REITs and banks likely to be forced sellers this year, says JLL

In what may be an early indication that property markets are close to resolving pricing uncertainty, some stressed and distressed owners are being finally forced into the market, Jones Lang LaSalle has said in its latest Global Market Perspective research report.

According to the broker, real estate investment trusts could be forced sellers in the coming months as they seek to raise capital following a considerable reduction of their market capitalisations over the past 18 months.

Banks, too, are likely to be sellers, given their large real estate holdings and the need to deleverage their balance sheets. The broker pointed out that banks such as RBS and Lloyd's Banking Group hold commercial mortgage debt that roughly equates to the year-end market capitalisation of the world's eight largest REITs combined. The sheer scale of these holdings at government-aided banks in both Europe and the US dictates that a return of liquidity in global property markets recovery remains largely in government hands.

While credit conditions are showing some improvements, commercial real estate lending largely is not. Although banks have received massive government aid, their commercial real estate lending remains frozen amid uncertainty about nationalisation and capital preservation for further loan losses. Banks are still absorbing government credit infusions rather than making significant new loans.

France and the UK are not forecast to return to positive growth until the first quarter of 2010, and Germany is not expected to recover until the second quarter of 2010, according to the latest report issued by Jones Lang LaSalle. The UK, one of the first and hardest hit global property markets, may be the first to recover, given than it started to correct in 2007 while other markets remained in denial. It is attracting increased interest, particularly from investors in the Middle East, Continental Europe and Japan. All are interested in purchasing direct real estate assets at cap rates up from the mid 4% to mid 7%.

In addition, the UK offers investors some of the best niche opportunities worldwide to purchase strong cash flows with low levels of leverage, the broker said. The weakness of the sterling is adding to the market's attractiveness for foreign investors. A trend indicated in recent London commercial property trades shows 8% to 9% yields. Internal rates of return range from the mid-to-upper teens. This may signal that broader investor interest is to come as sellers set realistic, market clearing prices.