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| Commercial property re-pricing has found a floor A mid-year update from LaSalle Investment Management on the European commercial real estate market reveals that investor sentiment has stabilized and that re-pricing has found a floor. There is also evidence, according to LaSalle, that there is increasing competition, particularly from foreign buyers attracted by the weakness in Sterling and the benefits of the UK lease, so investors need to move quickly to avoid missing the upturn. The 2009 Mid-Year Update follows the publication in January of the 15th edition of LaSalle's Investment Strategy Annual, a comprehensive survey of, and outlook for, the global real estate markets, which correctly called the market at that time and recommended a focus on retail rather than offices. LaSalle believes that occupational demand prospects look bleak across all commercial real estate sectors, but despite lower consumer expenditure, retail still provides the best investment prospects due to its defensive qualities. It says that good retail property is much more lettable in a recession than an office or warehouse as there is always a retailer looking to expand, even in tough times. In contrast, businesses will do everything possible to avoid taking new office space in a recession. LaSalle cites the successful letting of former Woolworth stores in the UK as proof of the adaptability of retail property at a time when office and warehouse vacancies are rising sharply. Looking to 2010, investors should capitalise on the reversion to more sustainable pricing though deals acquired today will need to withstand declining rental values, says LaSalle. This can be achieved through having a long lease that secures cash flow through the downturn and/or because the property is so attractive to occupiers that it will weather the recession without this protection. Correctly identified opportunities (appropriate lease structures and tenant covenants) will be able to cope with the general decline in rental values over the next five years. However, according to LaSalle, there are stock shortages in some sectors and when occupational markets recover, rental growth could quickly follow. But it warns that without active asset management, rental income will decline, with secondary assets likely to bear the brunt of these falls. The UK IPD Index will continue to remain weak into 2010, principally due to falling rents, especially for secondary quality assets, before recovering sharply as prices become increasingly attractive relative to other asset classes. LaSalle says the debt markets remain highly restricted with lending limited to preferred long-term customers and trusted business models, and even then there are difficulties borrowing more than €50 million. Typical loan-to-value ratios on prime assets are now limited to 50% to 60% with no available financing for speculative developments. write your comments about the article :: © 2009 Construction News :: home page |