Hong Kong and Macau, 5 August 2008 - Global commercial property transaction volumes in H1 2008 have fallen 41% from the record levels seen in H1 2007. At just USD 236 billion, investment volumes were almost back to H1 2005 levels. Despite the lower volumes, the trend toward the globalisation of real estate ownership was maintained with cross-border investment activity continuing to account for almost 45% of total transaction volumes. There were however regional variations with the share of cross-border activity rising from 25% to 30% in the Americas but falling from 46% to 34% in Asia Pacific and from 66% to 58% in Europe.
Stuart Crow, Head of Asia Capital Markets at Jones Lang LaSalle says: “The fall in volumes was driven by global credit conditions which made debt both less available and more expensive. As a result, many purchasers are unwilling or unable to transact at prices seen in 2007, while vendors are unwilling to reduce expectations. This has caused a stand-off between buyers and sellers, particularly for large lot sizes.”
The record transaction volumes in recent years were driven by the availability of relatively cheap debt. With the collapse of the global Commercial Mortgage Backed Securities (CMBS) market as well as a general increase in the cost of debt, highly leveraged investors have exited the market. At the same time, a sharply slowing global economy as well as falling values and expanding yields is causing investors of all types to be more cautious. While equity based investors are still active, they are selective. Many are waiting on the sidelines for pricing movement.
Looking to the year ahead, Mr Crow notes, “It may well take another year before debt markets stabilise and in the meantime we are likely to see increased distressed selling. High growth markets or core markets perceived as oversold are likely to attract the most attention from buyers. With high velocity of pricing change comes opportunity for buyers. The range of opportunity will increase for those able to commit equity in the next 12 months.”
Investors are also seeking out markets with lower transparency but solid growth fundamentals. These include Latin America, with particular focus on Brazil, Central and Eastern Europe, and markets in Asia Pacific such as Vietnam. Jones Lang LaSalle expects investment volumes in 2008 to be at least 35% down on 2007 with risk on the downside, bearing in mind that the market was already showing weakness in H2 2007.
H1 2008 Regional Highlights
Asia Pacific remained robust in H1 2008 with investment volumes almost unchanged at USD 55 billion (down 0.3% on H1 2007). However, in local currency terms, volumes were down by 9%. Overall activity was supported by domestic investors as cross-border investment declined by 25% in H1 08. At USD 19bn, cross-border activity accounted for 34% of total activity (down from 46% in H1 07).
South East Asia witnessed the strongest investment volumes across the region with its strong growth profile continuing to draw investors. Singapore in particular saw a significant rise in investment with total volumes reaching USD 4.8bn (up 20% from a year ago). In China and Japan, investment volumes grew in USD terms, up 3% and 8% respectively in H1. However, holding exchange rates unchanged between H1 07 and H1 08, both markets fell by about 5% with both deal size and the number of deals down under the impact of the credit crunch. In Australia, similar to the core European and US markets, rising borrowing costs led to an investor/ vendor disconnect. As a result, volumes in H1 2008 were down 52% in USD terms and 57% in local currency.
During the first half of 2008, transaction volumes in the Americas dropped 56% from a year earlier to approximately USD 75 billion. Cross-border investment was also down significantly, falling by 47% to USD 23 billion. However, as a proportion of total activity, cross-border investment increased from 25% to 30%.
Declines in volumes in the region were led by the U.S., which experienced a steep 61% fall from H1 2007 to roughly USD 64 billion. The most impacted types of transactions have been large portfolios and M&A activity, which really supercharged the U.S. market between 2005 and 2007. These deals have dried-up to the point of becoming practically non-existent during 2008. In Latin America, transaction volumes were also down in the first half. However, poor product availability was the main factor in falling activity as opposed to the credit crunch or economic concerns. Canada unexpectedly defied the overall trend of early 2008 with volumes rising by over 50% in H1 2008. Canada has thus far remained relatively immune to the credit squeeze due to its traditionally conservative banking and financial sectors.
The effects of the credit crunch have also bitten into Europe’s commercial real estate market with transaction volumes totalling USD 106bn in H1 2008; this represents a 38% fall in USD terms compared to H1 2007, and an even greater fall in Euros (44%). Cross-border investment declined by 46% to USD 61 billion, but continued to account for almost 60% of total activity.
Activity in Europe’s largest markets of the UK, Germany and France totalled just USD 53 billion in the first half of the year, a fall of over 50% on the same period a year ago. Some of Europe’s second tier markets, in contrast, proved more resilient. For example, Belgium, Finland, the Netherlands, and Spain all registered increases in dollar terms (although volumes were slightly down in Euros). These markets were supported by a number of significant portfolio and corporate deals, notably in the first quarter. Similarly investment volumes in Central and Eastern Europe remained resilient, supported by the continued strength of the Russian market and growing activity in Romania.