The dearth of transactions that has daunted U.S. commercial real estate investors for 14 months has spread overseas, but observers suggest that measures to restore liquidity could help some markets to avoid the degree of paralysis that lingers in North America.
Transaction volume worldwide has contracted across property types and totaled $388 billion year-to-date through August, down 57% from the same period in 2007, according to New York-based researcher Real Capital Analytics. That pace is still slowing, with third-quarter sales expected to show an even steeper decline of 68% from the year-ago quarter.
“The credit crunch that has been impeding deal flow in the U.S. and Europe is now spreading throughout Asia and erupting into a full-blown financial crisis in the West,” researchers contend in the September/October issue of Global Capital Trends, published by New York-based researcher Real Capital Analytics.
But if the credit crunch is to blame for declining sales numbers, then recent measures taken by governments around the globe may help to slow the downward spiral of dwindling transactions by boosting liquidity. This month the United Kingdom announced it will invest £37 billion in its largest banks, while the United States agreed to infuse its own banking system with $250 billion and expanded government backing of deposits through the FDIC. The Bank of Japan took steps to bolster Japanese stocks and finances, and 27 states in the European Union agreed to work together in supporting their own banks.
Those coordinated responses should help increase liquidity, but investors remain cautious about declining economic indicators, according to Global Market Perspective, a report published Oct. 17 by real estate service provider Jones Lang LaSalle. Even in markets where property values experience declines, however, more readily available credit will increase the number of investors able to bid on properties as more property owners become distressed and are forced to sell.
“For every region of the world, it all hinges on whether debt capital comes available,” says Keven Lindemann, director of the real estate group at SNL Financial in Charlottesville, Va.
So far, most overseas markets have maintained transaction volume better than the U.S. Through August, year-to-date commercial real estate sales in the U.S. reached $105.5 billion, down 77% from the previous year and down 80% since the crisis began, Real Capital Analytics reported.
By contrast Europe, the Middle East and Africa collectively had $152.4 billion in commercial real estate sales this year through August, down 46% from a year earlier. The U.K.’s $37.6 billion in sales since the beginning of the year were down 55% from a year ago.
While it’s too early to show up in sales data, the fourth quarter may bring an increase in transaction volume in Europe and the U.K., says Earl Webb, CEO of Capital Markets at Chicago-based Jones Lang LaSalle. Based on conversations with brokers and investors in Europe, Webb says the gap between bids and asking prices in Europe is narrowing and more sales are occurring as some banks as investors liquidate real estate assets.
“Investors there who need liquidity tend to get it by selling assets into the market at market-clearing prices faster than they do here,” Webb says. “In the U.K. for example, property trades are already taking place at fairly considerable discounts over where pricing was a year ago.” Indeed, buyers in August could expect an average yield of 6.3% for office, industrial and retail properties in the region, up from 5.8% a year earlier, according to Real Capital Analytics.
The only major commercial real estate market to see a decline approaching the precipitous drop in volume experienced in the U.S. has been Australia/New Zealand, where sales of $6.7 billion year-to-date mark a 74% decline from the same period last year. As a whole, the Asia-Pacific region, including Australia and New Zealand, racked up $113.3 billion in commercial real estate sales this year through August, down only 18% from the year-ago period.
Asia retains liquidity
Asia’s transaction volume has plummeted since midyear and volume for sales in the region will be down 68% in the third quarter from a year ago, Real Capital Analytics estimates. Asia enjoyed a brief surge in acquisitions earlier this year when investors sought refuge in markets they hoped would escape the illiquidity crisis plaguing the West. Japan even posted a 19% gain with its year-to-date transaction volume of $28.9 billion through August, although that number masks a more recent decline that is expected to show up as a 41% drop in sales in third-quarter sales from a year ago.
Some investors clearly expect to see buying opportunities in Asia, and those acquisitions could usher in renewed transaction volume by establishing market prices, according to SNL Financial’s Lindemann. Merrill Lynch has formed a $2.65 billion investment fund to buy Asian real estate, for example, and LaSalle Investment Management has launched a $3 billion opportunity fund focused on the same region. “The idea is that there are going to be some distressed sellers out there,” he says.
Transaction volume in Asia is down in part because investors the world over have grown more cautious in reaction to this year’s bank failures and bailouts, according to Lee Menifee, director of global strategy at CB Richard Ellis Investors in Los Angeles. Less debt is available in the region than in previous years, too, because the largely U.S.-based lenders who provided mezzanine loans and other secondary leverage have ceased to offer new loans.
Yet there is good reason for investors to consider commercial real estate acquisitions in China, Japan and other major Asian markets, Menifee says. Japan’s domestic banks continue to offer mortgage financing at 65% loan-to-value ratios for core assets in that country. The base interest rate in Japan is an incredibly low 0.5%.
China has lowered its official lending rate by 80 basis points to an attractive 6.92% and could easily boost liquidity if needed by easing restrictions on the use of foreign capital in real estate acquisitions. In the larger Asian markets, at least, the sales slump may be more transient than it has been in the West. “Asia is certainly not immune from the credit crisis,” Menifee says, “but it’s relatively less impacted.”