The headline RICS Commercial Property Sentiment Index (CPSI) holds steady in the latest survey for Q2 2024, while the outlook for secondary offices and retail remains particularly negative in many markets.
The headline RICS Global Commercial Property Sentiment Index (CPSI) for Q2 2024 was broadly unchanged from Q1 2024 at -11. Unsurprisingly, a similar picture is also evident in the underlying components of this series, with both elements remaining close to the Q1 readings; the Occupier Sentiment Index slipped very slightly from -8 to -10 while the Investment Sentiment Index edged up from -13 to -11.
As has been the case over recent quarters, feedback from MEA remains the most upbeat. The CPSI for this area in Q2 2024 stands at +8, which is slightly lower than the result for the earlier part of the year but still represents a solid positive trend. The other three blocs continue to reflect a more cautious mood, although less so when compared with the lows of 2023.
The latest reading for the Americas is slightly down on Q1 at -6 compared with -4, while the insight from respondents covering Europe shows the CPSI to be the same as in the early part of the year (-10). Meanwhile, APAC remains a laggard with a CPSI of -19, but this does continue to reflect a particularly stark divergence in market performance amongst those countries included in the regional aggregate.
The previous GCPM signalled an easing in credit conditions for the first time since the early part of 2022. The latest survey suggests this trend continued through Q2 2024 and at roughly a similar pace.
This pattern is broadly consistent with the modest moves by some central banks to lower interest rates.
Real estate still not viewed as cheap
With interest rates only just beginning to come down in a few economies and bond yields still elevated, it is perhaps unsurprising that on some traditional valuation indicators, commercial real estate is not viewed as offering compelling value despite its poor performance over the past few years.
Over 50% of respondents from the Americas view their local market as, to some degree, expensive (with the US figure at 56%). By contrast, the aggregated numbers from APAC show just over one-third of respondents are similarly minded. For Europe, approaching 40% of contributions perceive the real estate sector to be above fair value, although this drops to nearer 20% in the UK. Finally, the comparable figure for MEA is 45%, which reflects the relatively strong performances of a number of markets in this region of late.
New developments reflect contrasting real estate trends
The negative trend (at a global level) in the development starts metric that has been a feature of the GCPM since the onset of the pandemic shows little sign of flattening at present.
A net balance of +18% of respondents indicate that starts declined in the latest survey, which is very much in line with the results in recent quarters.
Alternative assets and prime space to continue outperforming
The headline readings for the twelve-month expectations series covering capital values and rents are little changed at a global level in net balance terms. Looking at these metrics by regional bloc, the MEA is predictably the standout with net balances of +47% and +39% for capital value and rental growth expectations respectively, suggesting the strength of key markets in the region will persist through the second half of this year and into 2025.
There continues to be a widespread perception that alternative assets will deliver stronger returns for investors than mainstream assets.
The Q2 2024 GCPM feedback across Europe remains relatively cautious, with headline market indicators continuing to display soft momentum. However, away from the traditional sectors, many alternative CRE asset classes are anticipated to deliver positive returns over the year ahead.
Secondary office and retail sectors remain under significant downward pressure
Both the secondary office and retail sectors are expected to see further declines in rental prices and valuation levels over the year ahead. Conversely, prime offices are expected to perform much better in comparison, with rents seen rising by just over 2%, while capital values are also expected to post a marginal pick-up.
In terms of the other sectors, prime industrial assets are envisaged seeing comfortably positive trends in both rents and capital values over the year to come.
Turning attention to some alternative CRE asset classes covered in the survey, data centres exhibit a particularly solid outlook for the next twelve months. Likewise, rents and capital values are anticipated to rise across multifamily residential, student housing, aged care facilities and hotels.
