The prospect of the global economy stabilizing in 2010 in the wake of the recent financial crisis raises the question of where and when investors should re-enter the property markets. This was the main focus of panelist at the 4th annual Global Property Market held in Toronto this week attended by over 400 real estate executives.
The U.K. is widely considered to be a bell weather market to watch as an early indicator for the recovery of global property markets from the grip of the economic recession. It was the first to falter in the wake of the financial crisis with property values dropping 45% since their peak in 2007.
In 2009 a flood of new investors are entering the U.K. market bidding on available properties and pushing up prices. According to Jacques Gordon a Global Investment Strategist with LaSalle Investment Management there has been a 20% increase in prices this year, and the U.K. is now considered to be an over inflated market.
According to Nicholas Cooper, Chief Executive Officer of ING Real Estate investment a regional shopping mall was recently sold by Lloyds Banking Group in Scotland attracted over 40 bidders. Hammerson with Canadian Pension Plan bought the 1m sq ft Silverburn centre near Glasgow at a yield of just above 6% (reported by Property Week on November 20th). Cooper said that at its peak the property was worth about £350-million. The purchasers beat two other short-listed parties, Universities Superannuation Scheme and British Land.
In addition to experienced offshore investors, like Canadians, there are numerous new foreign investors in the UK. They are from places like the Middle East, Japan and Korea, said Cooper. He estimated, without reference to data, that they account for about 10% of the U.K.’s commercial property transactions, seeking primarily acquisition of Class A office buildings in London. Over the next five years he expects to see a significant increase in new foreign capital.
A key to the rapid recovery of the UK market said Russell Chapin a Global Investment Strategist with UBS Asset Management was ‘a write down in property values without evidence from the appraisal industry’. He said this has facilitated sales by bringing prices closer to ones that could be negotiated by willing buyers and sellers.
In a presentation by Jacques Gordon, and in contrast to the U.K., the United States, Mexico and Japan are considered to have ‘paralyzed’ real estate markets. In the U.S. uncertainty in capital markets and excess debt secured against devalued commercial real estate, that is continuing to decline, is the cause of the freeze.
Commercial real estate debt in the U.S. is estimated to be $1.4 trillion dollars most of which will roll over in the next 3 years. The CMBS market represents another $300 million. A good portion of this debt is the responsibility of the regional banks of which there are about 8,200 in the U.S.
According to Michael McDonald, Managing Director, Eastdil Secured there are approximately 520 banks on the U.S. Federal Deposit Insurance Corporation (FDIC) watch list because they are carrying excess debt a large proportion of which is commercial real estate. Many of these banks are expected to fail over the next year. Approximately 50 banks have failed so far in 2009 representing daily losses of about $1-billion said McDonald.
“When reality sets in and the need to reset real estate values takes hold” then faltering US banks will shift from a policy of ‘extend and pretend’ to one of ‘foreclose and dispose’. This is the optimum time for an investor to step in and acquire a property according to Jacques Gordon.
While much of the discussion at the conference focused on the US and UK markets other mature markets and the emerging property markets were also raised. France and Poland were identified as prime locations for investment now while the remainder of Europe was seen as too economically unstable at this time. Spain was identified as a country that may become an attractive investment opportunity and Russia along with the former Soviet block countries were seen as places to avoid altogether.
A panel discussion on emerging markets of Brazil, India and China concluded a lot of research and time, local advisers and feet on the ground in those locations was an essential strategy for making good investments. Those on the panel also indicated that development properties with a plan to hold the properties for in excess of ten years was a common strategy for new investors in these areas.