"Nevertheless, those national markets in which confidence is high continue to drive forward, with the latest data suggesting momentum is still building," says RICS global CEO, Sean Tompkins.
"Encouragingly, the recovery in parts of the euro area periphery goes from strength to strength. Indeed, Spain and Ireland saw the sharpest pace of improvement in overall occupier market conditions during Q2 across all countries surveyed, with Portugal close behind, as captured by the composite Occupier Sentiment Index (OSI).
"Unemployment, although still significantly above pre-crisis rates, has been consistently declining in each case while output continues to rebound. What's more, investor demand remains firmly on an upward trend, resulting in strong prospects for both rental and capital value growth over the year ahead and beyond," Tompkins says.
"However, this recovery is not uniform across the entire currency bloc, despite credit conditions in the sector improving significantly following the European Central Bank's Quantitative Easing Programme. While Italy has shown signs of stabilisation in recent quarters, France and the Netherlands are continuing to see an investment market upturn at odds with weak occupier market conditions - caused by depressed tenant demand and an overhang of available space."
Meanwhile, the RICS report says the strongest Investment Sentiment Index (ISI) readings were returned in Germany, the UK and Japan. This was a result of accelerating growth in investment enquiries - from an already significant pace - driving up respondents' expectations for near term capital value gains in the process. Alongside this, each of these markets also recorded a firm increase in occupier demand, supporting upbeat projections of future rental growth.
Elsewhere, solid returns are also anticipated in New Zealand and the US although momentum does not appear quite as strong in these markets as in previous quarters. In the case of the latter, this may be linked to the fact that 63% of US contributors believe commercial property valuations are currently above fair value and therefore expensive. This is compared with 52% who took this view in the previous survey. What's more, capitalisation rates, according to Real Capital Analytics, are only a tenth of a per cent above their pre-crisis low at 6.7%.
"Other markets in which a majority of respondents believe commercial real estate can be classified as expensive include Japan (76%), Switzerland (67%), Germany (66%), South Africa (62%), Hong Kong (61%) and France (54%). At the other end of the scale, Russia, Spain, Portugal and Italy have the largest share of respondents who regard valuations to be below fair value at present. In the case of Spain and Portugal, the prospect of strong returns from relatively cheap assets appears to be a key driving force behind the sharp recovery in investment activity," Tompkins explains.
"Emerging markets once again returned a rather disappointing set of results, with India the only country in which a positive value for both OSI and ISI series was recorded, albeit marginal. Growth in investment demand (in net balance terms) is being outpaced by that of supply across South Africa, China and India.
"This trend is almost mirrored on the occupier side with the exception of India, where demand broadly kept pace with supply coming to the market. Nonetheless, the longer term view is somewhat brighter, with capital values and rents expected to rise in each market over the next 12 months."
According to the RICS report the feedback from Russia and Brazil is still very cautious, reflecting the ongoing economic troubles in both cases. Indeed, GDP is set to shrink in 2015 in its entirety, while unemployment is expected to continue rising. In addition, high inflation is causing further monetary policy tightening in Brazil, although in recent months the Bank of Russia has been unwinding some of the sharp hikes made towards the end of 2014 (the key policy rate peaked at 17%). Against this backdrop, rents and capital values are projected to fall further, albeit expectations are not quite as negative as in Q1.
"The Swiss market continues to struggle, with the economy contracting in the early part of the year following sharp exchange rate appreciation. In addition, credit conditions are reported to have deteriorated despite negative policy rates introduced by the central bank. Notwithstanding this, prices are expected to hold up relatively well in prime areas although rents are expected to fall right across the board," Tompkins concludes.
