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Global commercial property resilient despite economic woes

New development starts have risen most sharply in Brazil, Malaysia, Russia and Poland, the RICS Global Commercial Property Survey covering the second quarter of 2011 also shows.

The report indicates that the majority of countries surveyed witnessed positive growth in occupier and investment demand as well as in development starts during the second quarter of the year despite further increases in energy costs. In addition, the survey paints an optimistic picture for the next quarter, with the majority of countries reporting positive rental and capital value expectations and more than three quarters of respondents also expecting investment demand to grow.

The RICS Global Commercial Property Survey is a quarterly guide to the developing trends in commercial property investment and occupier markets around the world. Providing a snapshot of sentiment, the current edition details market conditions for the second quarter of 2011 based on information collected from leading international real estate organisations, local firms and other property professionals.

‘We would have expected our survey results to reflect some impact of the recent economic soft patch, but interestingly, it looks as though commercial property markets around the world remain strong, regardless,’ said Simon Rubinsohn, RICS chief economist.

‘China, in particular, has proven remarkably resilient in the face of the introduction of a series of measures designed to cool the market. Capital value and rental expectations remain buoyant in much of the world indicating a continuing level of optimism,’ he explained.

‘That said, the tentative recovery in the United States, visible in the previous set of results, already appears to be faltering and it is noticeable that the momentum in the Indian real estate market seems to be slackening,’ he added.

The report shows there is a Europe of two halves and the recent move by the European Central Bank to raise interest rates will likely further widen the already large gap between the performance of commercial property markets in core and peripheral Europe. While countries in the former continue to report generally positive numbers, most notably Germany, the latter group is struggling with the ongoing sovereign debt crisis and weak economic growth.

The majority of core European countries indicate positive occupier demand and development starts in the second quarter along with strong rental expectations for the next quarter. In contrast, Greece, Portugal, the Republic of Ireland and Spain sit at, or just above, the bottom of the rankings for most key indicators.

Despite the optimism expressed by agents in the first quarter of the year, the latest survey seems to suggest that the commercial property market recovery in the US may already be encountering significant headwinds. While still positive, the rate of growth in investment demand fell in and development starts continue to slide albeit a little less so than in the previous quarter, the report says.

Of most significance however, rental expectations, which had turned positive in the first three months of the year, have once again drifted back into negative territory, with agents reporting a net balance score of -11. ‘That said, capital value expectations are still positive. If the disappointing trend in employment data, most visible in the recent payrolls numbers, is sustained, the renewed softening in the occupier market could become more entrenched and at some point this could seep into sentiment on the investment side of the market,’ it adds.

Economic data suggests that China's economy is beginning to slow but this has not yet flowed through to the country's commercial property market which continues to post very high figures across the board. Both occupier and investment demand remained strongly positive this quarter, +63 and +42, respectively, and despite continued interest rate hikes and other restrictive measures, agents remain optimistic about the near term prospects for real estate. But the report warns; ‘While forward looking indicators remain positive for now, should the economic slowdown continue it could at some point begin to filter through to the commercial property sector’.

Despite recent actions taken by the Banco Central do Brasil to control rising inflation, agents report that the mood in the commercial property market remains upbeat in Brazil. The rate of growth in tenant demand picked up considerably with net balance scores moving from +38 to +79. Meanwhile, available space actually fell back this quarter, down 33.
Agents also report a strong development pipeline. Development starts posted a highly positive net balance score of +61, up from +13 in the first quarter. Looking ahead, agents remain optimistic regarding rental and capital value expectations for the next quarter, continuing a trend that began in late 2009.

The adoption of a more restrictive monetary policy does appear to be having an impact on property in India. While still positive, occupier demand fell from a net balance score of +39 in Q1 2011 to +8. Development starts saw an even more dramatic fall in the rate of growth, moving from +31 to +2 and investment demand moved into negative territory for the first time since the third quarter of 2009.

In addition, both rental and capital value expectations experienced a slowdown, from +39 to +18 and +40 to +27, quarter over quarter. Although this more subdued real estate picture is set to persist near term, the generally firm economy should prevent any outright decline in either rents or prices.

According to the survey, Russia saw a sharp rise in development starts in the quarter, from +11 to +44, which reflects strong occupier demand combined with a lack of good quality space. This imbalance, in turn, has led to a particularly positive outlook for rental expectations for the next quarter as the economy heads towards 5% growth this year. Meanwhile, capital value expectations remain very firm. Investment demand also continues to grow strongly and has now risen for seven consecutive quarters.