Investors expect rent growth will offset any inflation risks and enhance asset value, although structural shifts in the economy and a sustained period of price discovery remain areas of concern.
Top of Mind
As investment volumes rebound over the next 12 months, overall yields should stabilize. However, some shifts in value could occur between and within commercial real estate sectors.
The recovery of global real estate investment and lending will accelerate in H2 2021 and continue well into 2022. Investors show greater risk appetite and increased interest in the hardest hit asset classes in search of higher returns. Pricing remains strong and yields continue to fall for industrial and multifamily assets, while sectors like retail—and possibly office in the U.S.—face moderate yield increases. Near-term inflation is unlikely to cause yield expansion. Hedging cost will stay low for international investors to acquire U.S. dollar-denominated assets.
INVESTMENT VOLUME TO RISE BY 23%
Global investment volume increased by 19% year-over-year in H1 2021. Robust Q2 volume in North America and Asia Pacific matched pre-pandemic levels. Europe slightly lagged due to prolonged lockdowns earlier in the year, but is expected to rebound strongly in H2. CBRE predicts that global investment volume will increase by approximately 23% in 2021.
RISK APPETITE GROWS
Nearly 25% of recently surveyed investors are targeting opportunistic and distressed assets, particularly in the retail and hotel sectors, with adaptive reuse potential.2 Nevertheless, pricing has held up better than expected due to strong liquidity. Unless buyers and sellers are more in line on pricing expectations, deal sourcing will remain challenging in 2021.
2 CBRE 2021 Global Investor Intentions Survey, June 2021.
Figure 4: Global Real Estate Investment & Cross-Border Capital
Source: CBRE Research, Real Capital Analytics (Americas), Q2 2021.
HEDGE AGAINST INFLATION
In the long run, rents and consumer prices will rise at roughly the same rate. Rent growth will mitigate inflationary risks and protect real estate owners against market volatility. Income return proved incredibly resilient in 2020, averaging 3.9% growth globally. CBRE expects income return to remain stable and capital values to return to pre-crisis levels in 2021, potentially leading to higher total returns than in 2019.
Figure 5: Global Investment Returns
Source: CBRE Research, MSCI/IPD, Q2 2021.
LIMITED YIELD EXPANSION
The yield spread between prime assets and long-term bonds narrowed in 2020, based on recovered bond yields across global markets. The spread will continue to narrow, but not so much as to damage value. Industrial and multifamily yields fell in the past 12 months and CBRE expects this to continue given the strength of market fundamentals and uncertainty about the future of office and retail assets.
Retail yields edged higher in H1 2021, driven by softness in Europe. E-commerce growth is at the heart of retail repricing. Yield expansion should be more moderate in the next 18 months due to resilience of net-lease retail and grocery-anchored shopping centers.
Office yield remained largely stable in H1 2021. Modest yield expansion is expected in lesser class office assets due to uncertainty about the lasting impact of remote working, particularly in the U.S. The value outlook for prime office assets is reasonably stable given growing expectations that U.S. office demand will eventually rebound despite remote working arrangements and by the inability of other sectors to absorb all of the capital targeting real estate.
Figure 6: Composite Yields by Major Property Types
Source: CBRE Research, Q2 2021.
LOWER HEDGING COSTS FAVOR THE U.S. & U.K.
Cross-border transactions made up 26% of global investment volume in 2020, up slightly from 2019, due to rising cross-border dependency3 of European markets. CBRE’s 2021 Investor Intentions Survey finds the most planned capital flows are from Americas investors to Western Europe and from APAC investors to Developed Asia.
Euro Area, Canadian, South Korean and Singaporean investors have recently enjoyed low hedging costs or even small hedging gains in the U.S. Euro Area investors will temporarily have lower-than-average hedging cost when purchasing sterling-denominated assets too. However, as the recovery gains pace, U.S. dollar hedging costs will rise. Until then, foreign investors in the U.S. should accelerate their capital deployment plans.
3 Calculated as the share of cross-border capital in total transaction volume.
Figure 7: Hedging Costs Against U.S. Dollar Depreciation
Source: Chatham Financial, CBRE Research, June 2021.