RICS Global Commercial Property Monitor Q4 2014

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1 Simon Rubinsohn Chief Economist +44 (0) RICS ECONOMICS RICS Global Commercial Property Monitor Q * RICS Occupier Sentiment Index (OSI) is constructed by taking an unweighted average of readings for three series relating to the occupier market measured on a net balance basis; occupier demand, the level of inducements and rent expectations. RICS Investment Sentiment Index (ISI) is constructed by taking an unweighted average of readings for three series relating to the investment market measured on a net balance basis; investment enquiries, capital value expectations and the supply of distressed properties. Property Sentiment Defies Financial Market Turbulence remains robust, while the US shows some of the strongest Q4 momentum and now lead the way in terms of occupier market improvement Sentiment still weak in, while deteriorating even further in The Q RICS Global Commercial Property Monitor shows momentum beginning to shift up a gear in a number of countries, although conditions vary considerably. RICS composite indicators - the Investment Sentiment Index (ISI) and Occupier Sentiment Index (OSI) - confirm that commercial property continues to perform strongly in, in keeping with results posted over much of the past two years. What's more, forward looking indicators are pointing to this trend being sustained, with further meaningful rental and capital value gains anticipated by survey respondents. Although this may appear inconsistent with downbeat macro data, the low interest rate environment and high levels of liquidity are key driving forces behind the robust market trend. Significantly, New Zealand and now exhibit the firmest OSI readings, indicating occupier market conditions in these two countries are now improving at the fastest pace in this quarter s survey. Both economies have grown in excess of 3% over the past year and have achieved rapid rates of job creation, although it should be noted that s upturn started from a considerably lower base. Elsewhere, the US market appears to have strengthened over the past few months. Indeed, tenant demand and investment enquiries are rising significantly, which is in line with GDP reportedly growing at an annualised pace of 5% in Q3 and the rate of unemployment having fallen to its lowest level in over six years. The latest RICS results also show solid momentum in,, and the UK, with each country expected to record firm capital value and rental growth over the coming twelve months. In fact, and registered the sharpest increase in investor demand during Q4 (in net balance terms), relative to all nations covered in the monitor, which signals a strong rebound after the harsh impact of the 2008 global financial crisis in both cases. By way of contrast, the performance of the occupier markets in and Italy remains poor, as weak tenant demand is being accompanied by rising availability of space. Unemployment rates have actually edged up over the past year in both instances which goes someway to explaining the poor backdrop. Consequently, near term rent expectations remain negative. Crucially, however, the investment markets are showing some early signs of improvement, with investment enquiries rising substantially in and at a more moderate rate in Italy. That said, this has yet to fully feed through into capital value expectations which paint a broadly flat picture near term, albeit certain areas of the market may see marginal growth. The performance across most emerging markets was uninspiring during Q4, although respondents in remain optimistic about the year ahead (also reflected in the relative resilience of the stock market). As such, with the exception of, exhibits the strongest twelve month growth projections for rents and capital values compared with all other areas. Meanwhile in, OSI and ISI readings are implying a flat market, with growth in supply outweighing that of demand on both the investment and occupier sides. This trend chimes somewhat with the general slowdown in the rate of Chinese economic expansion in recent quarters. Despite this, small gains in prices and rents are expected over the coming twelve months, although respondents have been scaling back their projections. Indicators continue to highlight deteriorating market conditions in, where both occupier and investment demand remain in decline. Subsequently, capital values and rents are projected to fall across the board during the year ahead, albeit expectations are not quite as negative as previously. The medium term outlook does, however, turn more upbeat as respondents are anticipating commercial property prices and rents to return to growth over the next three years. Feedback from is more troubling; 54% of respondents expressed the view that Rouble depreciation was a threat to business (31% stated it was too early to tell). Moreover, interest rates have been raised to 17%, the economy is now contracting, and the huge fall in oil prices is likely to further exacerbate the economic turmoil. Together, these impediments present a challenging set of circumstances for the commercial property sector, with little respite anticipated in the foreseeable future. To receive a free copy of this report on the day of release, [email protected]

2 Occupier Sentiment Index and Investment Sentiment Index Investment Sentiment Index US UK 20 Czech Republic Italy Hong Kong Occupier Sentiment Index Twelve Month Rent and Capital Value Expectations (net balance %) 12 Month Capital Value Expectations UK US 40 Italy 20 Hong Kong Czech Republic Month Rent Expectations

3 Tenant Demand - change with preceding quarter (net balance %) US UK Czech Republic Hong Kong Italy

4 Investment Enquiries - change with the preceding quarter (net balance %) Czech Republic US UK Italy Hong Kong

5 Information RICS Global Commercial Property Monitor RICS Global Commercial Property Monitor is a quarterly guide to the trends in the commercial property investment and occupier markets. The Global Commercial Property Monitor is available from the RICS web site along with other surveys covering the housing market, residential lettings, commercial property, construction activity and the rural land market. For access to city level agents comments and contributor details please view the RICS economics website. Methodology Survey questionnaires were sent out on the 24th November with responses received until 18th December. Respondents were asked to compare conditions over the latest three months with the previous three months. A total of 1062 company responses were received, with 234 from the UK. Responses for were collated in conjunction with the Society of Chartered Surveyors. Responses have been amalgamated across the three real estate sub-sectors (offices, retail and industrial) at a country level, to form a net balance reading for the market as a whole. A positive net balance reading indicates an overall increase, a negative reading indicates an overall decline. RICS Occupier Sentiment Index (OSI) is constructed by taking an unweighted average of readings for three series relating to the occupier market measured on a net balance basis; occupier demand, the level of inducements and rent expectations. RICS Investment Sentiment Index (ISI) is constructed by taking an unweighted average of readings for three series relating to the investment market measured on a net balance basis; investment enquiries, capital value expectations and the supply of investment properties. Contact details This publication has been produced by RICS Economics. For all economic enquiries, including participation in the monitor, please contact: [email protected] About RICS RICS is a global professional body. We promote and enforce the highest professional qualification and standards in the development and management of land, real estate, construction and infrastructure. Our name promises the consistent delivery of standards bringing confidence to the markets we serve. The work of our professionals creates a safer world: we are proud of our profession s reputation and we guard it fiercely. Become a member of RICS If you would like to find out more about becoming a member of RICS, please visit Disclaimer This document is intended as a means for debate and discussion and should not be relied on as legal or professional advice. Whilst every reasonable effort has been made to ensure the accuracy of the contents, no warranty is made with regard to that content. Data, information or any other material may not be accurate and there may be other more recent material elsewhere. RICS will have no responsibility for any errors or omissions. RICS recommends you seek professional, legal or technical advice where necessary. RICS cannot accept any liability for any loss or damage suffered by any person as a result of the editorial content, or by any person acting or refraining to act as a result of the material included. RICS UK T +44(0) [email protected] RICS Asia T [email protected] RICS Europe T+32(2) [email protected] RICS Oceania T +61(2) [email protected] RICS Americas T [email protected] RICS T [email protected] RICS Middle East PO Box Dubai United Arab Emirates T: F: [email protected]