Most emerging markets rebounded swiftly from the 2008-09 recession. But while less vulnerable to the on-going impact of debt deflation than developed world, these economies remain exposed to any trade spill-overs. Favourable prospects for domestic demand, particularly in Asia Pacific, point to further expansion in 2011-12, according to Bank of America (BofA) Merrill Lynch report.
In China, the economy is slowing under the influence of tighter policy conditions and weaker export demand, with GDP growth of just over 8% next year. India’s economy is projected to expand by 7.7% in 2012, similar to this year’s rate, as generally vibrant consumer spending should help to offset reduced exports and investment spending.
Latin American activity is expected to be led by a combination of commodity exports and domestic demand, but the pace is likely to ease in 2012. Growth in Emerging Europe has been better than anticipated, partly due to the strong performance of CEE economies, though a marked slowdown in Turkey is set to undermine prospects next year. Prospects for the Middle East and North Africa continue to be clouded by political upheaval on one side and supported by high oil prices on the other. Growth is set to dip this year, but to recover during 2012.
Global inflation concerns have receded over the past few months. The fragile global recovery is expected to ensure that this year’s upturn in inflationary pressures is short-lived and that rates will ease next year. Unemployment remains relatively high in the developed world and there is no evidence yet of any pass-through into wages. In addition, the global downturn is expected to keep a lid on oil and commodity price pressures over the next 12 months. As a result, consumer price inflation in the developed economies is projected to fall from 2.5% this year to 1.5% next year. The reduction is less marked in emerging markets, where concerns about overheating from strong domestic demand are more pressing.
With policymakers keen to take any steps to avoid a double-dip recession, the prospects are for further monetary loosening over the short to medium term. In the advanced economies, interest rates are already at historic lows, but Central Banks in the UK and the US have already announced further measures to inject liquidity into their economies. Even the ECB, which became the first to hike earlier in the year, has moved back to a loosening bias, with some speculating that cuts may soon follow. Even in emerging economies, we expect some rate cuts over the next 12 months.
Despite mounting economic headwinds, the latest data on real estate market fundamentals is still relatively encouraging. Global investment and leasing volumes have held up well during Q3, net absorption remains positive, prime rents and capital values in the major markets are growing, and the global office vacancy rate is at its lowest level for two years. Weaker sentiment, however, is causing some market softening, although impacts are being felt differently; some locations and sectors are showing resilience, while others are registering a marked slowdown in activity.
Prime v secondary – Secondary assets and markets appear to have been disproportionally affected by weaker sentiment. The anticipated growth in interest in secondary product has softened as investors take refuge in core well-let product in specific locations. Capital has become refocused on prime real estate, for which there continues to be strong demand. The move up the risk curve is now likely to be much slower than expected, compounded by reduced availability of debt for riskier assets.
Domestic v international – Major international finance and trading hubs, such as London, New York, Hong Kong and Singapore, have seen a deceleration in office leasing activity as the finance sector reduces headcount. London has posted a 40% year-on-year fall in leasing volumes, while Hong Kong has registered its first quarterly decline in prime rents for two years.
Emerging v advanced – Most emerging markets have continued to show resilience, with robust absorption levels and rental growth across all commercial sectors. Asia Pacific, Latin America and the CEE regions are home to some of the world’s most dynamic real estate markets – including Jakarta, Beijing, Moscow and Sao Paulo. By contrast, expectations in the advanced economies of North America, Europe and Australia, over the near term, have been lowered. The biggest downside risks are in Europe, and particularly in those markets in the ‘eye of the debt storm’, such as Madrid, Milan and Dublin, where leasing markets remain weak.