The RICS Global Commercial Property Monitor for Q3 2019 shows a sector preparing for downturn, but hopeful of a soft landing. Is the post-recession global recovery at an end?
Simon Rubinsohn, Chief Economist, RICS
9 December 2019
Sentiment across much of the real estate world appears to have turned a little less positive in the third quarter of the year according to results of the Q3 2019 RICS Global Commercial Property Monitor (GCPM). In some cases, concerns have grown around the flagging momentum of economic activity.
However, the impact of a more challenging macro environment has, in part, been offset by the response from policymakers with interest rates being cut in a number of economies and quantitative easing, in some form, being resurrected.
The slightly more cautious tone is reflected in the headline readings for both the Occupier Sentiment Index (OSI) and the Investment Sentiment Index (ISI). An unweighted average of the major investible (and larger emerging) markets shows the former to have slipped from 0 in Q2 to -11 and the latter from +4 to -4. Since the underlying components of these two composite measures capture changes compared with the preceding period, it suggests only a modest dip in confidence overall despite the economic hiatus.
Although the key indices monitored in the Global Commercial Property Monitor have only edged lower in a modest way, there is still a sense from respondents that the real estate cycle is gradually moving into a downturn phase. In terms of the key group of markets that the survey focuses on, more than half of all contributors are now suggesting that the sector is either in a downturn phase or approaching a floor for the cycle compared with roughly two-fifths previously. By way of contrast, the proportion of respondents intimating the market is in an upturn phase has dropped to around 15 per cent with around double this proportion viewing the market in the peak phase of the cycle.
Significantly, despite the more downbeat view as to where the real estate market is in the cycle, there is still a strong sense that it is headed towards a soft-landing rather than anything more painful; this is broadly consistent with the OSI and ISI indicators referenced earlier. This sentiment is also visible in the responses to the question on expectations for capital values over the next twelve months which are broadly unchanged on where they were in Q2 and consistent with a largely flat picture.
Inevitably there are exceptions to this more cautious pattern, but they are typically to be seen in the emerging markets. Brazil is an example standing out from the crowd with more than eighty per cent of respondents seeing the market as being in upturn mode. Feedback from some African markets including Nigeria paint a similar, if somewhat less emphatic, picture, as does Saudi Arabia.
Although as noted earlier, the sentiment readings for Q3 are a little less upbeat than previously, there is a commonality in the broad regional story. European markets in general continue to score relatively highly with Germany and Netherlands, amongst others, still showing resilience away from the retail sector. The feedback from the UK is still reflective of the uncertainty associated with Brexit which is impacting on investor behaviour.
Meanwhile, the main Middle East centres remain stuck, to a greater or lesser extent, in negative territory with insight from the UAE providing little reason for encouragement as to any near-term improvement.
The results across APAC are still fairly mixed reflecting the very different dynamics in play through the region. The numbers for New Zealand and India are consistent with a modestly positive trend in sentiment while Singapore remains in neutral territory. In contrast, the Chinese OSI and ISI have been slipping slightly in each of the past four quarters, with forward looking indicators providing little reason for sensing this trend will reverse anytime soon.
Predictably, in view of recent developments in Hong Kong, the results for the SAR have seen a significant downshift both in terms of the occupier and investor mood music. Finally, the feedback for the US is pointing to little near-term change in the market, and twelve month expectations are telling a similar story.
It would be misleading to suggest this is a fully global phenomenon, with some positive trends visible particularly in a number of emerging markets, but the direction of travel is clear as structural change in shopping habits gathers pace. Most of the more mature markets have negative readings both for the retail sector OSI and ISI although, unsurprisingly, expectations differ materially between prime and secondary space with the outlook for the latter significantly more challenging.
The industrial sector is a direct beneficiary of the softer trend in the retail numbers but the survey is also continuing to show a generally positive assessment of the outlook for offices with occupier demand still being supported by economic activity even if it is less robust than it has been.
Subsequent to the publication of the Q3 monitor, WBEF spoke with RICS Economist Tarrant Parsons about what could be inferred from the results. Here is a flavour of what he had to say:
"It doesn't normally manifest itself as much as you would expect in real estate trends. It's always in the back of people's minds, but until policies are introduced, for example meaningful alterations to trade regimes, real estate markets will remain largely unaffected."
"It's a real worry. I think in the UK and US it's probably most pronounced – in markets where online retailing has grown too quickly, if you have a traditional retailer's business model it's causing a lot of trouble. The sector is going to remain weak at least for the next couple of years, until there's a massive adjustment of some description. And I see that trend becoming more widespread: retail isn't in decline in all markets at this point, but I imagine the online effect will catch up with those markets soon."
If you look at countries that were hardest hit by the crisis in the Eurozone – Greece and, to a certain extent, Cyprus – their recoveries are only now really gaining traction so they're at a different stage in the cycle. Brazil is another market that I would highlight: expectations there are positive as well. There have been lots of false dawns in Brazil recently, but if you look at monetary policy, the Central Bank has enacted three rate cuts in quick succession, and that has, I think, lifted sentiment. And that's a theme globally: though we have seen a widespread economic slow-down, it's been met pretty swiftly by central bank action."