World Office Yield Spectrum - 2H 2017

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Expectations of higher interest rates have remained just that, expectations. Uneven economic data as well as rising geo-political tensions have combined to create an unstable environment for rate increases.

Looking at the market over the next six months, a healthy deal pipeline and plenty of momentum suggest that real estate has not fallen out of favour as an asset class.

While prices remain generally high or continue to rise, however, volumes have softened as willing sellers are currently thin on the ground and potential purchasers balk at high valuations. We continue to believe that there is no shortage of capital out there and sovereign funds and institutions continue to raise their allocations to real estate, in some cases from single to double digits. Chinese capital meanwhile is becoming more selective.

With treasuries set to continue to underperform, real estate will remain a popular investment class and today’s low yielding environment should therefore persist. Should interest rates rise without being underpinned by strong growth (higher rental income), however, current yield levels would quickly look unsustainable.

Investment strategies are being influenced by opportunities being presented by digital disruption as well as demographic trends such as aging populations, urbanization and the rise of the millennial generation. Technology meanwhile continues to defy traditional definitions of real estate use as, for example, the difference between living and working environments and traditional bricks and mortar retail and logistics become less clear cut.

Source : Savills

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