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JLL: global investment volumes have slowed to $174 billion but fundamentals remain sound

JLL reports that despite slowing economic momentum and geopolitical tensions, the consequent monetary loosening policies by several central banks are flowing through to commercial real estate markets.

Jeremy Kelly, Director, Global Research at JLL, explains:

“Risk-free rates continue to plummet, lowering financing costs and widening spreads to property at a time when investors are hungrier than ever for yield. Although prices are elevated across many markets, fundamentals remain sound, underwriting is disciplined, and debt levels are generally modest.”

Nevertheless, investors are still cautious and selective and JLL expects global investment in commercial real estate to soften by about 5%-10% to roughly US$730 billion for the full year, according to JLL.

Slowing global investment flow, big NAV discounts on listed real estate securities, as well as more fears related to the maturity of the decade-old cycle have led some to call the end to the current property boom, but Capital Economics argues fears of a “crash” are overstated.

Andrew Burrell, Chief Property Economist, at Capital Economics, wrote:

“In our view, a crash looks unlikely. Property markets tend to closely follow the economic cycle and, while we have a below-consensus view on global growth, the dip in our forecast is both mild and relatively brief. This is consistent with a slowdown in capital growth to low, but positive rates, but no contraction.

“What’s more, an important trigger for past property crashes has been tightening credit conditions, which seem a very distant prospect, particularly with central banks back in easing mode.

“Nonetheless, there are cracks beneath the surface. Ultra-low interest rates have allowed property yields to drop to historic lows in most markets. While low rates probably rule out a sharp reversion, yield compression is stalling after driving returns since the financial crisis.

“This means investors will need stronger rental growth to boost returns, but this looks unlikely given the softer economic backdrop. As a result, we expect global returns to fall below 6% this year and move closer to 5% in the medium term.”

To read Capital Economics full note, entitled: How will global property markets perform?, please click here.

james.wallace@realassetmedia.com