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Thursday, October 4, 2018

Investors seek opportunities to deploy capital outside their traditional parameters


By Mark E. Rose (Toronto)

Capital continues to flow into global commercial real estate markets, inhibited only by the scarcity of available product for sale. Yields on commercial real estate are still attractive when compared with alternative investments; however, limited supply and cap-rate compression are leading some investors to seek opportunities outside their traditional parameters.

These are some of the key trends noted in Avison Young’s Fall 2018 North America and Europe Commercial Real Estate Investment Review:
https://avisonyoung.uberflip.com/i/1034498-ayfall18namericaeuropeinvestmentreviewoct3-18final The report covers commercial real estate investment conditions in 59 markets in six countries on two continents.

Public and private capital continue to target commercial real estate assets around the globe, pushing asset values higher and making it more difficult for investors to find rewarding opportunities – leading to more joint-venture, value-add and redevelopment opportunities. Investment capital flowing into the sector is buoyed by sound property leasing fundamentals with good demand; and with some exceptions, supply is still relatively constrained.”

With prime assets delivering slim returns, there’s a real quest for consistent growth across countries and asset types. All of these dynamics are occurring against a backdrop of ongoing geopolitical concerns, including the negotiations leading up to the new trade agreement between the U.S., Mexico and Canada, trade-war tensions in Asia-Pacific and Brexit in the U.K., not to mention the prospect of higher long-term interest rates and the impact on asset pricing – all of which continue to weigh on the minds of investors.

According to the report, even while the U.S. was in the process of negotiating a new trade agreement with Mexico and Canada, cross-border investment into the commercial real estate sector continued to flow, especially from Canada to the U.S. Mexico’s stable and healthy macroeconomic fundamentals have made the country a well-regarded destination for global investment capital and one of the most open economies for international trade and investment.

Across the Atlantic, London’s commercial real estate market has continued to show remarkable resilience in the face of stiff headwinds – enduring significant political and economic uncertainty caused by the EU referendum result, the shock result of the snap U.K. election and growing tensions between the U.S. and China, which have raised fears of a trade war that could have global economic impacts.

Across Germany’s five major markets, office assets once again attracted the most capital as already tight capitalization rates continued to compress. Frankfurt posted the country’s largest single transaction of the first half, while in Berlin, alternative asset types gained popularity with investors. In Romania, the capital city of Bucharest remains in top position with positive fundamentals and improving liquidity, and still offers favourable returns compared with other countries in the region.

While concerns over rising interest rates and their impact on values remain, we don’t expect to see a material decline in investor appetite during the second half of 2018.

(Mark E. Rose is Chair and CEO of Avison Young)

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