The road ahead

Updated on: Tuesday, January 12, 2010

While 2010 will be the year when global commercial real estate recovery begins, robust, broad-based growth is not expected until 2011. The global economy is moving towards recovery, thanks in large measure to government economic stimulus programs and loose monetary policies. Early estimates from IHS Global Insights forecast positive third-quarter growth in most G20 countries says a recent study by Jones Lang LaSalle’s Global Market Perspective that outlines the case for a global property market recovery - albeit an uneven one - that will begin in earnest in 2010 and expand in 2011. According to the study, real estate recovery in the year ahead will follow the specific rhythms of a given market, while occupiers and investors will try to strike a balance between challenges and opportunities. Markets where capital values have fallen beyond what economic and property fundamentals warrant are likely to lead the recovery.
The report says that the Asia Pacific region has emerged from recession, and its economic prospects continue to improve. According to Global Insight, a real GDP growth of five percent is expected in 2010, considerably stronger than in 2009, although still lagging the average growth of 2003-07 due to the region’s reliance on overseas demand. Overall leasing demand remains weak but is starting to improve as occupiers take advantage of major rent corrections. In most office markets, rents are starting to stabilise following typical falls of 40 to 60 percent from their peak. Leasing conditions will continue to be favourable to occupiers until at least mid-2010 in most markets, with supply-constrained markets likely to see the earliest turnaround in rents.
Investor sentiment is improving although overall investment activity is still significantly below the last two year levels. Although data suggests that capital values are generally likely to fall further in 2010, some markets have already bottomed and others will do so in early 2010. In a few markets in Asia, prices have already begun to rebound, largely driven by strong buying interests amongst local investors. Against that backdrop, however, governments around the region have signalled their intention to restrain the development of asset bubbles and this is expected to limit the extent of upward movement in values in 2010.
In many countries, cash-rich investors are beginning to move from the sidelines as the market floor in both pricing and transaction volumes draws near. Parts of Asia and Europe already are moving higher from pricing and activity lows. During the third quarter, initial yields in London, Shanghai, Hong Kong and Singapore fell by 25 to 90 basis points (bps). The United States remains the exception to this picture of slow improvement, as yields merely slowed their increase or stabilised.
In leasing markets, building supply is generally stable, but negative demand for real estate persists in many markets including the United States, the UK, most of Western Europe, Australia and Japan. Although the pace of decline is slowing in most global centres, leasing activity has not found a bottom in either pricing or demand. Jones Lang LaSalle forecasts a bottoming of leasing markets in the first half of next year in much of Asia and parts of Europe, and by the end of 2010 in many US markets.
In the Asia Pacific region where investors almost exclusively emphasised residential and retail sectors earlier this year, they have now broadened their horizons to include office buildings. And although forecasts about the impact of this change vary, it is generally agreed that as much as $50 to $100 billion of insurers’ money will ultimately make its way into commercial real estate.
As per the Global Market Perspective, as maturities mount, those with capital to pool will be able to buy distressed assets. While the floor is in sight, now is a good time to get those investment pools ready to acquire distressed developments. During 2010, companies will seek to capitalise on opportunities to purchase properties at attractive valuations and to reduce their occupancy costs. By mid-2010, this activity is likely to be a significant driver of a commercial real estate recovery.

The road ahead

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