Professionals dismiss fears of property sector meltdown

Real estate organisations have dismissed fears that the sector in Europe is heading for a crash amid the continuing turmoil on the financial markets. The Royal Institution of Chartered Surveyors (RICS) remains upbeat on the situation in the UK, suggesting that positive rental growth will prevent a 'hard landing' for the commercial property market there. The organisation said in its Commercial Property Forecast 2007/2008 that it expects commercial property to provide an 8% return over the course of 2007 as general economic strength and increasing capacity constraints fuel the real estate sector.

Returns will slow to 5% next year, RICS said, but 'investor returns will remain in positive territory held up by advancing rents. The office sector will continue to see the greatest rental advance peaking between 8-9% although a return to the 20%- plus performance of the late 1980s is not expected.'

RICS senior economist Oliver Gilmartin added: 'Despite the much-trumpeted rise in nominal bond yields during 2007, support for commercial property into 2008 will come from strong economic growth and rising commercial property rents. Stock market volatility during May 2006 and the first half of 2007 highlights the need for diversification within portfolios, with the insatiable appetite from retail investors unlikely to dry up into 2008.'

'The evolution of the market with the growth of property derivatives and REITs will allow commercial property to firmly assert itself as a core asset alongside bonds and equities in the years ahead.'

UK property major British Land has warned that the credit crush may be spilling over into the commercial property sector, with players dependent on high leverage hit the hardest. ‘More difficult credit conditions are likely to lead to fewer new buildings being put up because some people will find it harder to raise the money and be more nervous about finding tenants,' ceo Stephen Hester said. But the situation, he said, could work in his company's favour as it has a secure supply of debt funding and high occupancy rates.

Meanwhile, Neil Lawson-May, the joint head of real estate investment at lender Eurohypo, told Reuters that while some highly leveraged investors in Europe may face difficulties over refinancing, the real estate debt market is not heading towards a meltdown and the fundamentals of the real estate sector are still strong . 'There's lots more rollercoaster to come from all of this, but not necessarily directly impacting our real estate markets,' he said. 'This doesn’t feel like the last property crash (in the early 1990s) when we had overbuilding, and we're probably very near or at the peak in interest rates.'