Could Real Estate soon emerge from one of its worst crises? That’s what experts and professionals in the industry are hoping for, with the first encouraging signs of recovery. Of course, every one still has in mind pictures of massive foreclosures in the United States, and of entire empty floors in London’s business buildings. In the UK for instance, the Investment Property Databank (IPD) Monthly Index has dropped 43% between June 2007 and June 2009; France and Germany are likely to see value declines of 25-35% from peak levels while Central & Eastern Europe assets are more likely to see declines of 50% or more. While the property market had been a safe investment for years, all of a sudden, it became highly risky in key areas. In Commercial Real Estate (CRE), companies disinvested massively, prompting further price declines. With the economic slowdown, many office spaces were left vacant.
THE WORST COULD BE BEHIND US
But after those terrible times for the industry, there are signs, here and there, of a possible rebound. While prices fell dramatically, and many shied away from investing in Real Estate, the interest rates fell at historically low levels which made some properties more affordable and again seen as a reasonable investment. Property yields* have started to compress in select markets; the number and size of institutional investment transactions are increasing. In Europe, German and French funds have purchased institutional-quality assets with long leases; in Asia-Pacific, the bulk of the region’s recent transaction activity has occurred in China and Hong Kong – in Hong Kong, yields have even fallen to the low 4 percent level! Turnaround in volumes and yield compression has yet to reach the Americas, where financing is still difficult to obtain and closings are arduous.
CAUTION STILL APPLIES
But no matter how encouraging those signals are, experts and governments alike agree that caution still applies in these challenging times for the industry. If the recovery actually happens soon, it will be fragile and uncertain. In the United States for instance, the National Association of Realtors fears that homes sales will decline again without the tax credit programme, recently implemented by the local authorities. And the property market’s rebound will not just rely on government funded plans and on a general economic improvement. It will also depend on factors specific to the industry, such as the deleveraging still to occur within the banking sector:
Goldman Sachs estimates that the CRE loan balances as a percentage of overall corporate lending in the UK will decline over 40% to return to 16% of loan books from a peak of 36% in 2007; while transactions closed in the bubble market are due for refinancing shortly: £100bn of debt – combination of loans and CMBS (Commercial Mortgage-Backed Securities) issuances – in the UK are maturing from 2009 through 2011. If not refinanced, the market could see further defaults, and thus further price declines – a grim perspective for a market which is just showing green shoots of recovery.
* Yield = rent/valuation.