Frontier India Current Affairs

Written on April 11, 2008 – 2:24 pm | by FICA |

After a record year in 2007 for direct real estate investment globally, with volumes up 8% year on year to US$759 billion, Jones Lang LaSalle has commented on the outlook for 2008 in its latest Global Real Estate Capital report. The firm expects global investment market volumes for 2008 to be down over 30% on 2007. The Americas and European investment markets will certainly see a material decline in full year volumes and, although Asia may be more resilient, volumes will not achieve the heights of 2007.

Tony Horrell, International Director and Head of European Capital Markets says, “Reduced debt availability and investor confidence are likely to be here to stay for much of the first half of 2008 as the impact of the debt squeeze continues to ripple through markets, and central bankers and financiers work to stabilize and stimulate the debt markets. The situation is being exacerbated by unease about the global economy, in particular about major economies such as the US, the UK and Japan.”

Jones Lang LaSalle sees a number of factors that will constrain volumes this year; buyers and sellers adopting ‘wait and see’ strategies; prices having peaked in 2007 in many major markets; a misalignment between buyers’ and sellers’ price expectations; reduced availability of debt, tougher lending criteria and increased debt costs; reduced willingness and capacity to transact large lots sizes, a narrower spectrum of investors; and more exacting due diligence which leads to longer transaction processes.

Mr Horrell notes, “However, we do not expect a strategic and planned withdrawal of capital from real estate in 2008, or investors to significantly adjust their allocations to the asset class. Forecasts for 2008 remain positive and the long-term trends in real estate, such as the growing credibility of real estate as an investible asset class, improving transparency, urbanization, and restricted supply, continue to be positive drivers.”

Whilst domestic investment remained at around US$400 billion globally in 2007, similar to 2006 volumes, cross border investment increased by US$58 billion to $357 billion in 2007 and of that, inter-regional investment accounted for US$242 billion. In percentage terms cross border transactions now account for 47% of total transactions and inter-regional for 32% of total transactions.

The US, Germany and the UK have been the traditional targets of inter-regional investors. These markets accounted for 25%, 19% and 15% of inter-regional purchases respectively. However, there was a significant fall in the share of this investment attracted to the UK and Germany as new markets were targeted. Japan (11%) and France (9%) moved up the popularity curve, with global funds very active in both markets. Together these five markets accounted for 80% of total inter-regional purchases. The emerging markets of China, Poland and Russia also attracted strong interest.

Asia Pacific

Asia Pacific saw remarkable growth in both H1 and H2 2007. Despite the downturn in some major real estate markets in the second half of the year, and the effects of the weakening US dollar, capital flows continued to pour into the region. Direct commercial real estate investment reached a record US$121bn in 2007, up 27% on 2006, continuing to grow the region’s share of global volumes (now 16%). Japan, by far the largest market in the region, accounted for 50% of total transactions. Another 36% of transaction activity took place in four markets: Australia (15%), Hong Kong (7%), China (7%) and Singapore (7%).

Cross-border volumes in Asia Pacific surged to US$57bn in 2007, accounting for 47% of total transactions. All major markets in the region registered increases, with the exception of the Philippines and Thailand where cross border volumes were constrained by rigid foreign ownership legislation and a lack of investment-grade assets offered for sale. Buying activity was largely undertaken by Global, Australian, Singaporean and Hong Kong funds. Global, Hong Kong and Singaporean funds were also the predominant cross-border vendors.

Mr Stuart Crow, Head of Asia Capital Markets at Jones Lang LaSalle states, “We are seeing a definite shift in the origin of active investors with those less reliant on debt funding such as the German core funds, generating solid interest in quality real estate assets across the region. Whilst the Australian Listed Property Trusts (LPTs) played a large part in the buying activity in 2007 within the region, equity market dynamics at home are making it difficult for many of these funds to make accretive acquisitions outside of Australia. Instead, we are witnessing the re-emergence of Japanese interests in overseas investments, particularly in the developing markets of China, India and Vietnam.”

“Overall, the real estate picture for Asia looks positive and global capital allocations continue to re-weigh in Asia’s favour. We are likely to expect a rebound in investor confidence and transaction volumes to increase in the second half of 2008,” says Mr Crow.

Europe

Direct commercial real estate investment in Europe totalled US$333bn in 2007, a 3.5% rise on 2006. However, in Euro equivalents, volumes were 4% down on 2006. Volumes in H2, usually the strongest period for activity, were 5% lower than in H1. The impact on annual volumes was however marginal due to the very strong first half. The market continued to be dominated by the ‘big three’ markets of the UK, Germany and France, which together accounted for 63% of total volumes in 2007, although the UK’s share slipped to 29% with Germany grabbing a record 22% of investment and France 12%.

Cross-border investors continued to dominate activity, accounting for 63% of transaction volumes in Europe, marginally up on last year. At 70%, Germany had the largest percentage of cross-border activity, ahead of the UK, where it represented just over 50% of total activity. France, Sweden and Spain also saw a high proportion of cross-border investment. By contrast, a number of Europe’s smaller markets saw much higher levels of domestic investment, notably Norway (97%), Ireland (95%) and Portugal (77%). Inter-regional investment totalled US$116bn in 2007, equivalent to 35% of total activity, compared with 39% last year.

Americas

Direct commercial real estate investment in the Americas totalled US$304bn in 2007, up 8% on 2006. Transaction volumes in H2 were however 23% down on H1 due to a significant fall-off in transaction volumes in the US in Q4. The US market, which accounted for 93% of transaction volumes in the Americas, saw transaction growth of just 4% over the year. This is in stark contrast to Canada, the second largest market, where volumes nearly doubled to US$16bn. Also growing rapidly were the Latin American markets of Brazil and Mexico, which expanded by a combined 80% to nearly US$7bn.

The continued globalization of real estate investment was evident across the Americas region in 2007. Cross-border transaction volumes increased to US$91bn, or 30% of overall activity (up from 25%). New York was again by far the largest cross-border market, recording US$19bn, followed by San Francisco with US$8bn, Chicago and Los Angeles with approximately US$5bn each, and Washington, DC with US$4bn. Due to the relatively small number of active country markets in the Americas region, the vast majority (91%) of cross-border transaction volumes were also inter-regional.

Reported data covers all direct commercial property transactions (including hotels) but excludes entity level and residential transactions

Cross-border investment is where purchaser, vendor or both originate from outside the country where the asset is located.

Cross-border investment is classified as ‘intra-regional’ investment (both purchaser and vendor originate from the region where the asset is located) and ‘inter-regional’ investment (purchaser, vendor or both originate from outside the region where the asset is located).