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Capital flows’ recovery continues to pick up pace

Global Real Estate Perspective, February 2021

Real estate capital markets saw a continued rebound in activity in the final quarter of 2020, with the pace of quarterly declines decelerating. Robust transaction volumes during Q4, which were down a moderate 21% year-on-year, helped push full-year volumes to US$762 billion. Western countries with sectoral diversity, scale and transparency led the recovery over the past three months, notably France, Germany and the United States. Investor interest gained momentum in gateway markets, particularly in Europe and Asia, as well as in growing talent hubs.

Travel restrictions continue to hinder long-haul, cross-border capital flows, except for global firms with local presence. As such, the inter-regional share of annual investment remained depressed in the fourth quarter and decreased to its lowest level since 2013, at 9.7%. COVID restrictions have favored domestic and intra-regional activity, with the latter reaching its the highest share since the global financial crisis, at 13.2% of volumes.

Desirable long-let, core product is driving activity gains and represented the largest share of closed transactions in 2020. This marks a noteworthy shift from a global market hungry for yield and deep in demand for value-add opportunities in prior years.

Capital is targeting sectors exhibiting income and operational stability, notably the logistics and multifamily sectors, as rent collections hold steady and secular tailwinds remain intact. That said, the office sector experienced a moderate recovery in investor sentiment during the final quarter of 2020, with activity expanding more broadly in global gateway markets.

A divergent appetite for risk remains prevalent with investors and lenders, with high-quality, core product seeing the deepest liquidity. Sectors offering growth or stability are experiencing more resilient pricing. However, as bid-ask spreads continue to converge and risk aversion begins to subside, broader gains are poised to accelerate, particularly in segments of the office, retail and hospitality sectors.