UNITED STATES - RREEF has predicted cap rates on the purchase of existing US properties will rise by 50 basis points by the end of 2007.
Details of a report published by the real estate asset manager last month - called Prospects for the US Economy and Real Estate Markets: The Return of Rick Aversion… At Last - predicts cap rates will rise another 25-50bp in 2008, largely as a result of the recent dislocation in the debt markets.
Alan Billingsley, a director in the research department at RREEF suggested an increase in cap rates would be a significant event.
"A couple of main reasons for this are that the low cost debt is no longer available and there is now some risk in the market, which has been the case for several years," said Billingsley.
From 2001 to mid-year 2007, cap rates have declined around 300 basis points to an average of around 6%, driving returns historic low levels for all the main property types.
That said, RREEF is expecting cap rates will rise more for properties in weaker markets and submarkets, while those in strong primary markets will experience less of an increase.
One particular property types that could be affected is apartments, according to Billingsley, as this sector of real estate faces more competition for tenants as more single-family homes and condos go on the market.
"The markets that would be affected the most would be those areas that allowed a great deal of building and had no growth restrictions, like Florida, Phoenix, San Diego and Orange County in California."
In contrast, stronger investment markets are likely to continue to be the two coasts, focused on the cities of New York, San Francisco, Los Angeles as well as the Pacific Northwest.
One of the fallouts of the recent debt markets dislocation has been on sellers who have been forced to pull properties off the market while they wait to see where pricing will settle.
It is anticipated this will make it more difficult to find properties over the next few months.