Pace of capital value decline eases
In the first three months of 2024 US economic growth was positive, but weaker than expected. GDP expanded at an annualized pace of 1.6% quarter on quarter (QoQ), a sharp downshift from the 3.4% annualized in 4Q23. China’s GDP grew 1.6% QoQ, slightly stronger than the 1.2% QoQ growth in 4Q23, while annual growth was 5.3% year on year (YoY), slightly above the government’s official target of ~5%. The housing market continues to weigh on the Chinese economy, though manufacturing activity has picked up.
Preliminary figures showed that the eurozone economy bounced back in 1Q24, growing 0.3% QoQ. These figures follow, on revised data, a brief technical recession in the second half of 2023. Strength in the 1Q24 economy was widespread, with Spain expanding 0.7% QoQ and Germany, which saw some quarterly falls in GDP in 2023, growing 0.2% QoQ. The eurozone jobs market continued to be robust, with the unemployment rate remaining at a record low of 6.5% in March. The US labor market also showed ongoing strength, with the unemployment rate rising marginally to 3.9% by April from the record low of 3.4% a year earlier.
In the US inflation ticked up in 1Q24 to reach 3.5% in March, while eurozone price pressures eased and inflation continued to fall, dropping to 2.4% in March, a 32-month low. Eurozone core inflation remained elevated at 2.9%, mainly driven by services inflation which can be explained as a temporary effect of the early Easter break. In both Europe and the US inflation is expected to trend towards 2%, though the final road will likely be bumpy.
The Swiss National Bank (SNB) led other major central banks by cutting interest rates in March, reducing them by 25bps to 1.50% . The European Central Bank (ECB) continued to keep interest rates on hold, with its deposit rate at 4.0%, but is expected to deliver its first cut in June. The Fed also held rates, in a target range of 5.25% to 5.50%, with expectations for multiple rate cuts this year slashed on inflation concerns. We think that US interest rates have peaked, though when the Fed starts cutting is less clear. Divergences in policy are emerging between the US, Europe and Japan, with the Bank of Japan ending its negative interest rate policy in March.
Real estate investment volumes across the globe remained subdued in 1Q24, with all property investment totaling USD 125 billion, down from USD 155 billion in 4Q23. However, after allowing for the seasonally quieter time of year, global real estate investment volumes increased 16% QoQ in USD terms. Despite this, volumes remained very low compared to historical averages and were still down 58% versus 2Q22, when prices peaked.
Globally, most sectors and geographies showed some improvement in activity but remained weak. After allowing for seasonal effects, Americas investment volumes increased 24% QoQ in 1Q24 in USD terms and EMEA volumes were up 16%, whereas APAC volumes slipped 4% QoQ, with the region not having declined to the same extent during the downturn as the Americas and EMEA. At the global level, after allowing for seasonal effects, investment volumes rose across sectors.
Price adjustment in real estate values continued in 1Q24, though the pace of decline eased. According to NCREIF, US capital values fell 2.1% QoQ and, according to MSCI, UK capital values dropped 0.6% QoQ (see Figure 1). The falls left UK capital values 22% below their mid-2022 peak and US values down 18% from their mid-2022 peak. In both markets offices continued to suffer, taking US office capital values to 32% below their 1Q22 peak and UK office values to 28% below their 2Q22 peak. Retail and industrial capital values were more resilient and did not show significant changes over the quarter. In the rest of Europe, the latest data available from MSCI showed capital values down 18% to 4Q23 from their mid-2022 peak.
