertheless, if a definitive winding down QE and removing other emergency measures
unannounced reductions in bond purchases, described
turning point is to be discerned, it should be focussed on 2017, implemented to prevent a deep recession from progressing into
as ‘stealth tapering’. Inflation remains low and rate hikes
when the US Federal Reserve raised interest rates three times a sustained depression. Collectively these emergency measures
unlikely.
and announced three further increases for 2018 (the official rate resulted in the injection of over $10tn into national banking
may rise to 2% for the first time in 10 years). Furthermore, the systems. This amounts to almost half of US annual GDP, or »» The Bank of England is following its own path given
US was also the first country to begin unwinding QE by limiting
reinvestment of coupon payments in late October 2017. Over this
around 15% of global GDP. Brexit uncertainty. No plans for QE reductions have been
announced, but the Term Funding Scheme closed on 28
February 2018. Commercial bank lending rates are likely to
$4.2tn
rise. Official rate hikes are expected, but remain linked to
Brexit, sterling and business confidence.
In comparison to what is being done in the US, these initial
CUMULATIVE QE ASSET PURCHASES
policy adjustments have been modest, so far. Given the market
reaction to US moves, removing the vast stimulus will be done
€2.3tn
UK ECB US 1 JPN
6 very gradually, especially in markets vulnerable to political
instability (especially the UK & Eurozone). The transition period
will be measured in years and will most likely move in line with
4 the natural expiration rate of the QE bonds that are held, rather
$trillions
than any aggressive programme to begin selling the accumulated
stock of bonds. In this respect, the financial tide may have
2
turned, but it looks more like a gradual medium-term transition
to a ‘new normal’ rather than a rapid return to the previous
financial regime.
0
¥418tn
2009 2010 2011 2012 2013 2014 2015 2016 2017
¹US data includes MBS holdings
Sources: Bank of England, ECB, FRB (NY), Bank of Japan
6 When will the tide turn on commercial proper ty? MIPIM 2018 | Colliers International When will the tide turn on commercial proper ty? MIPIM 2018 | Colliers International 7£
Transition to the ‘new normal’
¥
and global capital
$¥
A gradual transition to a ‘new normal’ will require global capital Treasury bonds. This suggests that US Treasury yields must
sufficient to support such a transition. The evidence suggests rise further to attract investors.
that global capital is sufficient. In 2018, an anticipated $2.2tn
In comparison to the US, European and UK government financing
of US government and corporate bond issuance necessary
requirements are modest. The ECB, despite tapering, is still
to support fiscal policies and cover corporate refinance of
buying bonds and, like the US, there is a large EMEA corporate
maturing bonds is matched by an estimated $2tn in US
cash reserve amounting to $1.1tn (Moody’s July 2017 estimate).
domestic corporate cash reserves as well as another $1.5tn in
Given that European and UK 10-year bond yields are still 1.5%
US corporate offshore cash holdings. As bond yields rise, the
to 2% lower than US 10-year bonds, especially when ECB QE
opportunity costs of holding cash will become high and many
purchases are phased out in September, European and UK
¥
dormant investors will re-enter the market. However, recent
yields will also need to rise to attract investors. Given the role
research from Blackrock (January 2018) shows that despite
that global bond rates play in providing pricing benchmarks for
higher bond yields, global institutions plan to reduce exposure
commercial property, their movement is monitored closely by
to equities and expand exposure to real assets – commodities,
many property investors.
precious metals, real estate - rather than increase exposure to
The question is less about whether bonds will rise, but rather
bonds and fixed income. Appetite for fixed income is linked more
how far they will rise, and when?
to private credit investment than to core products such as US
¥£ £
ALLOCATION BALANCE FOR 2018 - NET CHANGE
Global Continental Europe US/Canada
80
60
¥
40
20
£
0
-20
-40
-60
Equities Fixed Income Hedge Funds Private Equity Real Estate Real Assets Cash
Source: Blackrock, 2018 Global Insitutional Rebalancing Survey, Jan 18
¥
£
8 When will the tide turn on commercial proper ty? MIPIM 2018 | Colliers International When will the tide turn on commercial proper ty? MIPIM 2018 | Colliers International 9The ‘new normal’
While it looks as though the 36-year bull market in global bonds and the ‘savings glut’ as detailed above. According to academic Of direct relevance to UK property is the shortage of ‘safe’ at 3.8%. Given the ‘enduring factors’, bond yields will rise more
may have run its course, there is little evidence to suggest that studies, this factor alone may be responsible for around 125 assets globally. While this shortage has driven bond yields lower, slowly than general economic conditions might otherwise seem
yields will return to previous high levels. Bond yields will rise bps of yield compression. Aging has meant falling economic it has also driven yields on prime commercial real estate assets to warrant. Furthermore, the risks to the forecasts are to the
over the medium-term, but will arrive at a more ‘benign’ level growth potential as well as increased savings. Likewise, US in Central London and other gateway cities lower through direct downside.
for a variety of reasons, reflecting several ‘enduring’ factors data suggests that QE is responsible for another 100 bps of investment given their appeal as wealth preservation assets.
Base rates follow a similar pattern as bonds and, like bonds,
that drove the long-term bull market in the first place (Oxford compression. A variety of other factors have also depressed QE and lack of ‘safe’ assets explain why 10-year bond rates
will peak at lower levels than previously. But, like bonds, the UK
Economics, 2016). Foremost among these is demographic aging bond yields, as detailed in the table below. fell so low and why prime property yields are at record lows
in particular will peak at a higher level (+50 bps) than both the
across prime markets in Europe and the UK.
Eurozone and the US, reflecting stronger anticipated economic
Bond yield and base rate forecasts. Given these ‘enduring’ growth over the forecast horizon.
long-term factors and, especially, the necessity for a gradual,
Factors Description ¹Long term effect on rates For global property, the relatively benign environment suggests
possibly a decade long liquidation of QE bond holdings, the ‘new
that any softening in pricing and outward yield shift will be
Demographic Reduced labour pool lowering economic growth po- normal’ is scheduled to arrive in the US when bond yields peak
↓100 bps gradual and more modest. Lower volatility looks increasingly
aging tential. Increased savings (‘savings glut’) & demand at 3.5% in 2022, in the UK when bond yields peak at 4% in
for interest like the long-term norm for property pricing.
2023 and in the Eurozone only by 2030 when bond yields peak
Quantitative Impact primarily on long-term bond rates ↓100 bps
easing
Slow productivity Undermining economic growth potential ↓80 bps
growth
PEAK TEN-YEAR BOND YIELDS (NOMINAL) BASE RATES FORECASTS
Rising debt Base rates compensate for increased ↓70 bps
margins borrowing costs
Average 01- 07 Forecast peak Downside QE phase Average 01- 07 Forecast peak Downside QE phase
6% 6% 2024 2027
2020
Shortage of ‘safe’ Lack of ‘safe haven’ assets globally ↓50 bps 2022 2023 2030
assets 5% 5%
4.7%
4.6%
4% 4%
4.5%
4.2%
Capital goods Impact of globalisation and free trade 3% 3%
3.3%
↓50 bps
3.0%
2.9%
3.0%
0.5%3.0%
2.8%
price falls
3.0%
2.8%
2% 2%
2.5%
3.5%
2.4%
4.0%
2.3%
2.3%
0.5%
1.8%
0.3%
1.7%
1.6%
1% 1%
0.1%
Income inequality Wealthy have higher savings rate ↓45 bps 0% 0%
US UK EZ (DE) US UK EZ (DE)
Source: Oxford Economics (February 2018, October 2016), Source: Oxford Economics base data (Feb 18 & Oct 16) as extrapolated
Colliers International by Colliers International
Fall in public Constrained budgets limit fiscal economic stimulus ↓20 bps
investment
¹These numbers are indicative only, interpreted from OE’s compilation of values from numerous studies.
Source: Oxford Economics, Research Briefing 28 October 2016.
10 When will the tide turn on commercial proper ty? MIPIM 2018 | Colliers International When will the tide turn on commercial proper ty? MIPIM 2018 | Colliers International 11The outlook for UK property IPF CONSENSUS FORECASTS
Rental growth Capital value growth Total return
“The IPF
6%
consensus
5% shows that
returns from
‘Headroom’ and a low volatility outlook. Lower volatility is also Sterling arbitrage remains supportive. Furthermore, UK 4% 2018 to 2022
will remain
a feature of UK property industry forecasts. The IPF consensus property is also supported by an ongoing currency arbitrage
3% stable in the
for the five years to 2022 shows that total returns will remain that is not likely to disappear until the terms of any political mid-single
stable in mid-single digits at an annualised 4.8% pa rate. This settlement with the EU have become clear and are agreed. digits at an
2%
reflects very modest rental growth of 1.1% per annum and capital Sterling remains almost 10-15% down on its average level in the annualised
value growth of -0.1% per annum. Colliers International forecasts six months prior to the EU referendum. By various measures, 1% 4.8% rate.”
are roughly in line with the industry consensus, but show greater sterling is understood to still be down by around 10-15% on
details with All Property yields drifting by around 10 to 20 bps long-term international equilibrium value. For an overseas UK 0%
before moving in again by a similar amount. This may happen property investor who expects sterling to revert to its long term
despite an outward movement in bond yields from around 1.5% value, this arbitrage works out to the equivalent of between 50 to
2018 2019 2020 2021 2022
to 3.8%. 100 bps in yield depending on your existing yield. Source: IPF
This apparent anomaly demonstrates the amount of ‘headroom’ In short, the outlook for UK property remains strong, buoyed on
that exists between All Property equivalent yields and the by many short and long-term factors. Increasingly, investors are
10-year gilt rate. The difference between Q4 17 MSCI/IPD All looking beyond London into the regional growth cities. Since the
Property yield at 5.6% and the 10-year gilt at 1.3% remains very early 2000s, international investors have invested successfully
Colliers International forecasts are roughly in line with the
wide at 430 bps. Much of the anticipated rise in gilts will be across the UK and this familiarity has widened the investible UK
industry consensus, but show greater detail with 'All property'
absorbed within that wide margin. In the period 2001 to 2007, universe. Coupled with regional political devolution, the UK looks
the yield gap averaged 240 bps, suggesting that gilts would need set to benefit from further expansion of international investment equivalent yields drifting out by 10-20bps before moving back
to rise by almost 2% before any significant impact was likely. flows. The Brexit negotiations may have caused some investors
to pause and take stock, but the very recent evidence suggests
in by a similar amount.
Quantitative easing has little impact. Interestingly, the figures
that international occupier demand for space in Central London
suggest that UK property pricing was generally unaffected by Walter Boettcher | Director | Chief Economist
and the UK has accelerated, even in the absence of a clear Brexit
the 100 bps of yield compression that might theoretically be
agreement.
attributed to UK quantitative easing. Hence, over the longer
term, any unwinding of UK QE looks unlikely to have any ALL PROPERTY EQUIVALENT YIELD AND 10 YEAR GILT RATE
disproportionate impact on UK property. Low yielding prime and
institutional grade assets would seem to be in the line of fire, but AP equivalent yield Ten-year gilt yield “All property
the ongoing global demand for safe haven assets looks set to 6% yields are
hold pricing firm, even in the lower yielding market segments. forecast
5% to drift
out, before
4% moving in
again despite
3% an outward
movement in
2% bond yields.”
1%
0%
2018 2019 2020 2021 2022
Source: Colliers International, Oxford Economics
12 When will the tide turn on commercial proper ty? MIPIM 2018 | Colliers International When will the tide turn on commercial proper ty? MIPIM 2018 | Colliers International 13The long-term outlook for
global property
COMPRISE OF REVENUE
In 2015, Colliers International published the paper ‘How
long will this bull market last?’ where we argued that many
10 to 15 years. This is not to say that the original property bull
market will rumble on for a generation, but it is to say that the
15,400
PROFESSIONALS
$2.7B
(US DOLLARS)
‘enduring trends’ would act to support commercial real estate sector looks to have reached a new level of maturity in the UK,
and that going forward this asset class would be lower yielding with a wider range and geography of prime assets now elevated
with limited volatility. In 2018, the trends continue to support to the status of ‘safe haven’ investments. This may be part
this view. Barring a new financial, economic or geopolitical of a global trend. Like all assets, safe haven property assets
calamity, the long-term outlook looks stable, with the financial will continue to require careful management and investment,
environment settling into a new normal over the next five to especially as the demand of occupiers (the ultimate source of
10 years that looks more benign than the pre-Great Recession all value) increases in complexity in response to ever changing
period. Much of this stability can be traced in various ways to a demographic pressure and the demands of new technology. MANAGING ESTABLISHED IN
2B 69
demographic super-cycle that is set to last for at least another
(SQUARE FEET) COUNTRIES
...the sector looks to have reached a new level of maturity in
the UK with a wider range and geography of prime assets
now elevated to the status of ‘safe haven’ investments.
Mark Charlton | Head of Research & Forecasting
LEASE/SALE TRANSACTIONS TRANSACTION VALUE
Contacts 68,000 $116B
FOR MORE INFORMATION
Walter Boettcher Mark Charlton
Director | Chief Economist Head of Research & Forecasting
+44 20 7344 6581 +44 20 7487 1720
walter.boettcher@colliers.com mark.charlton@colliers.com
This report gives information based primarily on Colliers International data, which may be helpful in anticipating trends in the property sector. However, no warranty is given
as to the accuracy of, and no liability for negligence is accepted in relation to, the forecasts, figures or conclusions contained in this report and they must not be relied on for
investment or any other purposes. This report does not constitute and must not be treated as investment or valuation advice or an offer to buy or sell property.
Colliers International is the licensed trading name of Colliers International Property Advisers UK LLP (a limited liability partnership registered in England and Wales with
registered number OC385143) and its subsidiary companies, the full list of which can be found on www.colliers.com/ukdisclaimer. Our registered office is at 50 George
Street, London W1U 7GA.
This publication is the copyrighted property of Colliers International and/or its licensor(s). © 2018. All rights reserved
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