EUROPE - More than €50bn of equity is targeting European commercial real estate this year, according to the latest European capital markets research carried out by Jones Lang LaSalle (JLL).
Institutions, opportunity funds, international wealth entities, third-party money managers and some open and closed-ended German funds are looking for opportunities to enter the market, according to the JLL's capital markets outlook paper, ‘Time for Decisions'.
Nigel Roberts, chairman of European research at JLL, said: "Some markets like London, Paris and Madrid are well advanced in their market corrections and will no doubt attract increased investor interest if the fundamentals are judged to support the new price levels.
"Fair value estimates, likely yield ceiling indicators and asset specific pricing will become crucial decision tools in 2009 for investors timing their market entry, and judging price and value trade-offs."
As a result of market conditions, JLL expects to see more trading of properties that are rarely brought on to the market and says these are likely to reach premium prices.
According to Roberts, rental markets and tenant demand will be critical components of pricing and value assessments in 2009.
"The supply side of most markets is not expected to be a problem because the pipelines are generally not swollen with schemes which are committed or under construction," he said.
Roberts warned, however, that weaker demand in some markets could lead to subletting and higher vacancy rates.
Debt financing for real estate is expected to remain low in 2009, with high margins and low loan-to-value ratios.
Tony Horrell, head of European capital markets at JLL, said: "We fully expect it will take three to five years for banks to repair their balance sheets and they will only begin to address this problem in 2009. They will most likely be ultra-cautious and conservative in their handling of their outstanding real estate exposure and highly selective in their lending criteria."
Property values have dropped by 40% in some European markets since their peak in mid-2007 and are expected to fall further this year. In the fourth quarter of last year, some recorded yield decompression of over 200 basis points.
According to Horrell, the equity figure targeting European commercial property could be higher than €50m but Jones Lang LaSalle has allowed for situations by which some investors including pension funds may reverse pressure on the third-party money managers to lessen the level of investment.
‘Time for Decisions' is based on research from the firm's meetings and interactions with different real estate players across a wide range of markets and the research by over 100 employees across Europe.