Jones Lang LaSalle Hotels: Global Market Perspective - global real estate market overview
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Jones Lang LaSalle Hotels: Global Market Perspective - global real estate market overview
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Category: Worldwide - Industry economy
- Figures / Studies
This is a press release selected by our editorial committee and published online for free on 2010-02-26
Abundance of equity chasing limited prime product
The real estate capital markets continue to be buoyed by substantial equity capital; yet there is limited property available to purchase. The debt markets remain constrained, although they are starting to free up in some Asian countries. Many assets are still being held with banks, which are prepared to extend loans for better assets in more robust markets, rather than risk taking immediate write-downs. Banks will continue to delay putting assets on the market until there are clearer signs of recovery in real estate fundamentals.
Securitized lending is gradually returning to the United States market, with increased interest in multiple borrower pools, although volumes are likely to remain low. In Europe, existing bondholders continue to be nervous about the CMBS market, and a recovery in CMBS issuances in 2010 is likely to be even more muted than the tepid return in the United States.
Breathing life into a new securitized market
In the United States, investor confidence is improving, which was echoed by the positive sentiment at two major recent conferences, the Mortgage Bankers Association conference in Las Vegas and the Commercial Mortgage Securities Association conference in Washington, D.C. While bankers were self-reflective and keen on not repeating past mistakes, there was a strong focus on the changes needed to reignite the market. The key topics which dominated discussions were that lenders, led by life companies were back, but banks complained about the lack of quality in the deals they are seeing. While nearly every participant in both conferences felt that property fundamentals will remain under pressure through 2010, there was debate on whether this would feed through to property values already down 40% from their peak.
But perhaps the greatest and yet most uncertain topic of conversation related to how much the US government will be involved in the securitization markets. Nearly every participant wants to see securitization come back; however, without confidence on future regulation, lenders may be less aggressive in accumulating the loans needed to launch securitizations.
A modicum of securitized lending has however returned to the US market, and several securities firms (e.g. Goldman Sachs, Deutsche Bank, JP Morgan Chase) are looking to ramp up their CMBS operations in 2010. The over-subscription of several 2009 issuances, which were limited to single borrower deals, has led to an interest in multiple borrower pools.
According to Jones Lang LaSalle’s US Lenders’ Production Expectations Survey, 48 percent of respondents say they expect CMBS issuance to range from $0 to $10 billion in 2010, while 27 percent predict production of $10 to $20 billion and an additional 21 percent predict $20 to $30 billion. Even under the most optimistic scenarios, volumes are likely to be small and a far cry from the $230 billion in CMBS issuances at the top of the market.
It is clear that ‘a tale of two cities’ is emerging where there is intense competition and capital for the best deals but limited, if any, capital for everything else. Given the amount of maturities the US markets is facing over the next few years, it is apparent there will be a need for concrete solutions to address the second- and third-tier loans that are scheduled to mature. The regulatory and legislative changes currently being discussed will have a profound and long-ranging effect on the markets and, by extension, the capacity to refinance upcoming commercial real estate loan maturities. Therefore any governmental mandates must be well thought out and not politically driven.
US Market - CMBS Issurance
US Market CMBS Issurance
Source: Commercial Mortgage Alert, Jones Lang LaSalle
Asia Pacific leading recovery
In Asia Pacific investment activity seems relatively insulated from the issues being faced in the US Transactions volumes have been improving since Q3 2009, particularly amongst larger cross border investors. This increase is supported by evidence that the occupational markets are in the final stages of decline and in some cases are in early recovery. There is sufficient equity in the market, and Asian based banks in particular seem to have strong holding power to work through problem loans - hence we are seeing very little forced selling.
* In terms of buyer activity, we have seen increasing interest, if not activity, from a selection of private equity groups who are now keen to place the money that they raised in 2007 and 2008.
* Asian funds, particularly government backed funds – e.g. National Pension Fund of Korea, Government of Singapore, and the China Investment Corporation - are active and are seeking opportunities.
* Banks have started to sell in Japan, with 6-8 deals being recorded over the past couple of months, primarily to foreign funds.
* China investment market is active and dominated by domestic investors. However, there is concern that proposed regulatory changes to offshore transactions may limit foreign investment.
* Australia has not been unscathed by the financial crisis but has emerged in better shape than many other countries due partly to its solid economic performance and partly due to the timing of the crisis which interrupted what was a gathering momentum for construction in late 2008.
* Asia Pacific debt markets are starting to free up. For example, the refinancing of a large office building in Singapore was recently achieved at 185 basis points above the risk-free rate compared to a rate of 300-400 basis points only a year ago.
Pause and reflection in Europe
In Europe, after an exuberant Q4 2009, particularly in the UK, the market is witnessing a period of ‘pause and reflection’. This is in sharp contradiction to the significant build up in equity capital targeted at European real estate:
* Jones Lang LaSalle estimates that there is well in excess of £50 billion of equity capital chasing UK real estate alone. A number of ‘forced buyers’ - retail funds, institutions and high net worth individuals - who have committed to acquiring real estate have emerged, but are frustrated by a lack of supply.
* The focus of equity capital is on prime property, which is pushing up prices, although there is an increasingly elastic definition of ‘prime’. Jones Lang LaSalle estimates that approximately 40 percent of the capital will be prepared to consider off-prime assets given lack of prime product.
* Debt markets remain constrained, and much of the equity capital chasing real estate is likely to remain frustrated due to this limited availability of debt, combined with a lack of product.
* The three largest work-out sources in Europe are likely to come from the Lloyds Banking Group, Royal Bank of Scotland and Ireland’s NAMA. Over the next 18 months, an estimated €30 billion is likely to fall out of their loan books, most of which will be UK based.
* In the UK, we see some evidence of the reorganisation of the REIT landscape. Liberty International, for example, announced it is to demerge, dividing its £6.1billion portfolio into a shopping centre REIT and London properties business.
* The continental European debt markets are unlikely to be unravelled over the next 24 months; unravelling CMBS exposures is likely to prove complex and time consuming.
* The recent suspension of quantitative easing in the UK is beginning to push up bond yields. However, with the massive wall of equity capital seeking to be invested, we may find that property yields are temporarily decoupled from bonds.
Brazil and Mexico on investors' radar
Brazil continues to be the darling of investors, as one of the few countries outside the Asia Pacific region exhibiting strong economic growth (with most economists predicting 5 percent growth for 2010). Both domestic and foreign investors are striving to acquire Brazilian properties or invest in funds. Investment management companies such as Tishman Speyer, Vision and Prosperitas, among others, are undertaking foreign fund raising. However, less favourable lease structures are failing to attract German capital, and hurdle rates are high. Capitalization rates are 10.5 to 11.5 percent for Class AA offices, compared to local interest rates at 8.75 percent. A lack of high quality properties on the market may contribute to some compression in capitalization rates over the short term.
Although Mexico has been badly affected by the global recession (GDP was down nearly 7 percent in 2009), office absorption in Mexico City has held up relatively well, and a number of large leases have been signed in recent months (e.g. New York Life, GE, Danone, Monex) bringing gross leasing activity to 2 million square feet and net absorption to 1.2 million square feet. These numbers represent an 8 percent reduction from 2008 and about half from the all time highs in the market.
Because most real estate loans that financial institutions provided to commercial property investors on attractive assets had so much equity going in, even with post-crisis reduced valuation levels, lenders have not experienced major defaults in the country. Given the significant presence of Spanish banks in the Mexican banking system, there is a new question of how Spanish banking difficulties could affect speculative construction loans and financing of new projects.
Finally, Mexico is back on the radar of a number of foreign investors, and German funds are showing increasing interest. As capitalization rates in Mexico are showing a favourable premium over the declining capitalization rates for prime property in the United States and in Europe, investors have once again refocused in trying to find investment assets in Mexico that just a few months ago were not nearly as attractive.
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