Global transactional volumes continued their period of growth in the second quarter growing by 9% over the first half of this year. At half year transactional activity stands at US$333 billion almost 50% up on the same period just two years ago, demonstrating the attraction of real assets in this current cycle.
The longer this period of growth continues the more vocal the commentary becomes about what will bring this cycle to an end, and will it be a dramatic climax or a more gradual decline before a further period of growth. Much has been made about the prospect of rising rates in the US, given they have such an influence over longer term bond rates all around the world. A look back in history tells us that direct real estate is not very sensitive to movements in either short term or long term interest rates, but is much more responsive to wider economic circumstances and performance.
Listed property stocks on the other hand are very susceptible to rising interest rates and we have already seen some REITs underperform the market as investors have recycled out of these higher yielding opportunities.
So, the question becomes will rising rates bring the fragile economic recovery to an end or are they a signal that economic growth is strong enough to be sustained through a normalisation in interest rates?
If we look at the US market we see transactional volumes and pricing in commercial property moving ever higher, with prime office yields in New York now regularly around 3.5% even while 10-year bonds are offering close to 2.5%. This trend seems to suggest that confidence and sentiment in the wider economy is strong enough to justify continued investment, with better economic conditions likely to deliver stronger rental growth, a trend many investors have bet on which now seems to be materialising in many locations.
Given the volume of capital markets activity that JLL is currently handling and the fact that if rates do rise it will be a gradual process in 2015, we estimate global transactional volumes will continue to improve in 2015 to approximately US$750 billion.