Across the globe, 2010 is likely to be reasonably promising for real estate investment across most markets, according to LaSalle Investment Management (LaSalle), which today released the 16th edition of its Investment Strategy Annual, a comprehensive survey of, and outlook for, the global real estate markets in 2010. LaSalle's report notes that the free-fall in values has stopped in nearly all the major markets it follows and the early stages of restored investor confidence have begun. The market is already seeing improved visibility on pricing and rising transaction volumes.
In 2010, LaSalle expects to see a further re-alignment in the pricing of risk with deal flow increasing modestly as sellers gradually come out of denial. Investors should seek an appropriate balance between: 1) total risk aversion, which is already leading to a surplus of capital targeting a handful of ultra-safe deals and 2) inappropriate risk tolerance in a period of economic uncertainty.
Commenting on the report, Jacques Gordon, Global Strategist at LaSalle Investment Management said: "Overall, investors in commercial real estate should be cautiously optimistic about the outlook in 2010. However, as a late cycle participant in the general economic recovery, real estate will behave differently from other asset classes. The income streams from leased buildings weathered the global recession in remarkably good shape, but as leases mature in generally weak markets, net operating income will be under downward pressure in many countries for several years to come.
"At the same time, in terms of stimulus packages and bail outs, commercial property has been treated quite differently from residential real estate, banking and other industry sectors. And private equity prices have not yet recovered as robustly as stocks or bonds. All these differences mean that real estate's diversifying power in a portfolio will be restored."
LaSalle acknowledges that investors have good reason to be risk averse but suggests that in 2010 (and even more so in 2011) they can look forward to more rational pricing and, in cases of distressed properties and owners, some very compelling opportunities. As they develop investment strategies for 2010-2011, investors with a clear view of the returns they require can prosper, says LaSalle.
In terms of the major risks to commercial property, the report's authors believe this lies with the capital markets, which are expected to be the main driver of performance, while economies are weak. Yet, real estate capital markets could be quite volatile in the years ahead, says LaSalle. It warns that the unintended consequences of monetary and fiscal stimulus policies of many governments could lead to too much money flowing back into property ahead of a solid recovery in fundamentals. This excess liquidity risk is already building in China and, to a lesser extent, the UK. To ameliorate this risk, investors should maintain a strict discipline that focuses on achieving a required return with realistic underwriting.
Looking at the major commercial real estate markets of the world, the report's authors observe that while they may have fallen together during the peak of the credit crisis, they are recovering in very different and surprising ways.
In the UK for example, LaSalle notes the sharp rebound in prices and says that, while capital values will still increase, it is now clear that the best opportunities in the UK have passed. In Continental Europe the investment environment continues to vary considerably: France and Germany are set to see most of the investment activity in 2010 while re-pricing in other countries continues at varying speeds and Central Eastern Europe continues to be paralyzed.
LaSalle sees a slower recovery in the US as, unlike the UK, the market has still to find a floor with weak economic fundamentals expected to push vacancies up and prices down until the second half of 2010. Asia is expected to offer investors the greatest range of opportunities in 2010, as China and India grow rapidl