Report Says Global Investing Could Drop by 30 Percent This Year

MBA (7/11/2008 ) Sorohan, Mike
A report from DTZ, London, citing a “sea change” in the global investing environment, anticipates a drop in global investment transactions this year by as much as 30 percent.
DTZ’s annual Money Into Property report found that the value of the real estate capital market reached $12 trillion in 2007, up by 18 percent from the previous year. Global investment transactions also grew to $730 billion in 2007. But DTZ, noting a decline in global investing over the course of last year, expects a drop of as much as 30 percent in 2008 to about $500 billion.

The report said global direct real estate transactions were down by 50 percent in the first quarter, compared to the same period in 2007. In the U.K., transactions appeared to stabilize in the first quarter but were still down by 42 percent from first quarter 2007. DTZ said a “rapid correction in market pricing” has seen yields move out by 123 basis points since their trough in April 2007, with foreign-based investors, notably German funds, sovereign wealth funds and private equity from the Middle East and Asia Pacific, starting to show interest in the U.K. market.

However, DTZ warned that the “enduring disconnect” in buyer/seller price expectations that has left many deals on hold or deferred suggests yield correction still has further to go in the U.K. and Europe.

“Globally we expect investment transactions to be around $500 billion in 2008,” said Paul Sanderson, EMEA Research Director at DTZ. “This shift reflects weakness over the first half of 2008 and a relatively modest pick-up thereafter, which is likely to be driven principally by the Asia Pacific market.”

Sanderson said investment opportunities remain, especially in the indirect market, “and are likely to grow in the direct market as we approach ‘fair value’ in the U.S. and Europe, with equity-based investors in a particularly strong position to capitalize.”

DTZ said the U.S. subprime mortgage crisis has had some impact on investing. The report said it believes the worst of the crisis could be over, but that the credit crunch—a marked tightening in the pricing and availability of debt—has much further to go, and will continue well into 2009. A separate DTZ Lenders Survey found that 75 percent of respondents in the European market anticipate tightening lending terms and conditions, and 45 percent expect a reduction in typical loan-to-value ratios. Furthermore, the majority of respondents expect no significant recovery in the European CMBS market until 2009 at the earliest.

DTZ said 62 percent of respondents expect to increase funds allocated to real estate in 2008, with European and Asia Pacific investors significantly more positive than those based in the U.S. Overall, investors expect to increase funds allocated to global real estate by an average of 4 percent and Asia pacific investors expect to increase their allocation by 10 percent.

“With prospects for capital growth limited, investor focus has returned to occupier fundamentals,” said Robert Peto, DTZ’s UK & Ireland chairman. “In the U.K. and U.S., a ‘double dip’ in investment markets remains a risk given the vulnerability of occupier markets to a weak economic outlook.”