Events MIPIM 2008 March 11-14, 2008 Cannes, France www.mipim.com Islamic Funds Asia 2008 March 10-13, 2008 Kuala Lumpur www.terrapinn.com/2008/iiasia/ Real Estate Investment World China 2008 March 31-April 2, 2008 Shanghai www.terrapinn.com/2008/reiwcn/ The Wall Street Journal Real Estate Forum April 28, 2008 New York City

	1,900 employees 45 offices, 28 countries $59 billion in assets $78 billion served assets

 

Global Investment
Europe dominates investment activity

Europe became the world's most active real estate investment market in 2007, with $349 billion worth of commercial property changing hands. In 2007, the region accounted for nearly 40 percent of the world's transaction volume, which increased 29 percent to $930 billion, according to Cushman & Wakefield Inc.


Cross-border transactions - deals in which at least one buyer or seller is not from the country where the transaction is occurring - accounted for 63 percent of the deals, up slightly from 61 percent in 2006, according to Jones Lang LaSalle.

However, the U.S. capital markets woes and credit crunch had a dragging effect on Europe and the rest of the world. Global transaction volume slowed by 12.5 percent between the first and second halves, and Europe's commercial property markets were similarly affected.

While commercial real estate investment in Europe is expected to remain strong this year, commercial real estate investment activity on a global basis is expected to fall 17 percent to $770 billion this year, according to Cushman & Wakefield.

Investors have been warned that European cities with high exposure to financial services, such as London, Paris and Frankfurt, are at risk because of the liquidity crisis. An ongoing disruption in the capital markets could cause unemployment rates to grow, impacting the office, retail and housing sectors.

Eurozone growth for 2008, which had been forecast at 2 percent to 2.5 percent, has been revised and is now closer to 1 percent to 1.5 percent. But, weaker economic growth is not a reason for investors to panic. "If growth remains positive, I'm not going to worry too much about rents in the coming year," says Nick Tyrell, managing director and head of research and strategy for JP Morgan Asset Management's European Real Estate Group.

German property shines
Europe saw a 10 percent increase in investment activity last year, driven by a 36 percent increase from foreign buyers who now, on average, are the dominant players in the region with a 55 percent market share, according to Cushman & Wakefield.

Growth was strong across a range of markets both East and West, although Western Europe overall posted only a 15 percent increase. The United Kingdom property market - the largest in Europe and traditionally viewed as a separate entity to the wider European market - saw a 13 percent drop in investment as a result of the liquidity crisis, according to Cushman & Wakefield. Germany and France both posted gains of around 30 percent, and many more investors began targeting Central & Eastern Europe, where there was a 47 percent increase in activity.

"We're looking at a market repricing, which you must expect to see two or three times in 100 years," says Andrew Smith, deputy managing director of fund management for Goodman Property Investors, a London-based investment management firm. "We've been avoiding the UK for our international clients in anticipation of a repricing as it had reached relatively unsustainable levels."

However, the drop in the UK market is not expected to be permanent. "We're now taking a more positive view of the UK," Smith says. "What has happened in the UK is unlikely to spread to the rest of Europe as there are lower interest rates, less overstretching in the market and healthy fundamentals."

While the UK has been experiencing a lull in investor interest, Germany has become one of the top countries for property investment. In fact, investment in Luxembourg increased more than 250 percent, according to Cushman & Wakefield.

"Germany's relative attractiveness has increased significantly due to a unique combination of willing domestic sellers, underweight cross-border investors, positive yield spreads and a recovering economy," says Tony Horrell, CEO of Jones Lang LaSalle's International Capital Group.

Germany's most recent rise began in 2006, when it saw growth in transactions of 140 percent to $62 billion, which represented 20 percent of total European transactions. In 2007, roughly $80 billion of German real estate changed hands, and the country is expected to continue to attract property investors this year.

"Greater activity from German funds is also likely on a global scale and a growing dimension for cross border investment is likely to come from Asia," says John Gellatly, head of global funds for BlackRock Inc., a New York City-based investment management firm. "Not only can we expect to see more investment from China and India as they diversify and recycle the growing surpluses being created by their buoyant economies, but we may also see renewed Japanese buying, particularly if REIT regulations are relaxed to encourage off-shore investment."

However, Gellatly and other investors are keeping a close watch on the German capital markets. "There's some worry about the ability of German banks to provide debt financing for real estate, and financing to the German economy," he says.

While lower risk core markets with longer term growth potential, such as France and Germany, continue to attract investors, new emerging markets offering higher returns alongside higher risk are also generating a fair amount of investor interest. Specifically, Turkey, Russia and the Ukraine are positioned to see a marked increase in activity in the coming year. In 2007, for example, property investment activity in the Ukraine increased more than 150 percent.

Institutions drive market
Across Europe, debt-dependent investors are at a disadvantage, and lower leverage, high net worth investors have risen to the fore, especially those from outside of Europe. "A shift in buying power [favors] well-financed, long-term institutional players," says David Hutchings, Cushman & Wakefield's head of research for Europe, Middle East and Africa, adding that sovereign wealth funds look set to be particularly active in 2008 as they take advantage of a change in pricing.

Currently, global pension funds have about 7.5 percent of their portfolio allocated for real estate investment, with [euro]2.4 trillion invested in commercial property, according to JP Morgan's Tyrell. He notes that a 10 percent increase in real estate allocation would create an estimated [euro]800 billion of net investment still to come.

"Increasingly we are going to see real estate in portfolios," Tyrell says. "It has an income through rent and, unlike some assets, appreciates with time. I wouldn't be surprised to see it become as much as 25 percent of an institution's portfolio."

"Real estate was typically controlled by individuals, who tended to over-leverage and get caught out on the downturn, causing wild swings," points out Charles Krusen, a partner with Alpha Equity Management, a Hartford, Conn.-based investment management firm. "Now that institutions are involved, there will be less volatility - the asset category is maturing. There will be more use of real estate for individuals and institutions as part of their investment mix and there will be less of a home bias as it goes global."

Copyright 2008, Penton Media.. All rights reserved. This article is protected by United States copyright and other intellectual property laws and may not be reproduced, rewritten, distributed, re-disseminated, transmitted, displayed, published or broadcast, directly or indirectly, in any medium without the prior written permission of Penton Media.