Global returns driven by the US recovery
Global commercial property, as measured in local currency, delivered a 9.8% total return in 2011, according to the IPD Global Annual Index.
Peter Hobbs, Senior Director of Group Business Development at IPD, who presented the results said, “Of particular interest is the divergence between the two largest markets, the US and Japan. In the US, continued yield compression delivered strong (14.5%) double digit returns for the second consecutive year, whilst in Japan returns remained flat (at 3.5%), due to further value declines and the low income yields.”
The wide divergence across markets has big implications for investors and managers with global real estate exposure. Beyond the US, there were only a small number of mostly commodity-driven markets, including Australia, Canada and South Africa, that exceeded the global average. Exposure to these markets would have likely boosted performance while, at the other extreme, exposure to a series of mostly (Southern) European countries that suffered value declines would have been a drag on performance.
Although national variations influence performance, there are also significant sector and city-specific differences. At a sector level, Industrial and Residential outperformed while Offices, for the second consecutive year, was the worst performing sector a full 150 bps behind the global average.
Revealing a new set of city-specific results, Hobbs explained the startling differences within national markets, with the divergence between top and bottom performing cities at over 1,000 bps in the US, and over 600 bps in Canada, Germany and UK. Even in the normally stable German market, Munich posted a strong return of 8.6%, better than the national performance of all European markets with the exception of Poland, and far stronger than Frankfurt at just 2.8%.
Despite these variations, the panel discussion and webinar feedback suggest that real estate remains well-placed, certainly in the near term. Values across the globe are still some distance from their pre-crash peak, having rebounded only by7%, after falling over 20% in 2008/9. Income yields also remain attractive in most markets and new supply remains muted.
The panelists felt the high double-digit returns of the US would revert towards the long-run average of high single digits. The weak fundamentals in Europe suggest that returns will be lower in this region although, as always, there will be significant differences across the markets.
The IPD Global Index is the authoritative measure of unlevered real estate performance across 24 global markets. It is based on the appraised performance of over 62,000 assets valued at over US $1.3 trillion.