The Leader - September/October 2008 - (Page 94) capIta l cor Ner Dr. paul sanderson, Dtz a Year into the credit crunch hoW Is the sQueeze affectING markets aND occupIers? According to latest estimates from DTZ (Money Into Property 2008), total capital invested in real estate globally continued to grow during last year to reach some $12 trillion, 18 percent up on 2006 and an astonishing 45 percent higher than three years ago. The rapid expansion of the real estate capital market in recent years has been in part testament to the increased sophistication and globalization of real estate as an investment class, with greater transparency and a widening range of access routes encouraging a growing and more diverse investor base. These developments are welcome and likely to be long lasting. However, the economic environment which prevailed over this period, characterized by buoyant economic growth and easy credit, has of course changed radically since the sub-prime crisis broke last August. A year into the credit crunch, where does this leave the real estate capital market and what does this mean for occupiers? In fact, globally the commercial real estate investment market had already peaked well before the sub-prime crisis broke, but the market’s cyclical downturn was greatly accelerated by the loss of confidence in international capital markets (particularly asset backed securities) which followed. The virtual closure of the commercial mortgage backed securities market (CMBS) hit the market hard, particularly in the U.S. and UK where this form of debt makes up a relatively large share of the capital market. But potential investors have also faced a more general tightening in the availability and pricing of debt. Banks’ capital and liquidity have been squeezed as a result of sub-prime related losses and tighter conditions in the wholesale funding markets, constraining their capacity to lend. At the same time, there has been a general re-rating of credit risk in the property sector in response to declining capital values and deteriorating economic conditions. Lenders are now focusing more intensely on property fundamentals and valuations, with few interested in financing the large $1 billion plus deals which were common last year. Globally, investment transactions were down some 50 percent in Q1 2008 compared to the same time last year and the investment market environment is going to remain challenging for some time. The major banks have sought to raise new capital, but credit conditions remain tight and both lenders and potential investors demand higher returns for bearing risk. At the same time, the economic slowdown outside the US appears to be gathering pace: in Europe the UK, Spain and Ireland are amongst those economies facing sharp housing-led downturns, but growing inflationary pressures have prevented the ECB and Bank of England from following the Fed’s lead in aggressively cutting interest rates. In Asia Pacific, conditions have remained relatively buoyant, prompting (probably ill-advised) talk of ‘decoupling’. But economic risks associated with the US downturn and accelerating inflation are growing. For real estate, coming months will see what has been an essentially investment-led downturn translate more fully into the occupier markets. The driver will be slowing economic growth, with retail sectors vulnerable in those markets where housing market downturns are likely to undermine consumer demand. In addition financial centres face particular problems given the impact on major financial firms’ of sub-prime losses and a sharp weakening in business volumes: take up in Central London, for example, was running nearly 20 percent down in the first half of 2008 compared with the previous year and, together with a relatively strong development pipeline, is expected to translate into a 20-25 percent fall in prime rents over the next two years. Survey evidence suggests underlying investment demand remains strong, but many deals remain on hold or deferred. 2 0 0 8 th e le aDe r 94 septemBer / octoBer
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