Over 50 bln. of equity capital is targeting European commercial real estate in 2009, according to Jones Lang LaSalle's new European Capital Markets outlook paper 'Time for Decisions'. Whilst some estimates of "war chests of equity" waiting to target distressed assets are overblown, institutions and third party money managers, opportunity funds, international wealth entities and some German open and closed ended funds will be looking for appropriate opportunities to enter the market.
Tony Horrell, Head of European Capital Markets at Jones Lang LaSalle said: "We have no doubt that operating conditions in 2009 will be the most challenging that many in the market have ever encountered, but for those able to look to the medium term and with access to capital we think 2009 will be the year when the market begins to clear and some opportunities will be too good to miss. For the smart investor this year will be about positioning themselves to take advantage of these buy-side opportunities as they emerge."
Real estate debt finance is set to remain limited this year, with low loan-to-value ratios and high margins. Horrell continued: "We fully expect it will take three to five years for banks to repair their balance sheets and they will only begin to address this problem in 2009. They will most likely be ultra-cautious and conservative in their handling of their outstanding real estate exposure and highly selective in their lending criteria."
Values across Europe overall have already fallen by up to 40% in some markets from their peak in summer 2007 and more value erosion is a certainty in 2009, and for some it will be better to sell now where markets have further to fall. At the fourth quarter 2008 some markets in Europe had recorded yield decompression in excess of 200 basis points since the peak for prime offices and shopping centers, whilst others have yet to experience more than a 50 basis points correction.
Nigel Roberts, Chairman of European Research at Jones Lang LaSalle commented: "Some markets like London, Paris and Madrid are well advanced in their market corrections and will no doubt attract increased investor interest if the fundamentals are judged to support the new price levels. Fair value estimates, likely yield ceiling indicators and asset specific pricing will become crucial decision tools in 2009 for investors timing their market entry, and judging price and value trade-offs. We also expect market conditions will contribute to the trading of increasing numbers of assets that are seldom brought to the market and these will most likely reflect premium prices or change hands irrespective of whether the market has hit a recognized price floor."
Nigel Roberts concluded: "The rental markets and the strength of tenant demand will be the critical components of pricing and value assessments in 2009. The supply side of most markets is not expected to be a problem because the pipelines are generally not swollen with schemes which are committed or under construction. Attention will focus on the resilience of demand in the face of some of the weakest economic fundamentals for decades. In some markets however, weak demand will lead to subletting and grey space will result in ever higher vacancy rates."