The lion's share of global real estate investment continues to target direct commercial real estate with US$682 billion invested in 2006, a surge of 38% over 2005, and nearly double 2003 volumes. This reveals from Jones Lang LaSalle's latest global real estate capital report, 'Moving Further and Faster'.
New sources of capital are targeting the sector, increasing competition for assets in almost all markets. Globalisation of the asset class continues relentlessly, with cross border transactions now representing 42% of total investment volumes (up from 34% in 2005), and inter-regional investment reaching 29% (up from 23% in 2005). In addition to direct commercial real estate investment ($682bn), investors privatised REITs and other listed real estate owning entities valued for $48bn, and purchased multi-family residential investments totaling $170bn, bringing global real estate investment to $900bn.
Tony Horrell, CEO of Jones Lang LaSalle's International Capital Group, commented: "There is currently a large overhang of investment targeting the sector with $5 of money chasing every $1 of product. Global real estate markets performed very strongly throughout 2006; it was the first year that all major developed and emerging market returns were both aligned and positive. Investment was driven by increased allocations to the asset class, growth in investible stock and by the increased attention of opportunistic private equity players who identified relative value in the sector. These increased flows into real estate gave rise to two notable phenomena in 2006 an increasing number of 'mega-deals', and continued globalisation of the asset class."
The largest increase in investment came from global co-mingled funds, which are now involved in transactions representing 17% of direct real estate investment globally. Global funds acquired US$83bn (up 240%, principally in Germany, US, UK, Japan) and sold US$39bn (up 32%).
Global funds' purchase activity was equivalent to the entire 2006 real estate transaction volume in Japan and France combined, or almost 90% of total Asia Pacific volume. Global funds dominated the German market, purchasing 40 percent (by value) of all German commercial property traded. Other significant cross border investors included US investors ($18bn, up 51%, principally invested in the UK, France and Germany), UK investors ($18bn, up 200%, principally Germany), Middle Eastern investors ($13bn, up 14%, principally the US, UK, Germany and South Africa) and Australian investors ($12bn, principally Germany and the UK).
Horrell added: "Germany's relative attractiveness has increased significantly due to a unique combination of willing domestic sellers, underweight cross-border investors, positive yield spreads and a recovering economy. Japan offers investors exposure to a recovering economy and yield spreads of almost 200bps."
Padraig Brown, Global Strategy and Research Director, Jones Lang LaSalle, went on to say: "A significant driver of transaction growth has been an increase in corporate real estate disposals. Corporate occupiers sold over $55bn of real estate assets during 2006 with the large corporate disposals occurring in Japan ($14bn) and Germany ($12bn) and other significant sales recorded in the US, the UK, Singapore, Finland and France. Whereas fewer than 25% of US corporates own their real estate, the majority of continental European and Asian companies retain significant real estate assets on their balance sheets. The trend towards sale and leasebacks will continue to drive improved real estate liquidity and investor interest in these markets.
"Emerging market growth was also strong," Brown continued. "Emerging markets had a strong year with over $40bn of transactions recorded (up 74%). Many of these markets have appeared on investor's radars only recently and are exhibiting exhilarating rates of growth, with the Russian market expanding by over 700% during 2006 and strong deal flow in China, Turkey, Mexico and Brazil.
"Real estate fundamentals remain strong, with soli