CBRE sponsored report ¦ This week, 21,000 property professionals from across the world will gather at the Palais des Festivals in Cannes, on France’s Cote d’Azur. At MIPIM, the world’s largest property event, the message echoing through the exhibition halls will be positive: property is back.
After the global financial crisis of 2008 prompted a fall in the value of commercial real estate (CRE), and the levels of rent it could command, levels of investment are beginning to return to former heights. Research from CBRE, the world’s largest commercial property advisory firm, shows that in 2014, four countries in Europe reported record levels of investment in CRE: Spain, Ireland, Sweden and the UK. The level of CRE investment in the fourth quarter of 2014 was the highest CBRE has ever recorded. The view from MIPIM looks good, and that’s not just the proximity of the Mediterranean Sea.
Compared with other sectors, property has shown strong growth since the global financial crisis. As an investment it offers a higher yield than bonds. Low interest rates have also helped, and there has been a huge investment demand in property fuelled by private and institutional capital, which requires the income that bonds just don’t provide now.
London and Hong Kong have experienced impressive growth due to their positions as major financial centres, aided by quantitative easing. But just because we are witnessing an upturn in property value, this does not mean a return to business as usual. New trends at the occupier level are transforming real estate.
Where, how and why companies are occupying space in cities is changing. These shifts mean that property investors and developers must now be more mindful and seek to understand the requirements and even personality of a likely tenant.
Property Stays Strong
There is an interesting story that illustrates the strength of commercial property as an investment and how it does not necessarily follow major economic trends. In London’s Canary Wharf, a skyscraper at 25 Bank Street was under development in 2001, earmarked for occupation by American energy giant Enron. This plan was abandoned prior to the company’s well reported collapse in December of that year. Nevertheless, Canary Wharf Group was able to secure an agreement with Lehman Brothers to rent the building on completion on a 30 year lease, and 25 Bank Street served as the European Headquarters of the financial services firm from 2004 until their own insolvency in 2008.
When this happened, around half the building was already let to sub-tenants who continued to occupy and paid rent; the former Lehman Brothers space was occupied by the administrators who also paid rent. The building was sold in 2010 to JP Morgan Chase for £495 million. What other financial asset – bond or equity – would continue to hold such a high proportion of its value despite such a turbulent sequence of events?
With the global economic recovery set to continue, the outlook is good for property. The US recovery is on track with growth of 2.5% in 2014 and 3.1% in 2015 likely. Growth for the same quarter in the eurozone is slower at 0.3%. However, falling oil prices, an end to fiscal contraction and QE seem likely to boost growth in 2015 and 2016.
Read more: Real Estate Reinvents Itself