In the wake of the global credit crisis, investment in European commercial real estate dropped 13% last year, according to Jones Lang LaSalle. The property advisor's latest report estimated the final total for 2007 would be about EUR 220 bn as the slump generated by the turmoil in the financial markets curbed spending on European real estate to EUR 100 bn in the second half of 2007, 25% down on the same period a year earlier. This followed a strong first half when EUR 121 bn was transacted.
In the wake of the global credit crisis, investment in European commercial real estate dropped 13% last year, according to Jones Lang LaSalle. The property advisor's latest report estimated the final total for 2007 would be about EUR 220 bn as the slump generated by the turmoil in the financial markets curbed spending on European real estate to EUR 100 bn in the second half of 2007, 25% down on the same period a year earlier. This followed a strong first half when EUR 121 bn was transacted.
Tony Horrell, CEO of European Capital Markets at Jones Lang LaSalle, said he believes that the price correction that started in the latter half of 2007 will continue through the first half of 2008, with a new market consensus on 'fair value' to be achieved by mid-year.
While Horrell expects total transaction volumes for 2008 will be around 20% lower than the estimated levels for 2007, he believes that the economic backdrop will be strong enough to generate positive demand side conditions in Europe's occupier markets. 'The sub-prime market induced credit crunch of early August came at a time when commercial real estate markets were riding high. That said, background concerns about the diminishing risk premia for all property types and the sustainability of yields at record lows were evident.'
The JLL report indicated that by early September clear signs were emerging that the sustained upswing was coming to an end, marking a turning point in Europe's real estate capital markets. Outward yield movements and negative capital growth ensued. This was most pronounced in the UK, but also evident across a number of continental European markets. The credit crunch set off a chain reaction, with deals already in process being renegotiated in light of tighter debt terms, transaction processes becoming longer, and some deals being re-priced or collapsing.
'The key issue going forward is the health of the overall financial markets and the availability of debt; at the moment there is a discord between the financial and the real estate markets. Real estate fundamentals remain healthy and we think that the economic backdrop in 2008 will be strong enough to generate positive demand in Europe’s occupier markets. So it really is a case of waiting to see how quickly lenders will come back into the market. Although the equity players, such as sovereign funds and institutions, are still looking to buy real estate, once some of the debt-backed investors come back into the market we should see a greater momentum of activity.'
