Re-pricing is bottoming out, says LaSalle IM

Investor sentiment has stabilised and re-pricing has found a floor, according to a mid-year update from LaSalle Investment Management on the European commercial real estate market. There is also evidence that there is increasing competition, particularly from foreign buyers attracted by the weakness in sterling and the benefits of the UK lease, the report said.

LaSalle believes that occupational demand prospects look bleak across all commercial real estate sectors, but despite lower consumer expenditure, retail still provides the best investment prospects due to its defensive qualities. It says that good retail property is much more lettable in a recession than an office or warehouse as there is always a retailer looking to expand, even in tough times. LaSalle cites the successful letting of former Woolworth stores in the UK as proof of the adaptability of retail property at a time when office and warehouse vacancies are rising sharply.

According to LaSalle, there are stock shortages in some sectors and when occupational markets recover, rental growth could quickly follow. But it warns that without active asset management, rental income will decline, with secondary assets likely to bear the brunt of these falls.

The UK IPD Index will continue to remain weak into 2010, principally due to falling rents, especially for secondary quality assets, before recovering sharply as prices become increasingly attractive relative to other asset classes.

Report co-author Robin Goodchild, LaSalle Investment Management’s Head of European Research and Strategy, says: 'There have been great opportunities emerging in the UK to acquire good quality real estate at attractive prices, particularly from REITs. More of these opportunities are starting to appear in Continental Europe as banks begin to deal with non-performing loans and their REITs are increasingly squeezed by re-financing issues. In particular, cash rich investors who can react swiftly should benefit from the re-pricing. However, some of the best opportunities are likely to be in partnership with the banks because of their desire to avoid fire sales.'

Overseas players enticed to the UK market by the fall in sterling include the Canadian Pension Plan for whom LaSalle has purchased a number of prime retail assets.

LaSalle says the debt markets remain highly restricted with lending limited to preferred long-term customers and trusted business models, and even then there are difficulties borrowing more than €50 mln. Typical loan-to-value ratios on prime assets are now limited to 50% to 60% with no available financing for speculative developments.

The 2009 Mid-Year Update follows the publication in January of the 15th edition of LaSalle’s Investment Strategy Annual, a comprehensive survey of, and outlook for, the global real estate markets, which correctly called the market at that time and recommended a focus on retail rather than offices.