Viewpoint_Investment_F-DAJS-NRN (4)
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VIEWPOINT Q2 2016 CBRE Research © 2016 CBRE Ltd | 1 • The level of foreign investments has increased more than twelve times in relation to the foreign investment level in 2009 which was around EUR 1 billion 1 . • U.K. and North America have the highest growth rates of cross-border investments. • The Nordic investment market is historically dominated by investors from within the Nordic Region. • Foreign investment flows are negatively and more significantly correlated with yield movements than domestic investment flows. The Nordic market represents approximately 10 to 20 % of the entire European commercial real estate investment market. Since the financial crisis in 2009, the Nordic property investment market has increased fivefold from EUR 7 Billion to more than EUR 36 billion in 2015 (see figure 1 below) 2. The Nordics look highly attractive and provides a historically high yield gap (i.e., the difference between prime office yields and 10 year government bonds) of over 300 bps in Q4 2015 with an average historical premium of 200 bps since 2007. Traditionally, 75% of the Nordic investment market was done by domestic investors 3. The share of foreign investors, including both Non-Nordic and Intra- Nordic, has increased more than twelve times and amounts to 35% in 2015. Their share has been growing throughout the last years from the low-point in 2009. Intra-Nordic investments are the largest component of foreign investments in the region (see figure 1 below). Intra-Nordic trade happens when investors from a Nordic country deploys capital in another country within the Nordic region. EMEA Investment The effect of foreign investments on prime office yields in the Nordics Dennis Schoenmaker Economist, Global Research Nicolaj Rud Nielsen Research analyst 1 Including both Non-Nordic and intra-Nordic. 2 The Nordic countries mentioned in this research are Denmark, Sweden, Norway and Finland. 3 To place the Nordic market and economy in European context the countries constituting the Nordics are considered the EU's fifth largest economy, Europe's sixth largest and the world's 12th largest economy with a GDP representing approximately 10% of the US economy and more than 50% of the German economy (Source: Oxford Economics).
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Transcript of Viewpoint_Investment_F-DAJS-NRN (4)
VIEWPOINT
Q2 2016 CBRE Research © 2016 CBRE Ltd | 1
• The level of foreign investments has increased more than twelve times in relation to the foreign investment level in 2009 which was around EUR 1 billion 1.
• U.K. and North America have the highest growth rates of cross-border investments.
• The Nordic investment market is historically dominated by investors from within the Nordic Region.
• Foreign investment flows are negatively and more significantly correlated with yield movements than domestic investment flows.
The Nordic market represents approximately 10 to 20 % of the entire Europeancommercial real estate investment market. Since the financial crisis in 2009, theNordic property investment market has increased fivefold from EUR 7 Billion tomore than EUR 36 billion in 2015 (see figure 1 below) 2. The Nordics look highlyattractive and provides a historically high yield gap (i.e., the difference betweenprime office yields and 10 year government bonds) of over 300 bps in Q4 2015with an average historical premium of 200 bps since 2007.
Traditionally, 75% of the Nordic investment market was done by domesticinvestors 3. The share of foreign investors, including both Non-Nordic and Intra-Nordic, has increased more than twelve times and amounts to 35% in 2015. Theirshare has been growing throughout the last years from the low-point in 2009.Intra-Nordic investments are the largest component of foreign investments in theregion (see figure 1 below). Intra-Nordic trade happens when investors from aNordic country deploys capital in another country within the Nordic region.
EMEA Investment
The effect of foreign
investments on prime office
yields in the NordicsDennis Schoenmaker
Economist, Global Research
Nicolaj Rud Nielsen
Research analyst
1 Including both Non-Nordic and intra-Nordic.2 The Nordic countries mentioned in this research are Denmark, Sweden, Norway and Finland.3 To place the Nordic market and economy in European context the countries constituting the Nordics are consideredthe EU's fifth largest economy, Europe's sixth largest and the world's 12th largest economy with a GDP representingapproximately 10% of the US economy and more than 50% of the German economy (Source: Oxford Economics).
VIEWPOINT
Q2 2016 CBRE Research © 2016 CBRE Ltd | 2
Due to its impact and distinctive features, the surge in cross-border investmentshas experienced an increased interest. As a result, cross-border investments (i.e.,foreign investments), has become an interesting topic in the academiccommercial real estate literature4. It is stated that foreign investments areattractive to diversify risk premiums in real estate portfolios. When foreigninvestors enter/exit a market, they could have different motives and thereforeaffect commercial property yields differently than domestic investors. This bringsan interesting question to the top. How did the surge in foreign investments (bothNon-Nordic and Intra-Nordic) affect Nordic yields in recent years?
To shed some light on this question, we analyse the correlation of quarterly year-on-year changes between the foreign and domestic investment market withquarterly year-on-year changes in Nordic prime office yields. In addition, quarterlyyear-on-year changes between foreign and domestic investments correlate 72%,indicating co-movements across investors’ location and investment in the Nordicregion. To calculate the Nordics’ foreign investment share, we multiply the Nordicquarterly investment figures with the Nordic yearly market share of foreigninvestments. This allows us to obtain a quarterly proxy for foreign investmentactivity in the Nordics. Therefore, we assume that the foreign market share isevenly distributed over the four quarters within a year.
First we look at the domestic investments and yields in figure 25. The quarterlyyear-on-year change in domestic investments and yields seem to be correlated,and, show in fact a contemporaneous correlation of minus 59%. The latter meansthat an increase in domestic investment volume is correlated with a decrease inthe average Nordic yield. Furthermore, the country specific correlations show asimilar negative correlation to rising domestic investments (see appendix). Thisillustrates some yield sensitivity by domestic investments to Nordic prime officeyields. Moreover, a closer look at the country specific correlations indicates thatthe lowest yield impact is found in Sweden. Sweden is the largest transactionmarket in the Nordic, with an estimated transaction volume close to EUR 13.7Billion in 2015.
4 McAllister, P., and Nanda, A., (2015). Do Foreign Buyers Compress Office Real Estate Cap Rates? SPR, Nick Tyrrell research paper presentation. 5 The analysis is based on 32 data points (2008Q1-2015Q4).
EMEA INVESTMENT
Figure 1: Capital Flows 2007-2015
Source: CBRE
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VIEWPOINT
To further investigate the effect between investments and yields, we use lineardependence by means of a bivariate regression (see figure 3). The bivariateregression shows a negative linear dependence between the two variables, but thelinear dependence leaves out a sizeable portion of unexplained variance. Thelatter can be seen by looking at the relative distance of the observations to theregression line (the statistical reference for this is the R-squared). However,despite being a simple bivariate regression, it reveals that an increase in domesticinvestments compress yields.
In the next step, we look into foreign investments and Nordic yields. In figure 4,we depict foreign investment volumes and Nordic yields. The difference(compared to figure 2) occurs when looking at the change in foreign investments.The change in foreign investments and yield changes show a highercontemporaneous correlation than for domestic investors, namely: minus 82%.This illustrates that foreign investments are more linear associated with yieldmovements than domestic investments. In addition, if we take a deeper look intothe country specific correlations, we find similar co-movements betweeninvestments and yields with the lowest yield impact in Sweden (see appendix).
Q2 2016 CBRE Research © 2016 CBRE Ltd | 3
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EMEA INVESTMENT
y = -0.0006x - 0.0358R² = 0.3526
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Figure 2: Year-on-Year Change – Average Domestic Investment and Yields 2007-2015
Figure 3: Change in Domestic Investments Regressed on Changes in Yields 2007-2015
Source: CBRE
Source: CBRE
VIEWPOINT
Furthermore, in figure 5 we depict our linear dependence between foreigninvestments and Nordic yields. In contrast to domestic investors, we find that thedistance between the observations and the line in figure 5 is much smaller(higher R-squared) compared to domestic investors (see figure 3). The latterindicates that foreign investments explain yield changes better than domesticinvestments.
This research indicates that foreign investments in the Nordic Region, compressyields to a higher degree than domestic investments. Interesting questionshereby is why foreign investments correlate more significantly with percentagechanges in yields than domestic investments?
Q2 2016 CBRE Research © 2016 CBRE Ltd | 4
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EMEA INVESTMENT
y = -0.0013x - 0.0655R² = 0.6668
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Figure 4: Year-on-Year Change – Average Domestic Investment and Yields 2007-2015
Figure 5: Change in Foreign Investments Regressed on Changes in Yields 2007-2015
Source: CBRE
Source: CBRE
VIEWPOINT
There could be many reasons for this to happen. First of all, it is possible thatforeign investors compress yields in the Nordic market as the spread is moreattractive compared to the foreign investor alternative investment opportunities.Furthermore, it could be that foreign investors have a different risk return profile.Particularly US capital might have a relative higher risk appetite and thereforemore likely to be more aggressive on yields than a domestic border-lockedpension fund would be. Moreover, it could also be possible that Nordic investorsare inefficient i.e., too localised, and thereby not realising the new world of realestate and being out-bid due to being bound by traditional norms. Hence, inaddition, domestic investors will invest throughout the cycle, and internationalinvestors, can be absent at some parts of the cycle and only invest at other parts.Nonetheless, there could be other reasons that explain the co-movements betweenforeign investments and yields.
The analysis is based on a short-time horizon so it could be that the aftermath ofthe global financial crisis might influences the outcomes. In addition, it must beacknowledged that it is only a linear relation between both series that has beeninvestigated. It could be a one of structural change in the Nordic market affectingthe results from foreign investments, so foreign investors in the long term will bean equal part of the Nordic investment markets. Nonetheless, it should giveinvestors some brief insight into the relationship between foreign investmentsand yield movements.
Q2 2016 CBRE Research © 2016 CBRE Ltd | 5
EMEA INVESTMENT
AppendixThe surge in foreign investments has a significant impact on prime office yieldsin the Nordic region. The three smaller Nordic markets (Denmark, Finland andNorway) all have a very high negative correlation.
DomesticDANISH %-YIELD
CHANGE
FINISH %-YIELD
CHANGE
NORWAY %-YIELD
CHANGE
SWEDISH %-YIELD
CHANGE
Denmark %-Investment change -0.46
Finland %-Investment change -0.28 -0.45
Norway %-Investment change -0.50 -0.33 -0.44
Sweden %-Investment change -0.26 -0.38 -0.36 -0.35
Foreign
DANISH %-YIELD
CHANGE
FINISH %-YIELD
CHANGE
NORWAY %-YIELD
CHANGE
SWEDISH %-YIELD
CHANGE
Denmark %-Investment change -0.75
Finland %-Investment change -0.63 -0.68
Norway %-Investment change -0.71 -0.49 -0.67
Sweden %-Investment change -0.56 -0.54 -0.62 -0.55
Figure 7 Foreign Investment – yield correlations 2007-2015
Source: CBRE, 2016
Source: CBRE, 2016
Figure 6 Domestic Investment – yield correlations 2007-2015
MARKETVIEW
Disclaimer: Information contained herein, including projections, has been obtained from sources believed to be reliable. While we do not doubt its accuracy, we have not verified it and make no guarantee, warranty or representation about it. It is your responsibility to confirm independently its accuracy andcompleteness. This information is presented exclusively for use by CBRE clients and professionals and all rights to the material are reserved and cannot be reproduced without prior written permission of CBRE.
To learn more about CBRE Research, or to access additional research reports, please visit the Global Research Gateway at www.cbre.com/researchgateway.
Dennis SchoenmakerEconomist, CBRE Global Research+44 2071 [email protected]
Nicolaj Rud NielsenResearch Analyst, CBRE Denmark+45 3525 [email protected]
EMEA INVESTMENT
