Following a robust H1 2018, there is some concern that the global economy has cooled and that this portends a less favorable investment environment in 2019. In fact, global GDP is likely to have achieved above-trend growth (3.7%) in 2018 and will decline only a little to 3.4% in 2019, despite a backdrop of political uncertainties.
With the economic cycle extending into the 10th year, real interest rates remain low and dry powder levels continue to rise. The capital needs to go somewhere. Where are the opportunities?
The office sector led rent growth among property types, up 3.6% year-over-year globally. EMEA registered its highest year-over-year rent growth (4.4%) of the cycle, while Asia Pacific (APAC) recorded a seven-year high (5.1%). Strong office-based employment growth in continental Europe contributed to widespread rent growth in major markets. Among them, Stockholm, Oslo and Berlin reported impressive gains. Technology companies and co-working operators drove the office demand in APAC, where limited supply lifted rent growth in markets like Singapore, Guangzhou, Melbourne and Sydney.
Office capital value growth was generous and stable across regions. Gateway markets in the Americas and APAC like New York, San Francisco, Beijing and Melbourne maintained high-level growth. In EMEA, new completions and rising demand moved capital values up in fast-growing markets such as Porto, Utrecht and Edinburgh. We expect the capital value growth to accelerate further, moving in sync with the upward trend of rent values.
Rent growth softened slightly in the industrial sector as supply caught up with demand, but capital appreciation remains robust. As we have commented, industrial real estate is subject to powerful structural tailwinds as well as the demand side benefits of sustained consumer spending growth.
Annualized industrial rent growth has reached a five-year high (2.7%) in APAC, driven by strong growth in Melbourne and Shenzhen. As an early adopter of e-commerce, APAC boasts one of the most established logistics networks with the best-quality warehouses. Cold storage facilities, for example, are expanding rapidly to meet the rising consumer demand for fresh groceries and prepared meals.
Meanwhile, industrial capital value growth topped other CRE sectors, especially in the Americas, fueled by the region’s strong e-commerce sales. Speculative development was restrained, driving up the price of prime assets too. Notably, Vancouver and Los Angeles are hot markets where sustainable demand exceeds supply.
Retail rents fell by 0.06% globally in the past year. Near-zero or negative rent growth persisted in the Americas and EMEA. Consumer spending has been strong, but investor and occupier confidence has yet to pick up. APAC appeared to be more resistant, thanks to an outperforming retail market in the Pacific and the growing middle-income population in Asia.
Though weakened from last year, retail capital value growth stayed positive across all regions. This reflects the long-term investor confidence in brick-and-mortar retail. Evidence shows that retail property owners and operators have become leaders in re-defining value, service and innovation in a digitized world. This shift is under-covered in the negative retail headlines. Retail investors are in it for the long haul.
As the world grapples with geopolitical risks, stock volatility and trade tensions, real estate investors can adopt a defensive posture on the basis of reliable rent growth. Some real estate such as medical offices even possess counter-cyclical characters to help investors diversify and navigate through downturns. Capital value appreciation has been remarkably resilient across the board. It is important to identify such opportunities and stay invested, because now is really the time to differentiate.