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Impacts T H E F U T U R E O F G L O B A L R E A L E S TAT E

Worldwide Trends 2018 report

Savills World Research. Published March 2018

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Contents 3 IntroductionBy Yolande Barnes, Head of Savills World Research

10 World overview By Yolande Barnes, Head of Savills World Research

12 USA By Keith DeCoster, Director, Research Operations, Savills Studley

17 Europe By Eri Mitsostergiou, Director, European Research, Savills

19 Germany By Matthias Pink, Head of Germany Research, Savills

21 France By Marie Josée Lopes, Head of Research, Savills France

23 UK By Lucian Cook, Director, Savills Residential Research and Mat Oakley, Head of Savills European Commercial Research

25 Asia-Pacific By Simon Smith, Senior Director, Savills Hong Kong

27 Japan By Tetsuya Kaneko, Director, Research and Consultancy, Savills Japan

29 Singapore By Alan Cheong, Head of Research & Consultancy, Savills Singapore

30 Vietnam By Troy Griffiths, Deputy Managing Director, Savills Vietnam

31 China By James Macdonald, Head of Research China, Savills

33 South Korea By JoAnn Jieun Hong, Director Research & Consultancy, Savills South Korea

35 Australia By Chris Freeman, National Head of Capital Strategy, Savills

37 Hong Kong By Simon Smith, Senior Director, Savills Hong Kong

40 Africa By Mark Latham, Managing Director, Pam Golding Commercial, Africa and Pam Golding, Founder and Chairman, Pam Golding

43 Global rural By Ian Bailey, Head of Rural Research, Savills

46 Contacts

3Click here to return to Contents page

IntroductionBy Yolande Barnes, Head of Savills World Research

This report is a round-up of forecasts from Savills real-estate experts around the world. Rather than presenting the usual, backward-looking data on what has happened in all the conventional real-estate markets, we look forward to how things will change and look at some of the less conventional alternatives which should be of interest to real-estate professionals. The report is for investors, owners, funders and advisors who want to understand how global trends in the economy, technology, society and the environment, will impact their enterprises. It translates some of the big-picture views, as presented in our first Impacts publication, into individual market consequences. This shows that global trends have already resulted in some remarkably similar trends seen in many markets, and across continents. Each trend plays out in a slightly different way and over different timescales in various places, but the main story is that the nature of real-estate risk has changed, and owners are viewing new and existing sectors and locations in a different way.

All real-estate professionals need to understand global forces in order to address what is happening in their particular locality or sector – whatever, and wherever, it is.

Sign up for the Impacts Quarterly It’s the essential email update on the future of global real estate. See savills.com/Impacts Also, a visit to savills.com/Impacts will help you tackle the real-estate challenges of 2018 and beyond.

USAInvestment type Property type Location

Characteristics Examples

Core Logistics warehouses Gateway cities LA, Dallas, Fort Worth, North New Jersey

Prime Grade A offices CBDs Downtown Bellevue, Seattle,

San Francisco, Silicon Valley, Boston

Luxury multi-family Highest-cost coastal metros

Core-plus R&D/Lifescience High-demand locations Boston, Bay Area, San Diego

developments and conversions

Offices and mixed-use Maturing sunbelts and Charlotte, Raleigh/Durham, Nashville,

lower-cost markets Portland, Pittsburgh, Indianapolis

Mixed office/retail Close-in suburbs Downtown San Diego

Value-add Non-gateway CBDs Dallas CBD

Industrial final-mile conversions Close-in suburbs on Any major population centres

transport routes

Hotel Tourism, domestic and business Washington DC, Manhattan

Opportunistic Redevelopment of corporate Remote beltway suburbs Chicago, New Jersey, Philadelphia

office parks

Mixed-use development on transit New commuter lines MARTA Atlanta

oriented development sites Brightline South Florida

BARTline San Jose

Alternative Multi-family Affordable High-growth markets

Mid market

EuropeInvestment type Property type Location


Core Prime offices CBDs Berlin, Madrid, Stockholm,

Oslo, Amsterdam, Brussels

Prime retail High street Paris, London, Milan, Amsterdam, Munich,

Frankfurt, Madrid, Barcelona, Vienna

Prime warehouses Countries with high UK, France, Germany, Netherlands,

e-commerce penetration Sweden

Core-plus Prime sectors and Alternative CEE region cities with Prague, Budapest, Bucharest

sectors for long-term investment strong fundamentals

Value-add Secondary neighbourhood Locations needing community

shopping centres retail hubs

Redesign of retail parks Out of town with good

catchments

Old office stock for conversion Downtown locations

to student housing

Opportunistic New emerging sectors such as Youthful cities Berlin, Amsterdam, London, Dublin

co-working, co-living, new types

of serviced office, micro-living

& student housing/hotels


GermanyInvestment type Property type Location


Core Traditional prime High demand, low vacancy Hamburg, Munich, Frankfurt,

rates, poised for rental growth, Berlin

especially offices & residential

Housing for let and long hold Gentrifying outer Berlin, Hamburg, Munich

neighbourhoods

Value-add Re-purposing and redeveloping Failing retail in locations

failing retail units suitable for mixed-use

and even logistics

Conversion of other mono-use

buildings to mixed-use

Opportunistic High-yielding data centres

FranceInvestment type Property type Location


Core Core-type assets with Peripheral Paris, but with Nanterre

slightly higher yields than access to public transport

Paris intra muros (inner) nodes

Core-plus Speculative development of Transport nodes on new, Roissy, Clichy Montfermeil,

assets that are part of the improved or linked lines which Orly, Issy, Versailles

Grand Paris project and its are part of the Grand Paris plan

transport hubs

Value-add Empty or part-empty buildings Inner and outer suburbs

for repositioning or change of use of Paris

Student housing and senior

residences


UKInvestment type Property type Location


Core Selective retail which was Streets and centres performing Central London

over-discounted in 2017 and in demand by innovative

occupiers

Urban logistics Near urban centres for M25 London

last-mile delivery

Regional logistics Strategic locations accessible Midlands

to large population catchments

Amenity farmland near more Arable and mixed Grade A land Southern England

populated areas

Core-plus Multifamily (build to let) High-demand cities Birmingham, Manchester, Bristol,

Oxford, Cambridge, Edinburgh

Forestry and land for

forestation particularly for

post-Brexit green subsidies

Affordable offices Accessible and affordable Provincial market towns with growing

locations where people want workforces

to work

Value-add Secondary and tertiary offices for Regional cities M25 towns, Bristol, Leeds

refurbishment and repurposing

High-yielding residential in North West England Liverpool, Manchester

locations with scope for

catch-up capital growth

Opportunistic Joint ventures with housing Growing urban centres

associations for long-term throughout England

residential income streams

Management and diversification

of distressed farms and farmland

threatened by Brexit

Alternative Strategic land for residential Local authority areas with up South-East England

development up-to-date local plans


Asia-PacificInvestment type Property type Location


Core Grade A offices Stock likely to experience Singapore

further yield compression due

to investor demand

Grade A offices Store of wealth China

Premium retail centres Well-managed and able to China

withstand competition from

e-commerce

Residential Areas with strong labour Japan

demand

Grade A offices Low vacancy buildings Core Seoul, Korea

Hyper marts With sale and leaseback clauses Tier 1 Korean cities

Property companies with 2017 real-estate gains will Australia

exposure to Sydney offices be priced in to unit values

Offices Lower supply areas with strong Australia

employment growth

Core-plus Grade A offices High-yielding emerging markets Vietnam – Ho Chi Minh, Hanoi

Higher-yielding & reversionary Decentralised locations; China

Grade A offices office clusters and out-of-

town business parks

Grade A offices for medium- Core locations Australia – Adelaide, Perth and Brisbane

term uplift

Under-performing retail assets For expert management and China

repositioning

Value-add High income retail Suburban Singapore

High-yielding offices for extension, CBD non-core Singapore

refurb and retail rent optimisation

Last-mile logistics Satellite locations near big Japan

population centres

Conversion of lower floors Areas of high/growing Korea

of offices to retail retail demand

Opportunistic Mixed-use Office, retail and apartments Vietnam

Industrial Logistics and manufacturing Vietnam

growth areas

Project conversions into Old under-performing assets China

co-working spaces

Debt financing In otherwise inaccessible, China

high-demand markets

Alternative Residential to let; healthcare Equity injection to asset China

data centres managers and operational

platforms

Residential build to let Neighbourhoods set to Australian cities with

benefit from infrastructure growing populations

improvements


SingaporeInvestment type Property type Location


Core Grade A offices Stock likely to experience

further yield compression

due to investor demand

Value-add High income retail Suburban

High-yielding offices for CBD non-core

extension, refurbishment,

retail rent optimisation

JapanInvestment type Property type Location


Core Prime offices Income producing

Prime retail Urban Tokyo, Osaka

Residential Areas with strong labour

demand

Value-add Upscale hotels Areas with strong tourism Tokyo, Osaka, Kyoto

demand and low luxury supply

Last-mile logistics Satellite locations near big

population centres

Regional offices

Opportunistic Portfolio breakup for management

and development opportunities

ChinaInvestment type Property type Location


Core Premium Grade A offices Store of capital Tier 1 cities

Premium retail centres Well-managed and able to Tier 1 cities

withstand competition

from e-commerce

Core-plus Higher-yielding and reversionary Decentralised locations; Tier 1 and higher-demand Tier 2 cities

Grade A offices office clusters and out-of-town

business parks

Under-performing retail assets For expert management and Major population centres

repositioning

Opportunistic Project conversions into Old under-performing assets China

co-working spaces

Debt financing In otherwise inaccessible, China

high-demand markets

Alternative Residential to let; healthcare Equity injection to asset Tier 1 and Tier 2 cities

data centres managers and operational

platforms


South KoreaInvestment type Property type Location


Core Grade A offices Low-vacancy buildings Core Seoul

Hyper marts With sale and leaseback clauses Tier 1 cities

Core-plus Older Grade A offices Core locations Seoul

for modernisation

Value-add Conversion of lower floors Areas of high/growing

of offices to retail retail demand

Semi-vacant buildings for Core locations Seoul

management and increased

occupancy

Opportunistic Logistics Well designed with maximum Greater Seoul

access to the Greater Seoul

market

AustraliaInvestment type Property type Location


Core Property companies with exposure 2017 real-estate gains will

to Sydney offices be priced in to unit values

Offices Lower supply Melbourne areas St Kilda Road

Core Plus Grade A offices for medium- Core locations Adelaide, Perth, Brisbane

term uplift

Industrial Locations with constrained Melbourne West

land supply

Opportunistic Over-discounted retail E-commerce resilient locations

Alternative Residential build to let Neighbourhoods set to benefit New Melbourne tram lines

from infrastructure

improvements

Hong KongInvestment type Property type Location


Core Grade A offices In areas with low future Central

supply and high demand

from PRC companies

Core-plus Residential Store of wealth characteristics Hong Kong Island

Value-add Tired and dated Grade A High demand, low supply areas Central

buildings for refurbishment

and repurposing

Industrial and warehousing for Strategic neighbourhoods

last-mile logistics with large populations

Opportunistic Over-discounted retail for E-commerce resilient locations

repurposing for domestic retailing and dense residential areas

Warehouses and industrial for Locations with good transport

last-mile logistics links and maximum access

to the biggest populations



World overview By Yolande Barnes, Head of Savills World Research +44 207 409 8899 [email protected]

Real-estate risk is changingThe global investment story is still about the search for income, overcrowded core markets and a search for alternatives – all of which mean that attitudes to risk are changing.

This changed attitude to risk is particularly apparent in China where a huge weight of money is press-ing on the sector and investors may be finding it difficult to access investment assets in their sectors of choice. In some cases, they are resorting to debt finance as a means of gaining exposure and, in others, buying into operational platforms and asset management companies. These options put greater emphasis on net real-estate income flows rather than investment trading of directly owned assets.

This theme is not confined to China and we expect it to be particularly prevalent in jurisdictions where freehold is unavailable. Leasehold ownership, of limited duration, is the norm in many emerging and recently emerged markets and this should automatically put emphasis on the size, reliability and duration of income over a fixed term rather than capital value appreciation through future trading.

Real estate as an alternative to government bondsA further sign that the nature of real-estate risk is undergoing global reassessment is that in countries where there is political instability or fiscal uncertainty, real estate has taken on a particular role as a stable provider of fixed income in investment portfolios.

Particularly in locations with Anglo-Saxon law traditions (usually former British colonies) where there is secure legal title, real-estate investors enjoy a degree of sovereignty over their possessions, which means they might be considered higher grade than local government bonds at risk of default. History shows that cities and buildings can often endure longer than political regimes and even sovereign nations. Little wonder that real estate is lower yielding than bonds in these circumstances.

Crowded marketsThere are only limited opportunities to invest in conventional asset classes in many world cities as the supply of investable assets has not kept pace with demand (especially where development debt finance has been scarce following the global financial crisis.

However, for those investors willing to consider something new, more opportunities will open up in 2018 and beyond. The growing numbers of middle-class populations in Asia, for example, offer big opportunities in that geography, but will only present well-matched risk for investors in locations where real-estate title is robust and markets are transparent.

Some world property markets have very different legal traditions and rights than those to which many global investors have become accustomed. Without change, there is a limit to how much land the real-estate investment universe can cover. Real-estate investment growth is more likely to be in new property types, sectors and neighbourhoods that haven’t been widely invested hitherto.


Lessons from JapanAs the western world learns to live with low inflation and low interest rates, lessons can be learned from Japan which has already experienced three decades of this phenomenon. Core residential investments in Japan are illustrating what will become a global phenomenon: there can be no capital value growth without rental growth – or the prospect of it.

Some alternatives are becoming coreMost of our global tipsters point to potential in, and growing demand for, alternative asset classes. This does not necessarily mean that investors are exploring outside their comfort zone on the risk curve. In a supply-constrained world, our researchers report that investors are still focused on quality and looking for prime investments, but would rather find them in new asset classes than move into secondary and tertiary properties in conventional asset classes. The extent of investable global real-estate asset classes is therefore expanding.

Not all alternative assets will make the gradeThere are signs that some of the successful emergence of new core asset classes experienced in, say, student housing and logistics, cannot be applied to all demographic or social trends. The aging of the US population, for example, hasn’t translated directly into demand for new types of housing for the aging or elderly. Instead, other, non-real estate solutions such as robotic assistance may be found. So, new social trends and demographic trends, although real, do not always have consequences in the real-estate world – or they may have unexpected consequences.

Disruption continuesTechnological changes will continue to disrupt real estate. The effects of e-commerce, driverless cars, new transport technologies, robotics and AI have only just sent the first rumbles of what may turn out to be major earthquakes in the industry. All this change will continue to alter the nature of real-estate risk which means future editions of this publication will have very different asset classes featured as ‘core’ tips.

Assets which would have featured as ‘core’ 20 years ago are now appearing as refurbishment and redevelopment opportunities in the ‘opportunistic’ and ‘value add’ categories. Investor appetite for stable, long-term income streams may mean that such short-term, single-use assets fall out of favour while the longer-term management of diverse, mixed-use portfolios and ongoing place making become mainstream investor activities.

Cyclical turning point?Our expert in the US describes how not every site or district can be the next tech/millennial/creative hub. The US experience may be indicating where the limits of the new, alternative real estate lies and where wishful thinking of the next cycle begins. With construction starts in the US spiking for the first time since 2008, 2018 looks as if it could be the fulcrum between the rational real-estate investing of the last 10 years and the next 10-year bout of over-exuberance, leading to correction.

So, 2018 will be an interesting year to watch world real estate. Investors need to distinguish between rational moves to the new successful asset classes in a time of change and disruption versus traditional late-cycle, over-exuberance and over-extension.


USABy Keith DeCoster, Director, Research Operations, Savills Studley +1 212 326 1023 [email protected]

OverviewGlobal real-estate trends often begin in the US, so this section could set the tone for other locations and broader global regions beyond 2018.

The US economy surprised on the upside in 2017. The economy turned out to be more resilient than some had feared in 2017, with payroll expansion, business confidence and consumer sentiment beating expectations. As we predicted at the end of 2016, strength was seen in maturing Sunbelt markets, such as Atlanta and Dallas/Fort Worth. But the strong performance in tech-centred markets surprised us as the pursuit of talent at all costs meant occupier demand surpassed even the 1999 dotcom boom benchmark.

But investment activity was down. Investment activity surprised on the downside, declining for the second straight year. The value of sales, including portfolio and entity transactions, dropped by 7% in 2017. Office property sales declined by 8%, with Manhattan taking the biggest hit. Other markets such as Los Angeles made up only a fraction of the gap and a few secondary markets saw higher sales.

Cross-border investors expressed a lot of interest in secondary markets, but still comprised only 10% of transactions in this market. The retreat of Chinese capital was a big factor with annual investment into the USA from this region down by 38% according to RCA.

Reluctant sellers are to blame. There appears to be a growing disconnect between seller and buyer expectations. Buyers are unwilling to pay record prices, but there is no pressure on owners to buckle. Sale volumes have consequently tumbled as prices continue to rise slightly. Low yields have encouraged buyers to take on risk in return for more income. This is evidenced by a jump in construction projects and easing of development loan requirements.

Buyers may be heeding some of our admonitions from a year ago. Many have embraced the strategy of investing based on long-term demographics and structural shifts in consumption patterns. This is still a good approach for risk-averse investors.

Limited liquidity in small metros increases risk. We warned there are only so many institutional- grade core and core-plus assets in secondary and tertiary markets, and overexposure to some smaller metros can be risky in the long term as current levels of liquidity cannot be guaranteed when time comes to sell.

But the definition of ‘core’ has broadened. Based on the most recent AFIRE survey, Los Angeles has supplanted Manhattan as the market of choice, in large part due to its torrid industrial market. Additionally, Seattle has moved up, while the nation’s capital moved down. These preferences mirror sales volume trends that took place in 2017 – any investor trying to break into these markets in 2018 will find that the definition of core has become much broader.


Beware of ‘can’t miss’ propositions in 2018. Not every town or parcel has the potential to be the centrepiece of a ‘millennial hub’ or ‘innovation district’, so avoid the dangerous ‘build it and they will come’ proposition from residential homebuilders seen in some mixed-use development projects and the multi-family sector in particular.

Every developer dreams of buying an alt-location and selling a new prime district. We think the biggest value appreciation will occur in neighbourhoods which are currently in the midst of a transformation, but this can take a couple of years – or a couple of cycles.

CoreIndustrial, specifically logistics/warehouses (Los Angeles, Dallas/Fort Worth; Northern New Jersey)The industrial sector remains undersupplied and still has the most potential to achieve above-average net operating income (NOI) growth. In fact, among the primary asset classes, industrial was the only one to see sales volume rise during 2017 (senior housing also posted a jump in sales volume).

Similar to trophy office and high-street retail, the gap in pricing between the most technologically advanced facilities and older logistics properties is very wide. Amazon, Fedex and other major logistics firms pay top dollar for the most modern facilities because the payoff for the enhanced efficiency of these properties is exponential.

OfficesTop-tier Class A buildings in Central Business Districts, such as Downtown Bellevue, Seattle, San Francisco, Silicon Valley and Boston, have further potential for rental rate growth. These properties are routinely selling for $400 psf or more, and cap rates are in the 3% to 5% range.

Similar assets in Manhattan and Washington, DC are still safe investments with long-term value, but NOI growth in the highest-calibre Class A properties has peaked. Landlords are having to grant generous concessions to keep leasing going. Los Angeles (one of last year’s markets of choice) has lost some momentum in its entertainment sector.

Luxury multi-family in highest-cost coastal metros Some multi-family developers looked as if they may have overestimated the capacity of households to pay luxury rent in 2017, but the tax bill now passed by Congress could boost demand for luxury multi-family product in the highest-cost metro areas. This is because limits put on the deductibility of mortgage interest, the elimination of the deduction for home equity lines of credit and a cap on the deductibility of property taxes will likely reduce the incentive and affordability of homeowner-ship in most costly markets.

Core-plusR&D/Life science developments or conversions (Boston, Bay Area, San Diego)Demand for life-science facilities, as well as R&D/flex space, is running into a very limited supply. Only a few national owners/developers specialise in this niche. Life science and biopharma is


inherently risky and vulnerable to merger and acquisition, but, for the time being, this segment is surging. The biggest companies can fund build-to-suits, but smaller and mid-sized innovators have difficulty finding options – they are too big for incubators, but are being squeezed out of product in San Francisco’s Mission Bay, South San Francisco and Cambridge.

Office or mixed-use in maturing sunbelt/lower-cost marketsSecondary markets with a strong balance of talented workers and lower living and business costs (such as Charlotte and Raleigh/Durham in the Carolinas, Nashville, Portland, Pittsburgh and Indianapolis) offer core-plus investments. Additionally, some micro-districts (LoDo/Cherry Creek in Denver, Plano and Frisco in Dallas/Fort Worth, Midtown in Atlanta) that were considered riskier just two or three years ago are now Core-plus or even Core.

Compared with gateway markets, pricing is still reasonable, typically under $400 psf, with cap rates in the 6% range. Supply patterns have been stood on their head in this cycle as construction in low entry-barrier markets was kept under control (while it surged in many of the costliest markets).

Value-addMixed-use or office/retail in close-in suburbs or non-gateway CBDsAnyone concerned with talent recruitment and retention in an array of industries, from tech through legal, finance and general business services, is making a big push to enhance the workplace for their employees so the potential growth in net operating income for reconstituted retail or office buildings can be substantial. Savvy landlords, who build their own brand with a reputation for comfortable and amenity-laden buildings, can transform a 1990 office asset or office park into a core building.

Tenants across many industries will now pay a premium for properties that are either already in a neighbourhood loaded with amenities or in a building that provides conveniences and shared amenities. A lot of cross-pollination is made possible by co-working space operators.

Some landlords in suburban locations (Doral in Miami, Waltham Mass) are taking this even further, beyond the building to the neighbourhood level. Recognising worker demand for urban, mixed-use environments, they are selling out parcels to retail and multi-family developers with a vision of creating small self-contained urban villages.

Building refurbishment is imperative in markets such as Washington, DC and Manhattan where the supply of Class A space is growing rapidly. Landlords who do not update their assets will eventually face pressure to lower rent, but, in some markets, it will take a lot more differentiation for an asset to stand out – so many developers will be embarking on major capital improvements. Last-minute provisions in the tax bill will encourage this. The legislation expanded the definition of qualified real property eligible for bonus depreciation. (This now includes items such as roof improvements, heating, ventilation, and air-conditioning, fire protection, alarms and security systems).

There are markets, such as Downtown San Diego, Dallas CBD, where upgrading amenities and space layout, even in Class B properties, can be successful. Pricing for office buildings in some of these non-gateway cities is often well under $250 psf and cap rates typically exceed 6%.


Industrial final-mile conversionsIncreasing demand for local logistics premises means repurposed office and retail properties are in increasing demand in close-in suburbs on transport routes. Watch for entitlement issues; the conversion of offices or retail product that is embedded within residential communities will be trickier in some areas than others. In some cases, the demand for logistics space is so strong that companies are converting mall or ‘big box’ space into fulfilment centres.

HotelsDespite some concerns earlier this year about reduced visits from foreign tourists, the stronger US wage growth, improved economic outlook in Europe, and renewed business travel has boosted prospects for tourism, domestic and business travel in places such as San Francisco, Washington, DC and Manhattan.

OpportunisticSuburban corporate office parksMore investors are eager to deploy funds on development as they realise that squeezing more NOI out of best-in-class assets will be a challenge. Remote beltway suburban office parks (suburban Chicago/New Jersey and Philadelphia) will require large and long-term investment, but development funding has become more readily available.

Understanding local entitlement and zoning is particularly critical. Suburban areas registering losses in their population and company base may have to fundamentally repurpose, but these properties are almost always selling for less than $200 psf. Complexes with any bit of vacancy (20% or more) will sometimes sell for less than $100 psf.

Transit-oriented development sites Infrastructure investments in areas poised for public transit breakthrough have the potential to substantially increase the value of infill sites and conversion properties up and down commuter lines. Long term, mixed-use developments look attractive in markets that finally appear to be gaining some traction on mass transit (Atlanta, South Florida and the Mid-Peninsula/South Bay area between Silicon Valley and San Francisco). BART and high-speed trains in Downtown San Jose, the Brightline trains in South Florida and MARTA in Atlanta provide a backbone for residential and commercial development as well as conversions.

Pricing topped off in core markets such as Boston, Silicon Valley and San Francisco, but there could be some value-add/opportunistic investments for buyers willing to invest in extensive conversion or redevelopment opportunities.

Neighbourhoods in the midst of undergoing a transformation such as Fulton Market/West Loop in Chicago, Midtown West in Atlanta are seeing substantial value appreciation for properties in micro- districts, but generally for smaller-scale boutique or creative-offices. There are also larger-scale development and place-making opportunities that create a real critical mass for some of these locations. They carry a different type and level of risk than many institutional investors are used to, as they may require cooperation of local city agencies and major demolitions, sometimes with environmental remediation.


AlternativeSenior housing is always said to be on the cusp of a breakout phase, but, so far, demand is not matching demographics. Annualised completions are modest, only totalling about 22,000 units. As of 2016, nearly 50 million US residents were 65 or older; 15% of the population. By 2030, the figure is projected to grow to 75.5 million, or 21% of the population.

Demand for assisted living has not yet spiked because people are healthier and independent for longer. Advances in smart-home health-monitoring devices geared to seniors (as well as the lower cost) may also keep people in independent living and out of specialised facilities.

Similarly, at the other end of the spectrum, student-housing demand seems limited. Affordable and mid-market multi-family housing is deficient in many high-growth markets, but one of the unintended consequences of the tax bill could be a decrease in the incentive to build low-income/affordable housing as the value of LIHTC declines.


EuropeBy Eri Mitsostergiou, Director, European Research, Savills +31 630 973 409 [email protected]

OverviewIn last year’s report for Europe we predicted, despite recent yield compression, that there were still opportunities for growth and some places were still at an early stage of their market cycle. These expectations were fulfilled and there were high levels of investment activity; up 4.4% year on year in Germany, a strong pick up of activity in the Benelux region (15% year on year) and a 11% year-on-year rise in Southern Europe.

We were expecting that prime yields would stabilise in most locations in 2017. What came as a surprise was that yields compressed further in 73% of the markets in our survey area (-25bps year on year average). This confirms the strength of real estate in investor asset allocation strategies.

We also predicted a continuous emphasis on alternative investments as a result of the shift from yield to income. Indeed the alternatives sector is becoming more established, accounting for almost one-third of the total investment activity. The residential sector (PRS, student housing and senior housing) captured the lion’s share of alternative investment in 2017.

Rising allocations into real estate, a positive economic outlook, strong market fundamentals in the prime segments, and an attractive spread over long-term interest rates will sustain high levels of capital flows into the European property markets. So, we expect the European property investment market will have another strong year in 2018, with total volume set to exceed last year’s level by 5 to 10%.

CoreIn 2018, we believe investors will take a measured approach towards risk, which will intensify competition for core investments, sustaining record low yield levels. There are clear signs that we are in a late-market cycle, with limited yield compression opportunities, but rental growth should counterbalance this. Demand and supply imbalance for high-quality space creates favourable conditions for positive rental growth.

Our picks are prime offices in Berlin, Madrid, Stockholm, Oslo and Amsterdam, where we expect prime CBD office rents to grow by more than 8% year on year. We anticipate that prime high street retail units in Paris, London, Milan, Amsterdam, Munich, Frankfurt, Madrid, Barcelona and Vienna will be the key targets of international retailers, plus prime warehouses in the UK, France, Germany, the Netherlands and Sweden, which are the markets with the highest penetration of e-commerce.

Core-plusAs yields for prime assets are expected to remain low and largely homogeneous across the core sectors of Europe, investors have started looking for alternative locations and sectors in order to diversify and achieve better returns.

Non-core markets, in economies which will outperform the European average, such as the CEE region, could attract investors that are prepared to move up the yield curve. Alternative sectors,


such as residential (housing, student housing and senior housing), hospitality, healthcare and data centres are characterised by strong fundamentals influenced by structural rather than cyclical factors, for long term, strategic investment plans.

Value-addFor investors who are prepared to take some redevelopment risks or invest more in active asset management, there are value-add opportunities, especially in sectors that experience the negative effects of structural change: secondary neighbourhood shopping centres can be turned around into community retail hubs, out-of-town retail parks with good catchments can be redesigned to attract new tenants, old office stock in downtown locations can be converted in student housing.

OpportunisticTechnological disruption and social change means occupiers need new and different types of space. We are witnessing the emergence, and fast evolution, of new property types. These are often hybrids of traditional uses, but with a focus on services, flexibility and sharing. Examples include co-working and serviced offices, co-living, micro-living, new leisure uses and student housing/hotels. These are segments which do not have the depth and liquidity of the established sectors, but we expect them to lead investment into new property types, some of which have yet to emerge.


GermanyBy Matthias Pink, Head of Germany Research, Savills +49 30 726 165 134 [email protected]

OverviewAbout 15 years ago, a long period of suburbanisation came to its end in Germany. The country’s large cities started to attract more people back to their centres again and fewer were lost to suburbia. The number of urban inhabitants has been increasing significantly ever since, but construction volume has been rather low. Too low, as we know today, to meet demand.

Vacancy rates are close to zero across all sectors in most of Germany’s big seven markets and rents are on the rise, particularly in the housing and office markets. As a consequence, offices and multi-family houses in prime and even secondary locations are safe bets for investors. However, investors are increasingly aware that there is virtually no room left for yield compression. Rental growth is the only way to increase capital values.

Core/Core-plusFor long-term investors seeking higher initial yields than they can get in the big seven markets, the regional cities remain a good choice. Many of them are prospering, too and, while market liquidity is way lower than in the major markets, market fundamentals are similarly good.

In terms of the housing market, outer neighbourhoods around the largest cities, such as Berlin, Hamburg and Munich, look increasingly attractive. Due to the shortage of (affordable) housing in the traditional centres of major cities, more people are looking for alternative, new urban neighbourhoods in and around these cities. We expect this to result in rental growth especially in new ‘up-and-coming’ areas. The traditional lack of liquidity in these outer markets should not be an issue for buy-to-hold investors.

Value-addWhile best-in-class shopping centres and prime high street properties are still core/core-plus assets, this is not true for other types of retail anymore. Many shops and retail concepts in Germany suffer from a stagnating or shrinking turnover, even if they sit in good locations. Department stores are just the most well-known examples. Many retail occupiers are aiming to reduce their space requirements and/or their number of stores.

But just because demand from retail occupiers is falling, this does not mean these buildings are always unattractive for other users. Food and beverage is becoming more important as a means of complementing retail and making retail centres more attractive for extended-stay visitors. Leisure uses can also become part of the story.

Residential, co-working spaces and urban logistics are also among the users looking for well-located ex-retail units. Converting mono-use buildings (of all types) to mixed-use schemes might be a way to add value not only for (future) occupiers of the building, but for neighbouring occupiers, too.


OpportunisticAfter eight years of upswing, it is difficult for investors to find high-yielding opportunities. Many sectors formerly regarded as alternatives, such as student housing/micro-living, healthcare and hotel, became mainstream and have experienced a significant yield compression over the past years. Data centres, however, are still very niche. The market is small and opaque, but that might change after a few more years of excess demand in the German investment market.


FranceBy Marie Josée Lopes, Head of Research, Savills France +33 1 44 51 17 50 [email protected]

OverviewEconomic growth means France has seen a period of rapidly increasing property demand. Moreover, the naming of Paris as the host city for the 2024 Summer Olympic Games has reinforced its attractiveness and guaranteed the continued development of the city up until 2024, particularly with regard to train stations and transport hubs.

The benefits of Brexit can also be added to this, which, along with a new French political context, has given a great boost to Paris.

Real-estate investment continues to benefit from good market conditions and, most notably, an excellent profitability/risk tandem. The shortage of supply continues to boost rents, but holds the investment market back, particularly the number of transactions in the <€100 million sector. Investment totals in France were once again high in 2017 (€25 billion). Investors are still very active, thus the level of investment should continue in 2018.

CoreInner Paris (intra-muros) is still the leading location for core investments, which make up 94% of all office investments in the capital. Competition is at its highest level ever.

Initial yields for the best-located office and industrial assets stabilised in 2017. After several trimesters of ‘compression’ (decrease of yields), it seems that a threshold has been reached. Yields in Paris intra-muros for prime office buildings is now at 3%.

The vacancy rate in the Paris intra-muros market has reached a historic new low and investors are starting to anticipate an increase in rental values. Like many places where yield compression is complete, it is this capital growth that will likely drive increases in capital values going forward.

In order to achieve slightly higher current yields, numerous core funds are looking to buy assets situated in the periphery of Paris, provided they have immediate access to public transport. Take, for example, the pre-letting of the West Park building (20,100 sq m) in Nanterre by Groupama following its restructuring. Excellent financing conditions mean that returns on these investments can be significantly enhanced.

Core-plusCore-plus investors build their investment strategy around two main concepts in France. The first idea is to consider the repositioning of buildings with short leases (one to three years), in order to carry out a renovation of the asset and look for a possible increase in its value. This can also take the form of a change in building usage or looking to build additional facilities. The second is speculative development, where, as soon as a building benefits from a good location or sector, it will benefit from the evolution of its market. This is particularly the case for operations that are part of the Grand Paris project in places such as Roissy, Clichy Montfermeil, Orly Issy and Versailles.


Value-addCurrently, it is very difficult to add value to properties in Paris intra-muros. The periphery markets of the inner and outer suburbs are therefore more favourable.

As always, value-adding funds concentrate on repositioning empty or partially empty buildings on the non-prime market, as well as development operations or changing a building’s use. In this highly competitive market, value-add funds are opening up their business spectrum to alternative assets. These funds have made up, on average, 12% of the total investment in France over the past five years. The most active of these funds are those dedicated to student and senior residences.


UKBy Lucian Cook, Director, Savills Residential Research (+44 207 016 3837 [email protected])

and Mat Oakley, Head of Savills European Commercial Research (+44 207 409 8781 [email protected])

OverviewLingering uncertainty was the core theme of 2017 as the UK began its transition out of the European Union. The market still lacks the clarity needed to make confident investments. Instead, risk aversion has been a dominant theme. This has translated into high demand for prime assets and secure income streams – in a wide variety of sectors.

We expect that long-term income streams will become increasingly prized over the next five years and project that income returns will account for 60% of total returns over this time. In common with many global commentators, we believe that yield compression is all but complete in core sectors and that pressure will increasingly be outward.

Opportunities in 2018 lie largely in the mispricing of assets in the wake of the Brexit vote or due to falling sterling, otherwise the cyclical spread of growth out of and away from London.

In agriculture, short-term uncertainty over Brexit needs to be weighed against the long-term fundamentals of high UK land quality, shortage of supply, amenity offering and tax benefits of ownership. We remain bullish on forestry, energy and alternative-foods production.

Core and Core-plusGreater uncertainty in the UK market means that quality investments in this sector are particularly sought after – and scarce. This means that investment activity has held up well and yields have not moved far out, despite the impacts of Britain’s exit from the EU.

Core investors would do well to examine prime retail assets which may have been over-discounted in 2017, not only because of Brexit, but also on overdone fears of the impacts of e-commerce. Not every high street will be adversely hit by e-tailers. Some will see increased demand for bricks from the retailers who had formerly confined themselves to clicks.

Like many of our other world commentators, urban logistics remain our top pick with that ever crucial last mile in mind.

Value-addSecondary offices for refurbishment and repurposing are likely to see substantial growth over the next five years if they are in popular and affordable areas with a growing workforce.

In the residential sector, prime, core markets look fully valued, but there is still catch-up potential in other regions. Good towns and cities in the high-yielding North West region of England should produce high income returns while also having potential for high capital growth.


Opportunistic and alternativeThere are not many sectors which are still considered alternative in the UK, as investors have increasingly recognised the strong fundamentals of logistics warehouses, student housing, hotels and farmland.

New ways of investing, say through joint ventures with housing associations or through compiling residential portfolios formerly owned by small-scale private investors, will need to be considered as conventional routes to acquisition become scarcer.


Asia-PacificBy Simon Smith, Senior Director, Savills Hong Kong +852 2842 4573 [email protected]

OverviewWith the huge run-up in asset values and equity markets worldwide there is a rising tide of concern that we are due a correction of some sort. Fears revolve around a banking or debt crisis in China or a dramatic economic slowdown, even an oil or energy crisis of some kind.

There are also concerns over geopolitical tensions in North Korea and the South China sea, coupled with broader concerns over populism, nationalism and protectionism. Specific global risks, which would impact Asia-Pacific may originate further afield (Brexit, Grexit, Italian banks, other European debt etc) but could nevertheless adversely impact world economies. The sudden sell off in US stock markets has reverberated around the globe (though without obviously disastrous consequences as yet) and fears remain that a disorderly unwinding of QE could precipitate further market instability.

Tokyo has traditionally dominated the Asia-Pacific region as the biggest real-estate investment market, closely followed by fast-growing Shanghai. In 2017, however, Hong Kong overtook both these cities by a substantial margin, attracting nearly US$15 billion of real-estate investment in the first nine months alone.

2017’s most active Asian real-estate investment market was fuelled by large amounts of mainland Chinese money taking a range of positions, including owner occupation and development land. This may have as much to do with cyclical conditions in mainland markets as Hong Kong investment seemed to have been at the expense of Tier 1 Chinese cities such as Shanghai, Beijing and Shenzhen, which dropped down the Asian investment league. Meanwhile the later-growth Chinese cities such as Guangzhou and Chengdu have moved up the league. The mature markets of Australian and Japanese cities are prominent investment destinations in the region, many seeing inward activity of over US$1 billion in 2017. Smaller, developing markets such as Bangkok and Kuala Lumpur are moving up the league fast, but do not yet have the quantity and quality of investable stock seen in the mature developed markets.

CoreYield compression continues to be a feature in many core markets as a weight of money presses on limited supply. Our researchers tip Singapore, core Seoul and Tier 1 Chinese cities for Grade A offices, Hyper-markets in Tier 1 South Korea and prime retail centres in Tier 1 China.

Core-plusGrade A offices also feature as core-plus investments in slightly more off-piste locations such as Perth, Adelaide and Brisbane in Australia and Ho Chi Min City and Hanoi in Vietnam. Chinese retail for management and repositioning also features in this category, as does Chinese higher-yield Grade A offices. Both of these categories might have featured in ‘Value-add’ rather than ‘Core-plus’ 10 years ago.


Value-addHigh yielding and high income asset classes feature in this section. Offices for refurbishment and conversion to mixed-use feature in both Singapore and South Korea, while the development of last-mile logistics premises are seen as a good bet in Japan.

OpportunisticThe development and conversion of buildings for mixed-use features slightly higher up the risk curve in Vietnam, as does logistics. In China, the conversion of offices to co-working spaces offers opportunities. Our Chinese researcher also takes us off the traditional risk curve by suggesting that debt finance may be the only way for some investors to get exposure to real estate in supply-constrained markets.

AlternativeThere are not many real-estate asset classes which have not yet become mainstream, but residential multi-family or ‘build to let’ is still very new and only just starting to happen in Australia. We pre-dict high demand and that it will very quickly become mainstream.

The same is true in China, where low yields in Tier 1 cities and very high demand for new apartment sales has pushed build to let residential to a back burner before now. Healthcare and data centres are other alternatives tipped to grow in China.


JapanBy Tetsuya Kaneko, Director, Research and Consultancy, Savills Japan +81 367 775 192 [email protected]

OverviewInvestment demand is strong, with fierce competition for quality assets. Yields are hardening, though net effective Grade A office yields at 3.0%, for example, are still substantially softer than say Hong Kong, suggesting there may still be room for some capital growth.

Pension funds and government-related investors intend to increase their real-estate exposure for the higher yields than are available from fixed income or equities. J-REITs may also come back to the acquisition market in 2018, if unit price stabilises.

Core and Core-plusThis is the most sought after segment in Japan and increasing demand for stable returns continues to compress yields – across asset classes and geographies. The office sector is performing better than expected with strong pre-leasing through the end of 2018. Prime urban retail is also sound, illustrated by the 2.5% cap rate in Tokyo and 3% in Osaka. Residential has seen gradual rental increases and this growth is expected to continue as labour demand strengthens.

Value-addAdditional value can be derived from the exponential growth of inbound tourists, which drives hotel demand. Upscale hotels are the better buy because supply, unlike budget hotels, is limited and rental increases may be obtainable through product differentiation.

Demand for satellite logistics facilities handling last-mile deliveries, will likely grow with the size of the B2C e-commerce sector in Japan. However, increasing land prices and site scarcity may limit development opportunities.

Regional offices have shown strong rental growth, which is likely to continue given already tight occupancy levels and limited supply, but very low availability means that low leasing volumes may limit the speed of rental growth.

OpportunisticPortfolio investment in Japan may continue in 2018. J-REIT takeovers may be tougher and take more time, unless NAV discounts become significant. There are still opportunities to spot sales where assets are underutilised or there is an opportunity to enhance net operating income through tenant reshuffles, renovations, conversions, and service improvements.

AlternativeAlternative assets are still facing issues in scalability and market fragmentation, but first-mover advantages can be significant. The possibility of handsome yields is stirring up investment interest. Healthcare, data centres, student housing, and self-storage facilities are all becoming increasingly popular. If pioneering investors facilitate the consolidation of fragmented markets, these alternative assets could become more investable for a wider audience of institutional investors.


SingaporeBy Alan Cheong, Head of Research & Consultancy, Savills Singapore +65 6415 3641 [email protected]

CoreGrade A offices in the CBD are still in high demand, particularly from Asian corporates and local real-estate developers, so yields continue to move in, despite recent poor performance on rental growth. Singapore’s net effective yields continue their move toward low, world-city norms.

In 2017, the secondary market was bolstered by the sale of Asia Square Tower Two for S$2.094 billion which caused the full year’s value to better that of 2016. However, transactions of such lumpy nature or those that are not officially on the market are difficult to predict, taking on a binary outcome of deal or no deal.

Since 2015, with the few available for sale investible grade assets being purchased by long-term holders, the pool of core assets now left for the picking has fallen significantly. Therefore, unless a vendor of a portfolio of office buildings appears in the market in 2018, it may be a year where investment sales activity for core offices quietens down a little with deals coming from off-market listings. Transacted prices are likely to rise further because the weight of money looking to purchase is now squaring off with limited supply or resistive sellers.

In the second half of 2017, landlords of CBD Grade A offices were emboldened by the strong take up of their new developments and began to raise asking rents. With that, the fear of further yield compression in the face of rising interest rates is not extinguished, but, rather, diminished. While rents for CBD Grade A office space have turned up since Q3/2017, capital values are inclined to drift up because interest from buyers pursuing investible grade assets is still high. Yields are expected to remain flat in 2018.

Value-addSuburban retail and CBD non-core offices are still producing high income. The yields for retail malls, in general, are still higher than those for offices. This may encourage institutional or Asian corporate investors to divert capital to acquire the remaining few suburban malls that may be available for sale in 2018. Other than suburban retail, the other opportunity lies in offices located in the CBD which have the potential for increasing the lettable floor space and/or sprucing up their internal layouts, and to optimise retail rents on the lower levels.


VietnamBy Troy Griffiths, Deputy Managing Director, Savills Vietnam +84 38 3823 9205 [email protected]

CoreLiquidity remains tight, the most recent sale of a HCMC Grade A office brokered by Savills achieved 6.75%. However, this is still good value, as there is a raft of legal reforms and continuing governance improvement. Currency and political risk are low, limiting risk, albeit execution can be challenging.

Opportunistic With limited core assets available, institutions seeking exposure to Vietnam will have to develop. On this basis, Mapletree have successfully rolled out their mixed-use VivoCity retail and MBC office with apartments to follow. The development of the Thu Thiem peninsular by several robust internationals will allow more pursuits of this nature.

Hospitality is booming, with brands racing to gain footprint and developers able to sell down lifestyle product at the front end. While hospitality is trading well, the guaranteed returns being offered make this product fragile. Industrial is the sleeper, with logistics in a turbulent state and manufacturing growing rapidly.


ChinaBy James Macdonald, Head of Research China, Savills +86 21 6391 6688 [email protected]

CorePremium Grade A offices in Tier 1 cities continue to be the only asset class that has adequate enough liquidity, transparency and underlying support to attract core money. While a number of these markets are likely to be faced with oversupply over the next 12 to 24 months that are likely to inflate vacancy rates, suppress rents and limit capital value growth, they continue to represent the safest store of capital for long-term investors.

Premium retail centres also hold an attraction to many investors, though investment opportunities are more scarce. Good asset managers are hard to come by and the sector is still prone to competition from online operators.

Core-plusWith more limited upside potential for added-value assets in city-centre locations, core-plus investors are shifting towards Grade A office properties in decentralised locations and seeking assets with rental reversion or lease uprisk to achieve higher returns. These assets will tend to be located in business parks or office clusters with relatively good accessibility.

Additionally, there are a handful of investors with retail management experience who are seeking opportunities to reposition underperforming retail assets, of which there are many in China.

OpportunisticOpportunistic investors are likely to focus on project conversions; converting older underperforming assets into higher and better-use assets. Recent examples have included a number of hotel and retail assets that have been converted into office space, often but not always leased and operated by co-working spaces. These conversions are likely to continue through into 2018 with demand from co-working spaces continuing to grow.

The government, concerned about real-estate asset bubbles, has tightened financing to the real estate market, especially to small and mid-tier developers. These developers are turning to investors as an alternative financing channel, so debt financing is becoming an alternative way of gaining real-estate exposure.

AlternativeFierce competition in the traditional asset classes and weakening fundamentals have convinced a number of investors to turn to alternative asset classes for opportunities. With limited investment-grade stock currently available, these investments typically focus on equity injections into asset managers and operational platforms. Hot sectors at the moment are the for-lease residential market, healthcare sector and data centres.

The for-lease residential market, or built to rent sector, has received significant support and encouragement from central and local governments including the release of lease-only residential


land plots and subsidies for tenants. This is seen as a way to encourage potential home buyers to lease rather than buy and so suppress future house-price inflation while also creating new business opportunities for developers.

The healthcare sector received significant attention at the 19th national congress, with new hospitals and clinics springing up all over the place, a lack of development and operational expertise could create opportunities for international specialists.

Data centres, while dominated by local telecoms operators, are also receiving attention as cyber security laws state that personal information and important data collected and generated in China must be stored domestically. This, in combination with rising data consumption (73 million terabytes in 2017, forecast to grow to 181 million terabytes in 2020), will create a solid demand base.


South KoreaBy JoAnn Jieun Hong, Director Research & Consultancy, Savills Korea +82 221 244 182 [email protected]

OverviewThe Seoul office market is quite complicated these days. Due to high levels of supply in the past five years, rents have been falling or have been almost flat in effective terms (although headline rents have been moving in an upward direction).

CoreWhile the average market vacancy rate for Grade A offices in Seoul core areas has been in double digits for the past five years, still 40% of the buildings have fewer than 5% vacancies.

Office projects tend to contribute the lion’s share of investments in South Korea. Domestic investors seek Grade A office assets for a combination of self-use and investment, as well as stabilised core assets for pure investment.

Hyper-marts with sale and leaseback clauses in Tier 1 cities are still sought after core investments, but these sorts of opportunity are becoming scarce.

Core-plusThe high supply of new office space in recent years means there is intense competition to lure tenants. Grade A offices needing capex for modernisation or with some leasing risk, but in prime areas of Seoul, are nevertheless in demand from investors who target older, Grade A property in core locations with core-plus or value-added potential.

Other investors will take on semi-vacant buildings with the potential to lease empty space in order to get a foothold in core areas. This strategy may be successful for many as the overall Korean economy is forecast to improve and an increase in occupier leasing activity may be expected.

Value-addSome investors are exploring opportunities to convert the use of less productive assets. These include converting the lower floors of office blocks into retail space, especially in areas where retail uses are established or growing.

Some investors are taking vacancy risk on half vacant offices in Seoul for management.

OpportunisticThe logistics market has been slow to grow and much of the existing facilities are aging and of poor quality. However, the development of e-commerce in Korea is faster than any other country in the world, so there is also fast-increasing demand for the right type of facilities, in the right location. The right buildings have modern designs such as multi front-loading docks together with spacious yards. The right locations are those which give maximum access to the Greater Seoul area, which is the largest consumer market in Korea.


AustraliaBy Chris Freeman, National Head of Capital Strategy, Savills +61 282 156 093 [email protected]

OverviewThere has been a strong ‘risk-off’ approach taken by most institutional capital investors in recent years. Secure property was highly attractive as a bond proxy given the material spread on offer. This continues to be true (so core property will still be sought after), but there are good reasons for investors to move up the traditional risk curve.

Strong growth in employment rates will strengthen occupier demand and will make the less-core assets more palatable and even attractive. Core-plus stock will likely see greater risk-adjusted performance than core over 2018.

As expected, yield compression continued in Australia during 2017. Unlike many developed countries, interest rates actually rose in Australia after the global financial crisis in 2008 – by 175bps. They did not begin to contract until late 2011, so Australia’s credit cycle is relatively delayed and, with it, falling interest rates and bond yields, and property yield compression.

In recent years, market focus has been strongly on Sydney – and with good reason. The restriction on new supply means that only 7.0% has been added to the CBD’s office stock during the past decade. At the same time, the population of Sydney’s inner region grew by almost 26% and the financial assets of Australia’s Superannuation funds doubled. The weight of money on the constrained Sydney office sector meant high capital growth rates and strong yield compression, with capital growth of 17.9% during 2017 alone.

Growth isn’t all down to yield compression, however. Rental levels rose by 16.3% to average AUS$1,000 psm for Grade A stock. This performance was reflected in the fringe and suburban mar-kets, too. North Sydney capital values were up by 17.7% and by 27.3% in Macquarie Park. Parramatta saw an exceptional increase of 41% due to development and regeneration improving both the loca-tion and the quality of stock.

While Sydney’s demand and supply dynamics continue to look very favourable in the longer term, cyclical forces are at work. The city looks fully valued against other Australian cities and in an historical context. Slower growth might be expected in 2018.

Economically, Australia has recorded some major shifts over 2017. Employment growth is up by a strong 3.1% nationally with Queensland leading the race at 4.8%. Professional job advertisements (which are highly correlated with tenant demand) have risen 15% in South Australia and 12.6% in Western Australia, while NSW has remained static. Given such material economic shifts, a change in property acquisition focus should also be considered.


CoreGiven employment gains, offices will likely continue to outperform in 2018. For fund managers, those with a strong Sydney office exposure will continue to be the darlings as the 2017 uplifts are captured in valuations and will drive company, trust and unit prices upward.

Victoria is a standout economically, and this should continue to drive direct real-estate demand in Melbourne’s favour, although this will be balanced, in rent and value terms by high supply. Both factors need to be considered in acquisition decisions at a local level as areas with supply hindrances may continue to outperform the CBD.

Core-plusInvestors looking for markets that are coming off the trough will get in front of the herd with higher-quality stock in Adelaide, Perth and Brisbane. Outperformance may not be recorded until after 2018, but stock will be more attainable than in Sydney and Melbourne.

Industrial stock should also continue to perform well. After being flat for many years, due to ample land and low economic rents on new supply, Melbourne’s West is looking promising. Land value growth was seen in 2017, and this should flow into rental and capital value uplifts.

OpportunisticRetail is facing challenges, but the spectre of e-commerce is starting to be realised and may have been overplayed in some instances. Savills analyse retail drivers across circa 2,100 regions in Australia and there are still opportunities in the sector – although asset selection is paramount. This year should present opportunities for those who understand the difference between e-proof and e-vulnerable locations. Those who do should be on the lookout for over-discounted buildings.

AlternativeThe residential market slowed over the past year and 2018 is expected to be a subdued market as prices remain on a ‘high plateau’, especially in Sydney and Melbourne. However, there are still opportunities, particularly in locations set to benefit from infrastructure improvements. The emerging build to let sector has received a lot of attention over the past year and this is expected to become increasingly invested in 2018 as major residential investors look to diversify.


Hong KongBy Simon Smith, Senior Director, Savills Hong Kong +852 2842 4573 [email protected]

OverviewReal-estate markets in Hong Kong performed largely in line with rental expectations last year, albeit with big differences between sectors. Further yield compression was a surprise, however, and capital values continued to rise faster than rental values, with the exception of retail, where investors seem to have proved more pessimistic than occupiers.

Rents continued to rise for Grade A offices in the Central area (up 6%) where take up was driven more by mainland Chinese companies, coupled with increasing activity from co-working operators. PRC tenants accounted for around 25% of Grade A take up in Central, Admiralty and Sheung Wan in 2017, and this figure can be expected to rise over time. Co-working operations took up more than 500,000 sq ft.

Overall stock scarcity in Central and a willingness among tenants to look further afield, meant Grade A rents in Admiralty, Sheung Wan, Wan Chai, TST and beyond were also up on the year. Investor appetite for this sector meant yields compressed further and capital values rose by 25% and 15% respectively, substantially exceeding our expectations at the start of the year.

Residential capital growth was also stronger than expected, at 12% for luxury apartments and 10% for townhouses. Investor appetite for ‘store of wealth’ investments was particularly marked in this sector as townhouse rents surprised on the downside, falling 2%. Meanwhile, luxury-apartment rents did not justify the full extent of price rises despite rising in line with expectations (5%).

Flatted factories, on the other hand, surprised on the upside, with rents rising 5%, while warehouse (godown) rents stayed static. Investors remained relatively sanguine in this sector, so yields didn’t move in quite so much, and prices rose 8% and 10% respectively. This asset class still offers plenty of redevelopment and refurbishment opportunities.

Retail was the main casualty of 2017: prime shop rents fell 2% while shopping centres were down 1%. Investors proved more fearful than occupiers, or perhaps anticipated rental movements in the longer term, discounting prices by 4% on 2016 levels. Both rent and capital value falls were on the lower side than we originally feared as new brands took over space from downsizing luxury retailers.

Hong Kong’s economic growth is forecast to be positive, at around 3% per annum (2018-2021) in the medium term, but this is lower than seen in most of the last 20 years. Business confidence is robust, hiring intentions are positive across a range of sectors and the IPO pipeline, so important for financial services, is still delivering in terms of numbers.

As with many other cities across the world, Hong Kong will be slightly more dependent on rental growth to drive investment returns (although capital growth remains a significant driver of returns


as it has traditionally in the past) as yield compression halts or even reverses slightly. Rental forecasts are therefore of increasing importance in determining likely performance in the coming year.

CoreSupply conditions for Grade A offices are set to alter substantially in 2018 with more than 3.5 million sq ft of Grade A space due for completion. This is more than was seen in the last three years put together. 2019 will see high completion levels, too. But most of this new supply is in Kowloon East and Island East, or other areas outside Central, so supply looks set to remain scarce there. Rental growth patterns are likely to diverge more than in previous years between more fully supplied markets and Central.

Core-plus As with many other countries, the rise of e-commerce cannot be ignored and the importance of strategically placed last-mile delivery depots will likely rise in importance, so well-connected industrial and warehouse buildings, possibly even parts of neighbourhood malls, with large local catchments will be in increasing demand for this purpose. The warehouse sector also has the advantage of being relatively high yielding by comparison to retail and offices so will be income- producing in the interim.

Value-addThe acquisition and repurposing of older Grade A or Grade B buildings in Central may become an attractive proposition as the competitiveness of the area is threatened by its dating stock and attractive workspaces in other areas.

In the residential leasing market business hiring intentions are positive, while a tendency to offer ‘all-in’ remuneration packages to expats, the high cost of renting on Hong Kong Island and more school options are pushing tenants into new areas, especially in Kowloon and the New Territories so spotting the ‘rising neighbourhoods’ is a good value-add proposition.

OpportunisticIn the retail market, mainland visitors were up slightly in 2017, but spending levels remain lower than at any time since 2012. The domestic economy is supporting retail demand as unemployment is low and consumer confidence is high as incomes grow and house prices hit new records. Retail sales appeared to turn a corner in 2017 after three years of falls as mainland arrivals returned so there are grounds for optimism for the rental outlook in some locations. Street shop prices have fallen by an average or 30% since 2012.


AfricaBy Mark Latham, Managing Director, Pam Golding Commercial, Africa (+27 72 053 9797 [email protected])

OverviewAfrica has a land area roughly equivalent to the continents of Europe, Australasia and Antarctica combined. It contains 54 countries of great diversity, different cultures, histories, languages and stages of economic development. Covering them all in a single section would be almost meaningless, but, given the increasing interest in the region from a variety of investors and would-be investors, some markets are worthy of mention.

While the continent is huge, the size of the investable real-estate market in Africa is very small by comparison. Land title, transparency, liquidity and supply of investable product remain an issue in many areas, so global inward investment has been selective. Meanwhile, the size of African economies is small and growth has not been as fast as in emerging Asia or India.

South Africa is the only real-estate market in sub-Saharan Africa directly comparable with the North American and European markets. Though not immune to geopolitical issues and a volatile currency, it offers legal title and product types more familiar to investors from the rest of the developed world.

Like so many other major global real-estate markets, property title and the legal system in South Africa is similar to other Anglophone markets. Investors are, therefore, helped by a sense of familiarity which often doesn’t exist in other parts of Africa. It may be that those countries which are more likely to develop global real-estate markets on the continent will be those with systems of property law more akin to North America and the UK.

Two cities attracting interest, but not, as yet, huge amounts of inward real-estate investment are Lagos, Nigeria and Nairobi, Kenya. Nigeria and Kenya are among the biggest economies in Africa, but have seen different rates of growth recently due to the adverse effect of falling oil prices on Nigeria’s oil-dependent economy.

Both Lagos and Nairobi have seen falling currencies and a loss of confidence in the last few years, resulting in lower demand for real estate, falling rents and a knock-on effect on capital values. There has been little interest in those markets from foreign investors and transactions have been thin on the ground for Grade A offices.

Leasing has been very weak in the West because the oil companies and companies associated with or servicing the industry have not been taking space. Demand from the remainder of occupiers is local – and different to the multinational corporate demand. Occupiers are looking for cheaper solid Grade B space rather than high-spec Grade A offices. There is too much supply of the wrong corporate Grade A product which most occupiers find too expensive and sometimes inappropriate for their needs.

This is also true in Nairobi but, although demand here has held up well and is not blighted by


the economic effects of the oil price, high levels of supply has meant rents are subdued. Even multinationals in Nairobi prefer simpler, cheaper sub-Grade A space so there is little demand for international investor product.

Elsewhere and in the South of the continent, things are different again. While South Africa may boast world-class real-estate markets, other countries have tiny markets and limited demand for the standard international real-estate products. This is even the case for countries which have seen high rates of economic growth. Inward investment into these countries is often more likely to be related to infrastructure, especially where Chinese money is concerned, and even agricultural land rather than business space and other western-style real estate.

Supply of conventional real-estate asset classes is limited and occupier demand is once again more likely to be for low-rise Grade B space at reasonable cost.

In South Africa, demand for new and shiny buildings is an exception to the rule for much of the rest of the continent. This premium product is full in most sectors, but leaves a large supply of vacant secondary stock. Depreciation is therefore an issue for investors to consider and can be quite rapid.

Core-plusThe only South African city where there is undersupply in some sectors is Cape Town. There is strong demand for space from those relocating from other parts of the country, attracted by the Cape lifestyle. For this reason, residential property is performing strongly, particularly at the upper end. While the recent currency rise may have removed some of the attraction for overseas investors, the long-term supply and demand dynamics of Cape Town should make investment an attractive proposition.

In Johannesburg, there is more muted residential rental growth, but hospitality uses are still of some interest in this and other gateway cities in the country.

Value-add and opportunisticIt might be said that any investment outside South Africa falls much higher up the risk curve than these conventional global categories would allow, but Africa is undoubtedly the biggest opportunity for real-estate development left in the world. Investors may need to be much more broadminded about what constitutes development and may need to look out for local rather than international solutions.

In the hospitality sectors, there are opportunities for international products to be built for business users in key gateway cities. On top of this, the development of tourism will offer opportunities at a few of the right resorts.

Logistics is a very new but growing proposition – as it is in most global markets – and may be something best attached to infrastructure projects, particularly transport and roads.

Retail is still evolving, but there are signs that traditional markets are where the demand will be as


much as modern, western style malls. It is very possible that several generations of retail formats may be skipped in Africa – especially if e-commerce takes off before 20th-century shopping styles can take hold. Any investor would, therefore, be advised to keep a close, local ear to the ground before investing, and perhaps be prepared to put money into buildings that are new and different to what has been experienced on other continents.


Global ruralBy Ian Bailey, Head of Rural Research, Savills +44 2072 993 099 [email protected]

OverviewWorld farmland has been a strong sector since 2000. Our Global Farmland Index has recorded average annualised growth of 13.3% since 2002 and 2% over the past five years (see graph below). The index, combining a wide range of geographies and farm types, has recorded strong, steady growth with low global volatility. This illustrates the benefits of a mixed portfolio which crosses world regions, evening out local fluctuations and performance variations.

Pressure on commodity prices has been the common theme over the past five years, putting downward pressure on global values. Farmland values are less volatile than other commodities and were significantly less affected by the credit crunch in 2008. The long-term fundamentals still apply with increased food production (balanced by reduction in food waste) and competitive land use driving demand and making farmland an attractive longer-term investment.

Core and Core-plusCore investment opportunities in farmland are scarce and yield compression is complete, so core and core-plus investors need to balance risk through portfolio management and diversification. Investor demand should become increasingly sophisticated, widespread and cover more sectors as more investors seek diversified rural and agricultural portfolios.

The global reach and the range of land-based enterprises in the world today, from food to energy production, offer this type of investor the opportunity to spread risk and maximise returns. A farmland portfolio can be spread across countries and regions, soil types, climates and enterprises. This enables organisations to mitigate volatility in markets, inputs and outputs to achieve stable incomes and values.

The drive to diversification makes it impossible to tip a single sector or location. The key to future investment performance is to increase unit production through land improvement and the efficient use of the latest technologies balancing capital value growth with reasonable risk. The right asset in the right market will yield positive returns for the investor in the long term, but returns are much more likely to be measured on the basis of long-term net operating income rather than investor demand and trading. With income value and land improvement bring capital value growth.

However, as with all investments, especially with a range of cultures, political administrations, ownership structures, tax regimes and foreign-investment regulations, it is essential to understand global markets.

Value-addInvestors looking for a diversified product with good long-term credentials should consider forestry for timber production as an alternative ‘get 100% of your land back’ investment. Forest assets combine the production of timber with the security of land holding and have the unique benefit of adding value as the store of timber on a site matures.


The future value of forestry land is pegged to the price of timber, so it can provide a hedge against inflation over the longer term by giving core year-on-year growth. The price of timber is forecast to rise as the global population grows and increased demand drives inflation, especially as the stock of sustainably harvestable wood comes under pressure. Returns are realised either from capital growth of the land and subsequent sale of assets, or by harvesting the timber at maturity.

Although there are opportunities across the world, UK forests are an increasingly sought after asset class. They benefit from good growth rates, a tax-efficient environment and a well-developed woodprocessing industry which is undergoing a decade of inward investment to install state-of- the-art mills across the country. The UK is the third-largest importer of wood products and, with domestic production at fairly constant levels, dependency on imports means global pricing trends will be important.

Recent UK forest performance has been excellent with the long-term annualised total return calculated at 10%, competing favourably with other asset classes. Although returns could come under pressure due to higher demand for the asset, growing timber is a long-term game and our view is that there is plenty of scope for growth in the sector over the next two or three decades.

In the UK, investors have opportunities to structure for capital growth or tax-free income depending on objectives. The scale of available investment opportunities is a limiting factor. The UK market only sees around £80 million of transactional activity annually. Investors looking to scale up to larger positions will find opportunity in other regions of the world where large portfolios are available, although individual country risk will also need to be considered.

OpportunisticThe Romanian farmland market is developing rapidly as many Western European and Scandinavian investors continue to see opportunity in the current relatively cheap land values. The Romanian farmland market offers investors the ability to acquire high-quality farmland at reasonable prices relative to mature markets of Western Europe, including the UK.

Many farmland assets in the country have reached the level of maturity where barriers to entry that were present in the 1990s and early 2000s are no longer issues for new investors and now give the opportunity for good investment returns. These include clean title in tradable structures, viable tenants, experienced operators and viable access to infrastructure. Where, previously, Romania had been a frontier region for mainstream investors, it is now possible to source quality assets and viable long-term tenants with a substantial track record of performance.

Top-quality arable land values range from €5,000 to €7,500 per hectare and the available assets include large farms with the key crops being corn, soya and wheat. Value can be added where water storage is available giving the potential to convert dry land arable to irrigated vegetable land. In addition, as part of the EU, CAP subsidy is available to Romanian agriculture.


AlternativesAlthough food production is an important, and often the primary use for farmland, energy producing land, as an asset class, offers alternative opportunities to enhance performance. Over the past 10 years, energy production has emerged as a financially robust alternative/mixed-use, capable of generating returns far in excess of conventional agriculture.

While wind continues to dominate the sector, solar PV is well-established and energy storage is set to play an important role in our electricity networks, presenting new opportunities for land owners.

Energy storage, when combined with primary generation, meets the need to balance variations in electricity demand with intermittent generation on an almost instantaneous basis. It offers commercial value for not only utility and transmission companies, but also for end-users and property owners alike. Aside from financial incentives, other benefits include time-of-use bill management, lower unit cost self-consumption and backup power.

Kickstarting this movement are three multi-trillion dollar industries – IT, transport and energy – whose combined investments are improving energy densities, increasing life spans, and spurring on cost deflation towards parity with conventional hydrocarbons.

The market could be significant. Numerous commercially driven projects are now appearing around the world, including demand-charge management in San Francisco, distribution upgrade deferral in New York, national energy transition in Germany and via integrated commercial developments in the UK.


Yolande BarnesHead of Savills World Research

+44 207 409 8899

[email protected]

Simon SmithSenior Director,

Savills Hong Kong

+852 2842 4573

[email protected]

Mark LathamManaging Director,

Pam Golding Commercial, Africa

+27 72 053 9797

[email protected]

Eri MitsostergiouDirector, European Research,

Savills

+31 630 973 409

[email protected]

Marie Josée Lopes

Head of Research, Savills France

+33 1 44 51 17 50

[email protected]

Keith DeCosterDirector, Research Operations,

Savills Studley

+1 212 326 1023

[email protected]

Tetsuya KanekoDirector, Research &

Consultancy, Savills Japan

+81 367 775 192

[email protected]

Lucian CookDirector, Savills Residential

Research

+44 207 016 3837

[email protected]

Alan CheongHead of Research

& Consultancy, Savills Singapore

+65 6415 3641

[email protected]

James Macdonald Head of Research China,

Savills

+86 21 6391 6688

[email protected]

Ian BaileyHead of Rural Research,

Savills

+44 2072 993 099

[email protected]

Mat OakleyHead of Savills European

Commercial Research

+44 207 409 8781

[email protected]

JoAnn Jieun Hong

Director, Research & Consultancy,

Savills Korea

+82 221 244 182

[email protected]

Chris Freeman National Head of Capital Strategy,

Savills

+61 282 156 093

[email protected]

Matthias PinkHead of Germany Research,

Savills

+49 30 726 165 134

[email protected]

Troy GriffithsDeputy Managing Director,

Savills Vietnam

+84 38 3823 9205

[email protected]

Contacts


The views expressed in this publication are not necessarily those of Savills or the publishers. The information contained in this report is correct at time of going to press. All rights reserved. No material may be used in whole or in part without the permission of Savills. While every care is taken in compiling content, Savills does not assume responsibility for effects arising from this publication.

Savills plc is a global real-estate services provider listed on the London Stock Exchange. We have an international network of more than 700 offices and associates throughout the Americas, the UK, continental Europe, Asia-Pacific, Africa and the Middle East, o ffering a broad range of specialist advisory management and transactional services to clients all over the world.

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