Real estate: developments in the real estate business

In light of challenging business conditions, the fundamental data of global real estate markets were relatively positive. But the general mood remained tense. In 2012, the volume of investment in commercial real estate was generally stable in major markets – including Germany, the United States and the United Kingdom. But smaller and emerging markets like Brazil suffered significant setbacks. By year’s end, activity in the markets had picked up, enabling a small increase in transaction results to be achieved compared with the previous year. Investors increasingly focused on core properties – that is, long-term rental property – to avoid risks. By contrast, the market proved to be challenging for lower quality real estate and for property with development potential in terms of leases and building structure.

Trends in European real estate markets continued to be characterised in 2012 by a strong regional imbalance. Investors continued to view the region’s established and saturated markets as safe havens. But activities outside the core markets could not live up to market players’ expectations. In 2012, sales of about €120 billion were produced with commercial real estate across Europe, a total that corresponds to the previous year’s total. Nearly 27 percent of the transactions involved retail property, a figure that was slightly below the previous year’s total of about 31 percent. Investments in the retail segment were primarily made in Germany, France and Great Britain. Across Europe, the trend towards a continued stabilisation of commercial real estate yields continued. But the economic slowdown had a growing impact on the European rental market. Corrections occurred particularly in the eurozone’s crisis countries. Momentum eased in other markets.

In Germany, the transaction volume for real estate climbed as a result of major portfolio transactions at the end of the year. Compared with the previous year, it climbed by 8 percent. This result confirms the strength of the German investment market, particularly against the backdrop of the euro sovereign debt crisis, economic uncertainty, financing bottlenecks and a continuing aversion to risk seen among investors. The last factor has led investors to focus largely on properties in the core segment of German investment centres. As a result of the limited supply in this category, however, investor interest increasingly shifted to economically robust locations away from the real estate centres and to real estate with attractive location qualities and risk-adequate prices that requires a higher level of management effort.

In Eastern Europe, it was extremely clear that the uncertainties in the eurozone were continuing and that investors were focusing almost exclusively on core properties. The result was a sharp drop in market activities. In 2012, transaction volume for commercial real estate was about 35 percent below the previous year’s level. Despite steep losses in the mature markets of Poland and Russia, these markets were very robust at the end of the year and acted as the driving forces of regional market developments. In particular, the investment activities in the Russian market had a stabilising effect. Because there is a shortage of first-class real estate properties for retailing in Eastern Europe, demand is being drawn to office real estate. Throughout the region, yields remained largely stable or decreased slightly.

The difficult economic conditions seen around the world had a distinct impact on the real estate markets of Asia and the Pacific region in 2012. Demand was subdued: transaction volume for commercial real estate plunged about 6 percent from the previous year’s level. China was the primary cause of this drop: here, a challenging financing environment combined with government restrictions on project development triggered a plunge in land transactions.

This resulted in a 22 percent drop in total investment volume compared with the previous year. In Japan, investor confidence improved markedly during the year following the earthquake and reactor disaster, as reflected by a 17 percent increase in investment volumes. But the lack of investable properties continued to curb transaction activity. In general, Asian investors dominate real estate demand in the region. Only about 10 percent of transaction volume in 2012 involved investors outside the region. This activity concentrated primarily on China and Japan. In contrast to the market for rented office space, Asia continued to have healthy demand for rented retail selling space. The strongest demand was generated by China once again. Yields partially fell throughout the region. Slight yield compression was generally seen in the office segment while yields for retail properties rose slightly in some markets, including China.