How Did Germany, Japan, and South Korea Escape the Global CRE Fall?

Between lockdowns and travel restrictions, the COVID-19 pandemic contributed to the precipitous fall of global commercial real estate investments in the first half of 2020. The final tally was US$321 billion in the first six months of the year, a 29 percent drop. But there were outliers: Deal volume in Japan increased seven percent to US$24 billion, and Germany saw only a 1 percent decrease. Additionally, South Korea outperformed its long-term, first-half average in spite of a 15 percent decline. How did they do it?

According to a new report from JLL, these countries were able to make the most of real estate transparency, government stimulus, and domestic capital.

A lack of real estate transparency can undermine investor confidence, says Sean Coghlan, head of global capital markets research for JLL. That confidence is particularly vulnerable during a time of travel limitations when conducting due diligence is hampered. “In the current environment, transparency has become a mitigating factor for investment decisions. Strong governance is mitigating uncertainty in some cities and supporting investment activity,” Coughlan said.

Both Germany and Japan delivered stimulus packages acknowledged to be among the biggest in the world. Prime Minister Shinzo Abe doubled Japan’s stimulus measures to US$1.1 trillion in May, while Germany’s amounted to more than 1.3 trillion euros (US$1.47 trillion). South Korea passed a stimulus measure of US$277 billion, but its GDP growth showed a contraction of 3.3 percent in the first six months.

Investors in Germany have deployed more than US$11 billion into the country’s commercial real estate market year-to-date, according to JLL. An ongoing appetite for real estate has driven Germans to be the most active investors in the world thus far. “These funds are discretionary vehicles which invest on behalf of private capital. In the low interest rate environment, this structure remains attractive as a means of generating yield,” said Coughlan.

Japan’s real estate market has also seen several large real estate transactions. The country is home to the world’s largest pension fund, the Government Pension Investment Fund, which has signified its intentions to apportion more to alternatives assets, including real estate.

What does the rest of the year hold? Asia seems poised to be at the forefront of the global recovery, having grappled with the pandemic the longest and seeing lockdowns lift. Business sentiment is also improving in regions like China.

Overall, according to Coughlan, domestic capital will play a starring role in the real estate market recovery. ”We have already started to see domestic sources in Europe and the U.S. drive a higher share of investment activity—albeit volumes are still down,” he said. ”This is likely to become more evident through the second half of the year given the drop-off in inter-regional and intra-regional investment, and the importance of domestic capital in stabilising liquidity.”