Dr Peter Damesick, Head of UK Research for CB Richard Ellis, said: "International Financial Centre markets are specialised, share high exposure to financial markets, and are inherently volatile. However, our report reveals key differences between these four IFCs in terms of the effects of the crisis and the trends that have emerged as signs of recovery have appeared."
Office demand in New York and London was affected more quickly and directly by the global banking crisis than in the two Asian cities. In Hong Kong and Tokyo, it was the ensuing global recession, with collapsing production and trade, which did the most damage to occupier demand. Tokyo’s market saw only hesitant signs of recovery over the second half of 2009, while in both London and Manhattan there was a significant pick-up in office demand as financial market conditions improved.
London’s office investment market was also an early casualty of the credit crunch, with values and turnover dropping sharply from late 2007; but pricing and activity rebounded over the second half of 2009, with strong demand from overseas investors. Hong Kong has had an even larger rebound in office values in 2009, almost re-gaining pre-crisis levels. In marked contrast, in the New York market, with its high dependence on securitised debt, investment activity almost ground to a standstill during the course of 2009.
Peter Damesick noted that recent trends held lessons for investors: "Capital flows are key drivers of real estate pricing in International Financial Centres, with impacts that are separate from, and greater than, any consideration of rental fundamentals or cyclical volatility. Investors should examine carefully whether perceptions of market stature and liquidity in IFCs lead to mis-pricing of risk in these inherently volatile markets. Their strongly cyclical nature also underlines the importance of timing of investment acquisitions.
"The need for capital markets to be founded on much clearer assessments of risk is one of the key lessons to emerge from the financial crisis and is highly pertinent for investment in IFC office markets."
Key findings from the report include:
* London, New York, Hong Kong and Tokyo recorded similar proportionate falls in prime office rental levels from peak to trough, but timing and market drivers differed. London’s property market responded most rapidly to the onset of the crisis and has been the first to see rents turning back up;
* Different market experiences reflect differences in the economic structures of the four cities. In Tokyo, financial services are less important, less internationally oriented and have a smaller share of the CBD office market than in the other three cities;
* Tokyo’s office investment market is heavily reliant on domestic investors;
* New York was acutely affected because of high dependence on securitised debt, leaving investment activity depressed in 2009. Capital values were most severely affected here with a drop of around 55%.
Leasing Market Trends
* Occupational demand for CBD offices was severely hampered in all four cities. London and New York saw a greater and earlier direct impact from contraction of demand in banking in finance compared with Hong Kong and Tokyo. By Q3 2009, a common trend of rental stabilisation was evident;
* Hedge funds played a big part in changes to top rental levels in Hong Kong, New York and London.
Investment Market Impacts
* Office investment values at the start of the credit crunch in mid-2008 were at highly elevated levels following a period of strong growth. In New York, London and Tokyo, the high values reflected major yield compression driven in large part by debt-financed investment demand. In contrast, in Hong Kong, average office yields were more stable in the run-up to the crisis and office capital growth was more a function of rapid rental growth;
* The four cities show contrasts in trends experienced during 2009. New York’s dependence on securitised debt continued to stifle demand for investment stock. Tokyo remains a buyer’s market, but with financially sound domestic investors and some domestic lending recently supporting brisker activity compared with earlier in 2009;
* London and Hong Kong have shown much stronger improvement in investment volumes and values. In London, this was driven largely by overseas investors, enhanced by Sterling’s depreciation. Hong Kong has seen a very strong rebound in both sales volumes and prices, underpinned by the relative financial strength of local investors and rising interest from mainland Chinese investors.
* The recent downturn’s origins in the credit crisis meant that development activity was curtailed relatively early by reduced access to financing. This was particularly evident in London but also had a dramatic impact on New York. The development pipeline for all four markets for 2010-11 is comparatively limited and therefore reduces the risk of excess supply depressing rental levels; conversely prospects for rental recovery are improved.
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