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GLOBAL ECONOMICS, REAL ESTATE PRICING
& OUTLOOK FOR 2017
RICHARD BARKHAM
GLOBAL CHIEF ECONOMIST
BREXIT
TRUMPISM
4 ECONOMICS, PRICING & OUTLOOK FOR 2017 CBRE
EURO-TRUMPISM
5 ECONOMICS, PRICING & OUTLOOK FOR 2017 CBRE
5
6
7
8
1980 1982 1983 1984 1985 1987 1988 1989 1990 1992 1993 1994 1995 1997 1998 1999 2000 2002 2003 2004 2005 2007 2008 2009 2010 2012 2013 2014 2015
IRAN-IRAQ
WAR STARTS
INDIRA GANDHI
KILLED
REAGAN
SHOT
FALKLANDS WAR
LOCKERBIE
BOMBING
GLASNOST IN
USSR
US EMBASSY IN
BEIRUT BOMBED
IRAN-IRAQ
WAR ENDS
BERLIN WALL
FALLS
IRAQ INVADES KUWAIT
1ST GULF WAR
MAASTRICHT TREATY BOSNIAN WAR ENDS
BRITISH RULE IN
EUROZONE
CREATED
9 / 11
US INVASION OF
IRAQ
MADRID TRAIN
BOMBING
GAZA WAR
RUSSO-GEORGIAN
WAR
SYRIA WAR
ISIS
EMERGES
JAPANESE TSUNAMI
PARIS BOMBING
BREXIT VOTE /
TRUMP
FALL OF THE
SOVIET UNION
CRIMEA
ANNEXED
LET’S GET GEOPOLITICS IN PERSPECTIVE
Source: CBRE Research, Macrobond, IMF, WEO.
G7 COUNTRIES, UNEMPLOYMENT RATE (%)
6 ECONOMICS, PRICING & OUTLOOK FOR 2017 CBRE
5.0
5.5
6.0
6.5
7.0
7.5
8.0
8.5
9.0
ONLY THE CYCLE MATTERS
Source: CBRE Research, Macrobond, IMF, WEO.
G7 Countries Unemployment Rate (%)
We are close to
the cyclical
trough
7 ECONOMICS, PRICING & OUTLOOK FOR 2017 CBRE
THE CYCLE DRIVES WORLD EQUITY VALUES
-60
-40
-20
0
20
40
60
80
100 4.0
4.5
5.0
5.5
6.0
6.5
7.0
7.5
8.0
8.5
MSCI Equities 2Y-o-2Y (%) G7 Unemployment (%)
G7 Unemployment (inverted) MSCI World Equities Index (2y/2y)
Source: CBRE Research, Macrobond, MSCI, 2016.
2 year lag
8 ECONOMICS, PRICING & OUTLOOK FOR 2017 CBRE
…AND WORLD REAL ESTATE VALUES…
4.00
5.00
6.00
7.00
8.00
Global Composite Office Yield G7 Unemployment
G7 Unemployment and Global Composite Office Yield (%)
Source: CBRE Research, Macrobond, 2016.
9 ECONOMICS, PRICING & OUTLOOK FOR 2017 CBRE
…AND FUNDAMENTALS (EUROPEAN OFFICE VACANCY )
Source: CBRE Research, Macrobond
European Office Vacancy (%) G7 Unemployment (%)
4
5
6
7
8
9
2
4
6
8
10
12
14
1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
European Office vacancy G 7 Unemployment
SLUGGIS
H
10 ECONOMICS, PRICING & OUTLOOK FOR 2017 CBRE
AND RENTAL PRESSURE
SOURCE: CBRE RESEARCH, MACROBOND.
Euro Office Rental Growth (%) G7 Unemployment (%)
0
1
2
3
4
5
6
7
8
9
-30
-20
-10
0
10
20
30
40
1987 1989 1990 1991 1993 1994 1995 1997 1998 1999 2001 2002 2003 2005 2006 2007 2009 2010 2011 2013 2014 2015
Average Euro Offices G7 Unemployment
SLUGGIS
H
GEOPOLITICS RARELY BRINGS
THE CYCLE TO AN END
• Headline slide V.2, use
this slide to highlight an
important headline or
information in a
presentation.
12 Economics, Pricing & Outlook For 2017
CBRE
INTEREST RATES ARE KEY TO THE END OF THE CYCLE
G7 INTEREST RATE, DEVIATIONS FROM TREND AND G7 UNEMPLOYMENT
-2
-1
0
1
2
3
4
5
4
5
6
7
8
9
1980 1982 1983 1985 1986 1988 1989 1991 1992 1994 1995 1997 1998 2000 2001 2003 2004 2006 2007 2009 2010 2012 2013 2015 2016
Interest Rate (%) G7 Unemployment(%)
G7 Unemployment G7 Interest rate, deviations from trend
Spike Spike Spike No Spike
Source: CBRE Research, Macrobond, 2016.
SO WHY IS IT
NOT HAPPENING?
• Headline slide V.2, use
this slide to highlight an
important headline or
information in a
presentation.
ITS BEEN A VERY
TOUGH RECOVERY
15 ECONOMICS, PRICING & OUTLOOK FOR 2017 CBRE
THE U.S. WAS VERY BADLY DAMAGED BY THE GFC
U.S. UNEMPLOYMENT (U3 AND U6, %)
Source: CBRE Research, BLS, Q3 2016.
0
2
4
6
8
10
12
14
16
18
1994 1997 2000 2004 2007 2010 2014 2017
U6 Unemployment U3 Unemployment U3 Unemployment forecast U6 Unemployment forecast
17.1%
9.0%
16 ECONOMICS, PRICING & OUTLOOK FOR 2017 CBRE
THE EUROZONE CRISIS WAS A MAJOR HICCUP
Eurozone Unemployment (%)
Source: CBRE Research, Macrobond, Q3 2016.
6
7
8
9
10
11
12
13
2000 2003 2006 2009 2012 2015 2018
Unemployment Unemployment Forecast What might have been
Four wasted years
17 ECONOMICS, PRICING & OUTLOOK FOR 2017 CBRE
THE RISE AND SLOWDOWN IN CHINA IS PART OF THE STORY
Source: CBRE Research, Macrobond.
China GDP Growth Y-O-Y (%)
4
6
8
10
12
14
16
1992Q1
1993Q1
1994Q1
1995Q1
1996Q1
1997Q1
1998Q1
1999Q1
2000Q1
2001Q1
2002Q1
2003Q1
2004Q1
2005Q1
2006Q1
2007Q1
2008Q1
2009Q1
2010Q1
2011Q1
2012Q1
2013Q1
2014Q1
2015Q1
2016Q1
2017Q1
2018Q1
2019Q1
2020Q1
GDP growth GDP growth forecast
AVERAGE 10%
AVERAGE 9%
NEW NORMAL 6%
18 ECONOMICS, PRICING & OUTLOOK FOR 2017 CBRE
MOST RECENTLY AN EMERGING MARKETS CRISIS
Source: CBRE Research, Macrobond.
Average annual GDP growth (%)
-4
-2
0
2
4
6
8
10
12
China Emerging Markets Brazil Russia Opec
2002 - 2013 2014 -2016
19 ECONOMICS, PRICING & OUTLOOK FOR 2017 CBRE
DEMAND SHOCKS HAVE KEPT INFLATION DANGEROUSLY LOW
Core CPI Inflation vs. Target
Source: CBRE Research, Macrobond, Q3 2016.
0.0
0.5
1.0
1.5
2.0
2.5
Canada France Germany Italy Japan UK U.S.
Core…
20 ECONOMICS, PRICING & OUTLOOK FOR 2017 CBRE
THERE IS A BIGGER
PROBLEM OF
GLOBALIZATION
21 ECONOMICS, PRICING & OUTLOOK FOR 2017 CBRE
TRADE SHOCK FROM CHINA
Source: CBRE Research, Macrobond.
Share Of World Manufacturing Output (%)
0
5
10
15
20
25
30
35
Canada France Germany Italy Japan UK U.S. Brazil China India Russia
2000 2016
REMEMBER THE FIRST OIL SHOCK?
23 ECONOMICS, PRICING & OUTLOOK FOR 2017 CBRE
CAPITAL RECYCLING THEN
OPEC THE WEST 1970s
24 ECONOMICS, PRICING & OUTLOOK FOR 2017 CBRE
CAPITAL RECYCLING NOW
THE WEST OPEC
CHINA
EMs Now
25 ECONOMICS, PRICING & OUTLOOK FOR 2017 CBRE
THE WORLD HAS FAILED TO DE-LEVER
Source: McKinsey Global Institute, CBRE Research, 2016.
Change In Debt To GDP By Country 2007 To 2014 (%)
0
0.5
1
1.5
2
2.5
3
3.5
4
Canada France Germany Italy Japan UK U.S. Brazil China India Russia
2007 2014
26 ECONOMICS, PRICING & OUTLOOK FOR 2017 CBRE
BACK TO THE CYCLE?
27 ECONOMICS, PRICING & OUTLOOK FOR 2017 CBRE
THE CHINESE STARTED IT
Source: CBRE Research, Macrobond, 2016.
(5)
(4)
(3)
(2)
(1)
0
1
Jan-07 Oct-07 Jul-08 Apr-09 Jan-10 Oct-10 Jul-11 Apr-12 Jan-13 Oct-13 Jul-14 Apr-15 Jan-16
Bu
dg
et
bala
nce,
% o
f G
DP
China, Central Government Budget Balance, % of GDP
Major fiscal boost
TRUMP IS
ALSO ON
THE CASE
29 ECONOMICS, PRICING & OUTLOOK FOR 2017 CBRE
REAL WAGES ARE GROWING STRONGLY
SOURCE: CBRE RESEARCH, MACROBOND
US REAL EARNINGS GROWTH
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
REAL
EARNING
GROWTH
AVERAGE
30 ECONOMICS, PRICING & OUTLOOK FOR 2017 CBRE
INFLATION IS TRENDING UP
SOURCE: CBRE RESEARCH, MACROBOND
US CORE CPI
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
1993 1994 1996 1998 1999 2001 2003 2004 2006 2008 2009 2011 2013 2014 2016
CORE-CPI
TARGET
A MONETARY POLICY
RESPONSE SHOULD BE
EXPECTED
32 ECONOMICS, PRICING & OUTLOOK FOR 2017 CBRE
SHORT RATES HEADING UP
Source: Atlanta Federal Reserve, Bureau of Labor Statistics, Macrobond, CBRE Research.
U3 Unemployment (%) Fed Funds Rate (%)
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
11.0
0
2
4
6
8
Jan
1995
Jan
1996
Jan
1997
Jan
1998
Jan
1999
Jan
2000
Jan
2001
Jan
2002
Jan
2003
Jan
2004
Jan
2005
Jan
2006
Jan
2007
Jan
2008
Jan
2009
Jan
2010
Jan
2011
Jan
2012
Jan
2013
Jan
2014
Jan
2015
Jan
2016
Jan
2017
Jan
2018
Fed funds U.S. forecast (Oxford) Fed dots Forward curve Unemployment Unemployment (forecast)
Cyclical low last 20 years
33 ECONOMICS, PRICING & OUTLOOK FOR 2017 CBRE
LONG RATES HAVE ALREADY MOVED
Source: Macrobond, CBRE Research, 2016.
0
2
4
6
8
10
12/1
990
12/1
991
12/1
992
12/1
993
12/1
994
12/1
995
12/1
996
12/1
997
12/1
998
12/1
999
12/2
000
12/2
001
12/2
002
12/2
003
12/2
004
12/2
005
12/2
006
12/2
007
12/2
008
12/2
009
12/2
010
12/2
011
12/2
012
12/2
013
12/2
014
12/2
015
12/2
016
US Government 10 Year Bond Yield (%)
34 ECONOMICS, PRICING & OUTLOOK FOR 2017 CBRE
AN ERA OF DANGEROUS DOLLAR STRENGTH
SOURCE: CBRE RESEARCH, MACROBOND & ST. LOUIS FED
S&P 500 CORPORATE EARNINGS, USD NOMINAL TRADE WEIGHTED EXCHANGE RATE
80
90
100
110
120
130
100
120
140
160
180
200
220
240
260
2012 2013 2014 2015 2016
S&P 500 Corporate Earnings USD Nominal Trade Weighted Exchange Rate
CORPORATE EARNINGS (USD, BN)
EXCHANGE RATE (USD)
35 ECONOMICS, PRICING & OUTLOOK FOR 2017 CBRE
EMERGING MARKET $ DEBT
Source: CreditSights, Bloomberg Business review, BIS, BAML Index Data, Haver, 2016.
0
40
80
120
160
200C
zech
rep
ublic
Tha
iland
Chi
na
Mal
aysi
a
Tai
wan
Isra
el
Sou
th K
orea
Sou
th A
fric
a
Phi
llipp
ines
Pol
and
Rus
sia
Indi
a
Qat
ar
Mex
ico
Indo
nesi
a
Hon
g K
ong
Col
ombi
a
Sin
gapo
re
Chi
le
Tur
key
Bra
zil
Exports of Good Services & Income Receipts (%)
Private sector Loans Private sector
36 ECONOMICS, PRICING & OUTLOOK FOR 2017 CBRE
OUTLOOK FOR GLOBAL REAL ESTATE PRICING
37 ECONOMICS, PRICING & OUTLOOK FOR 2017 CBRE
WORLD REAL ESTATE PRICES
4.00
5.00
6.00
7.00
8.00
Global Composite Office Yield G7 Unemployment
G7 Unemployment and Global Composite Office Yield (%)
Source: CBRE Research, Macrobond, 2016.
38 ECONOMICS, PRICING & OUTLOOK FOR 2017 CBRE
ACTUALLY TWO KEY DRIVERS GLOBAL OFFICE YIELDS VERSUS G7 BOND RATES AND G7 UNEMPLOYMENT
0.00
2.00
4.00
6.00
8.00
10.00
12.00
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
3/1/
1990
12/1
/199
0
9/1/
1991
6/1/
1992
3/1/
1993
12/1
/199
3
9/1/
1994
6/1/
1995
3/1/
1996
12/1
/199
6
9/1/
1997
6/1/
1998
3/1/
1999
12/1
/199
9
9/1/
2000
6/1/
2001
3/1/
2002
12/1
/200
2
9/1/
2003
6/1/
2004
3/1/
2005
12/1
/200
5
9/1/
2006
6/1/
2007
3/1/
2008
12/1
/200
8
9/1/
2009
6/1/
2010
3/1/
2011
12/1
/201
1
9/1/
2012
6/1/
2013
3/1/
2014
12/1
/201
4
9/1/
2015
6/1/
2016
Global Office Yield, G7 Average Bond Rate (%)
G7 Unemployment (%)
G7 Unemployment Global Composite Office Yield G7 bond rateSource: CBRE Research, Macrobond, 2016.
39 ECONOMICS, PRICING & OUTLOOK FOR 2017 CBRE
KEY COEFFICIENTS
SOURCE: CBRE RESEARCH
• 70 bps G7 bonds
• 50 bps G7 unemployment
CONCLUSIONS
41 ECONOMICS, PRICING & OUTLOOK FOR 2017 CBRE
• Globalisation has thrown up many problems
– Political volatility will be with us for some time
– Fiscal stimulus - immediate response – correct
– Trade and immigration checks – longer term response - wrong
• Capital glut diminishing
– Rates depressed in medium term, but end in sight?
• Cycle alive and well
– Demand shocks had moderating impact – this will reverse
• End of cycle
– Will driven by the U.S. – will unfold in emerging markets
42 ECONOMICS, PRICING & OUTLOOK FOR 2017 CBRE
• Real estate (firm conclusions)
– Fundamentals and rent pressure will protect values for 24 months
– But the era of yield compression is over – bond rates win in medium term
– Next recession probably reasonably mild
• Real estate (speculative conclusions)
– Regime shift – back to a higher inflation higher interest rate world
– More higher yielding bonds to compete with prime real estate
• Questions to be answered
– Will de-globalisation affect cross border capital flows?
PROFESSOR RICHARD BARKHAM PHD MRICS
GLOBAL CHIEF ECONOMIST
+44 20 7182 2665
THANK YOU