Global real estate fundamentals will remain healthy in most markets over the next 12 to 24 months, supported by moderating but above-trend economic growth, improving earnings, and the continued inflow of capital, according to the most recent "Global Vision" report issued by ING Real Estate.
"With commercial property yields relatively low, real estate investors are asking, 'Is the party over?'" said Timothy Bellman, Global Head of Research at ING Real Estate. "Our answer is 'no' but there will be significant variations in performance by sector and by region. The global movement of capital is changing the nature of investment opportunities."
In 'Global Vision,' ING Real Estate's annual global research report, the Group notes the flow of capital into real estate has continued unabated, and that cross-border investment will continue to play a major role in underpinning current pricing. ING Real Estate has seen an increase in both real estate investment trusts and commercial mortgage backed securities (CMBS), as real estate, both public and private, continues to outperform equity and bond markets in most major markets.
The ING Real Estate report forecasts significant improvements in Continental Europe's real estate investment climate. Ian Whittock, Head of European Research and Strategy said, "I expect the more mature continental European Markets to perform strongly in 2007." Global Vision highlights Continental Europe's recovering economy, healthy real estate market fundamentals, and the prospect for a significant yield re-rating in the years ahead. "Because of increased transparency, liquidity and strong performance in recent years, real estate has emerged as a widely accepted asset class and, as a consequence, investors have increased their exposure to real estate." said Maarten van der Spek, Managing Director of European Research and Strategy Continental Europe. "With fundamentals generally healthy and improving, earnings growth should also continue to support steady income returns and we expect the strong capital inflow to continue," he added.
In 'Global Vision', ING Real Estate's analysis of property market cycles shows that capital market trends and yields, over the next three years in Europe, are likely to deliver attractive risk-adjusted total returns, suggesting an overweight to the region for core investors. ING Real Estate has seen strong positive changes in several key markets and property types in Continental Europe, indicating a significant improvement in property market fundamentals and a region that is at the beginning of a recovery in the employment markets.
While the ING Real Estate report forecasts increasing capital flows into Europe, yields are expected to continue to re-rate over the medium term. "Global investors will be swift to take 2/2 advantage of the yield arbitrage opportunities that Continental Europe presents relative to other regions in the world. Investors should consider reallocating or increasing their exposure to the European real estate markets," said Ian Whittock.
In the United Kingdom, ING Real Estate predicts moderating performance in the industrial and retail segments, while the outlook for the office and residential markets is more positive.
In Asia Pacific, the prospect of further major yield compression is limited in most markets. Timothy Bellman commented, "Leverage no longer enhances returns as much as it did in recent years in many markets due to compressed yields and a higher cost of borrowing. With a low cost of debt, Japan is the major exception. Throughout Asia Pacific real estate fundamentals are still generally strong, offering sound growth prospects." High demand for prime office space in most capitals and buoyant requirements for modern logistics space reflect the strong growth and trade of the region, particularly intra-regional trade.
In North America, the U.S. office sector is poised to perform well in the short-term, with demand far outstripping supply. Dr. Indraneel Karlekar, Head of Research for ING Clarion Real E