Professional Documents
Culture Documents
For further information or to speak to a member of our specialized International Capital Group
please contact:
1.4
5.5
0.5
2.1
3.7
4.5 8.5
1.6 7.9
Global
1.5 3.6
Asia Pacific 0.5
0.3
1.5 0.4
Americas 0.0
1.8
Europe 0.4
7.5 7.0
0.4
0.1
Note:
1 Direction of arrows indicates flow of capital (e.g. Americas investors made purchases in Europe amounting to USD 5.5 billion, and USD 1.4 billion of sales).
2 Capital flows from Middle East include GCC and Israeli investments.
3 ‘Global Sources of Funds’ raise significant capital from multiple regions, i.e. source of capital is not identifiable to a single country or region.
Source: Jones Lang LaSalle; Property Data (UK); Akershus Eiendom (Norway); Athens Economics (Greece); Wuest and Partners (Switzerland); Real Capital Analytics (USA)
Global Real Estate Capital, H1 2008
Executive Summary
The global credit crunch has had a dramatic The markets proving to be of most interest to
impact on commercial property transaction purchasers are those where significant re-pricing has
volumes. In H1 2008 global direct real estate occurred such as London as well as the more opaque
investment1 fell 42% from the record levels seen emerging markets with strong growth profiles.
in H1 2007. At just USD 233 billion, investment
volumes were almost back to H1 2005 levels. Key Points:
● The globalisation of real estate remains a
The key factor behind the fall in global transaction key trend. Despite the overall reduction in
volumes in 2008 has been the credit crunch. Debt transaction volumes, cross-border investment
financing for real estate transactions has become both activity continued to account for almost 45%
more expensive and less available. As a result, many of total transaction volumes in H1 2008,
purchasers are unwilling or unable to transact at prices compared to 46% in H1 2007.
seen in 2007, while vendors are reluctant to reduce ● Inter-regional investment activity also
expectations. This has caused a stand-off between remained relatively stable, the proportion of
buyers and sellers, particularly for large lot sizes. total transaction volumes slipping marginally to
28% from 30% in H1 2007.
While the crunch has been global, the American ● During the first half of 2008, transaction
and Western European markets have been hit volumes in the Americas fell 56% from a year
harder than most. While initially avoiding the earlier to approximately USD 75 billion.
slowdown, the investment environment in Asia ● Transaction volumes in Europe totalled
has also suffered, though mainly in the higher USD 106 billion in H1 2008. This represents a
geared, more mature markets. 38% fall in USD terms compared to H1 2007,
and an even greater fall in Euros (44%).
With the global economy expected to continue to ● Asia Pacific remained robust in H1 2008
weaken over the remainder of 2008 and throughout with investment volumes at USD 52 billion,
2009, capital values are likely to remain under only marginally down on H1 2007 ( 5% in
pressure, although volumes should begin to USD terms). However, at constant exchange
increase again. This is likely to be a result of more rates volumes were down by 12%.
distressed selling rather than a demand bounce. ● While in 2008 transaction volumes have
Purchases will predominantly be equity driven, with generally been lower around the world,
an increasing number of opportunity funds being corporate sales have proved to be an exception.
launched. While debt is available for smaller higher Increased debt costs and generally slower
quality deals, demand-led transaction volumes are economic activity resulted in many corporations
likely to remain relatively low until the securitisation around the world looking to reduce gearing by
market is up and running strongly again. the sale and leaseback of property.
● Global Sources of Funds remain the main
Fig 1: Global Transaction Levels by Sector inter-regional investors, with Middle Eastern
and German based funds also very active
10% inter-regionally.
● Hotels was the sector hardest hit by the
12% Office
1
Entity-level transactions, development projects and multi-family
residential investment are excluded from our data.
2
We convert transaction values into USD at the average daily
Source: Jones Lang LaSalle rate for the quarter in which the transaction occurred.
Global Real Estate Capital, H1 2008
Table 1: Global Direct Commercial Real Estate Market at a Glance In H1 2008 global
H1 2008 H1 2007 transaction volumes
Total Transactions (USD bn) $233bn $398bn fell 42% from the
Cross-Border (USD bn, %)3 $104bn (45%) $181bn (46%)
record levels seen in
H1 2007
Inter-Regional (USD bn, %)4 $65bn (28%) $120bn (30%)
3
Cross-border investment is where purchaser, vendor or both originate from outside the country where the asset is located.
4
Cross-border investment is classified as ‘intra-regional’ investment (both purchaser and vendor originate from the region where the asset is
located) and ‘inter-regional’ investment (purchaser, vendor or both originate from outside the region where the asset is located).
5
‘Global Sources of Funds’ raise significant capital from multiple regions, i.e. source of capital is not identifiable to a single country or region.
Source: Jones Lang LaSalle
$393bn
400 $354bn
80 $75bn
300
$233bn $55bn $52bn
200 Cross-
Border 40
Investment
100
0 0
2003 2004 2005 2006 2007 H1 2008 H1 Americas H1 Americas H1 Europe H1 Europe H1 Asia H1 Asia
07 08 07 08 Pacific 07 Pacific 08
Domestic Intra-Regional Inter-Regional Domestic Intra-Regional Inter-Regional
Note: Additional sources to the data include Property Data (UK); Akershus Eiendom (Norway); Athens Economics (Greece); Wuestand Partners (Switzerland); Real Capital Analytics (USA)
Global Real Estate Capital, H1 2008
Key Trends
Reduced debt Debt
availability over the Summary What happened?
next few years will The key factor behind the fall in global As the US sub-prime mortgage crisis escalated
restrict transaction size transaction volumes in 2008 has been the in 2007, global debt markets contracted.
credit crunch. Debt financing for real estate Following significant growth between 2000 and
and volumes
transactions has become more expensive and 2006, CMBS issuance has ground to a halt as
significantly more restricted. The commercial investors have become increasingly concerned
mortgage backed securities (CMBS) market with, among other things, the underwriting
has quickly become virtually insignificant. quality of commercial mortgages. Balance
Spreads have surged and much stricter terms sheet lenders have also found it extremely
including significantly lower loan to value difficult to distribute or syndicate their
ratios (LTVs) are being required by all exposure and have seen their sources of
categories of lenders. As a result, many of the funding become scarce due to market
most active buyers over the past few years uncertainty. As a result, lenders in many
have been sidelined or indeed, to reduce markets have been left holding sizeable
gearing, become sellers. While debt is still portfolios of commercial loans and are unable
available for select transactions, it appears or unwilling to make new loans, causing a
unlikely to return to pre-crunch levels within severe lack of liquidity in the marketplace. This
the next few years and this will restrict the has resulted in a dramatic increase in lending
volume of real estate transactions. margins and a reduction in leverage.
Office Market LTV 10-Year Bond Rates 5-Year Swap Rates March 08 Dec 07
(as at 31 Aug) (as at 31 Aug) 5 Year Swap Rates 5 Year Swap Rates
A vicious cycle has emerged where the lack of How long will it last?
available funding has contributed to a decline The prospects for the debt financing market
in real estate pricing across the globe with the remain unclear. While debt is available, the cost
US and Western Europe suffering the most. is higher and it remains focused on smaller,
This has also impacted conduit lenders, who high quality deals. CMBS spreads, at the time of
are having difficulties in selling down existing writing, remain elevated as sub-prime mortgage
loans from their balance sheet. More recently, issues continue to plague the market.
and with mixed success, some of the biggest Nevertheless, the right transaction can still draw
financial institutions have accessed or planned significant lender interest. Jones Lang LaSalle’s
to access the equity markets to help Real Estate Investment Banking division in the
strengthen their balance sheets. US recently reported that while the number of
lenders in the market is certainly smaller than it
Asia has not been immune was when securitization markets were booming
Despite Asia having less direct exposure to the in early 2007, there is still interest, particularly
crisis due to the limited development of amongst insurance companies and foreign
securitized financing, credit conditions banks, for senior and mezzanine debt. On
continue to tighten and project finance LTVs quality assets there is still interest for up to 60%
have fallen across all major markets. leverage, and for some players leverage can
approach 70% (including mezzanine funding).
Over the past 10 years, LTVs across the major Given the level of both LIBOR and Treasuries,
markets in Asia were between 70% and 90%. this represents attractive pricing for a borrower,
Since the sub-prime mortgage crisis and the and reinforces the message that there is lender
global financial market turbulence, the banks’ appetite for cash-flowing assets with strong
reluctance to lend has brought about a sponsorship in good locations.
substantially smaller and more narrowly-
focused lending market. The LTVs are now in However, debt financing is likely to remain
the maximum range of 50–60%. Leveraged more costly than previously and subject to
buyers, which accounted for much of the stringent conditions. This will keep financing
growth in global real estate capital flows in volumes below pre credit crunch levels until
2007, have been squeezed out by rising the backlog of troublesome commercial loan
financing costs and reduced debt availability. backed liabilities has cleared and lenders have
stronger balance sheets. Even then, lender
risk appetite will remain subdued as memories
of the sub-prime crash linger. Consequently,
global real estate transaction volumes are
likely to remain under pressure throughout
2008 and 2009.
Global Real Estate Capital, H1 2008
Who’s Buying
As a result of the credit crunch, purchasers of Figure 5 shows that US investors remain the
direct property tended to be mainly equity main purchasers of commercial real estate,
funded. Unlisted funds continued to dominate though UK based funds have pushed global
the market, while listed property investors funds to third place. Global funds, however,
were less active (see Figure 4). Of the listed remain the main inter-regional investors, with
REITs who purchased property, many were Middle Eastern and German based funds also
Japanese or American, although the Japanese very active outside their home region (Figure 6).
mainly purchased in their domestic market,
while over 60% of the US REITs’ purchases German open-ended funds have re-emerged
were cross-border. as major purchasers of international property
over the last few years. German ‘open-ended’
funds are unlisted investment vehicles that can
Fig 4: Investor Type H1 2008 and H1 2007
continue to grow their assets by taking on new
2% 2% 2% 0% equity capital through the issue of unit
certificates to individual investors via the retail
3%
7%
9% banking network. They have become popular
7% as they are seen as offering diversification
10% from equity markets and higher yields than
39%
11% 45% bonds. Daily redemption is an additional
advantage. German closed-ended funds differ
13%
in that no further units can be issued after the
16%
initial placement and are typically sold to HNW
16% 18% investors at higher minimum subscriptions.
Increased cross-border investment by open-
ended funds followed the introduction of a new
Purchaser Type H1 2008 Purchaser Type H1 2007
German law, the Fourth Financial Market
Unlisted Listed Private Hotel Owner/Operator Promotion Act in 2002, which allowed more
Other Institution Corporate Government flexibility for international investment. Most
Source: Jones Lang LaSalle
German cross-border purchases in H1 2008
were made within Europe, where they
amounted to just under USD 8 billion.
Fig 5: Global Direct Commercial Real Estate Transactions: Investor Type
However, over USD 4 billion of real estate was
USA purchased inter-regionally, with Japan being
UK
the major destination. Prominent German
cross-border investors in H1 2008 included
Global
Deka Immobilien, DEGI and Commerz Real.
Japan
Germany
The following section analyses in more detail
Netherlands
the growing prominence of Middle Eastern
France investors in global real estate markets.
Canada
USD bn
Sweden
0 20 40 60 80 100 120 140 160 180
H1 2007 H1 2008
Global Real Estate Capital, H1 2008
6
Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates (UAE)
Spain Grupo Prisa Miguel Yuste 40, Gran Via 32 Office 469 million
South Korea Kangho AMC Co. Millennium Seoul Hilton Hotel 456 million
Japan Japan Airlines International Haneda Airport Maintenance Center 1, 2 Industrial 401 million
Results from Jones Lang LaSalle Hotels’ Whilst buyer appetite remains strong, buyers are There is limited
Hotel Investor Sentiment Survey (HISS) still waiting for significant falls in prices which have pressure for sellers to
July 2008 research indicate that globally buyers yet to materialise. At the same time, there is divest while hotel
outnumber sellers 4:1. The same survey also limited pressure for sellers to divest as long as trading remains healthy
suggests that capitalization rate (initial yield) hotel trading performance (occupancy and ADR)
requirements for hotel transactions have also remains healthy. This position is, however, likely to
moved out, albeit on a moderate basis, change over the short to medium term, and factors
reflecting the perception that risk in the hotel that may speed up this process include upcoming
investment market has on the whole increased refinancing considerations for existing owners as
due to the continued uncertainty of the financial well as any deterioration in hotel trading markets
markets and reduced availability of debt. and in the greater economic environment.
Table 4: Cap Rate (Initial Yield) Requirements for Fig 9: Global Hotel Transactions Market – Source of Investment by Region
New Acquisitions
100%
Dec-07 Jul-08 Difference 90%
80%
Americas 7.9% 8.6% 0.7% 70%
60%
EMEA 6.9% 7.4% 0.5% 50%
40%
Asia Pacific 8.5% 8.2% -0.3% 30%
20%
Global 7.8% 8.1% 0.3% 10%
0%
AP AM Europe Middle East Global
Weighted by number of responses Domestic Intra-Regional Inter-Regional
Source: Jones Lang LaSalle Hotels’ HISS
USA Fountainbleau Miami Beach Resort (50% stake) $375m N/A Nakheel Hotels (UAE)
USA Hyatt Regency Century Plaza $367m $504,800 Next Century Associates and D. E. Shaw group JV
S. Korea Millennium Seoul Hilton Korea $563m $821,300 Kangho AMC Co. (Korea)
Multiple Northern European Properties portfolio (39 hotels) $1.2bn N/A CapMan (Finland)
UK Thistle Portfolio (2 hotels) $637m $998,500 Abu Dhabi Royal Family (UAE)a
The Americas
During the first half of 2008, transaction volumes in
the Americas fell 56% from a year earlier to
approximately USD 75 billion. The global credit crisis
began in the US with the sub-prime mortgage
meltdown, so it is not surprising that this market has
suffered more than most, experiencing a steep 61%
fall from H1 2007 to roughly USD 64 billion. The
transactions most impacted have been large
portfolios and M&A activity, both of which helped
supercharge the US market between 2005 and
2007. These deals have become practically non-
existent during 2008. In Latin America, transaction
volumes were also down in the first half. However,
poor product availability, rather than the credit crunch
or economic concerns, was the main factor behind
falling activity. Canada unexpectedly defied the
overall trend of early 2008 with volumes rising by
over 50%. Canada has thus far remained relatively
immune to the credit squeeze due to its traditionally
conservative banking and financial sectors.
Table 6: Americas Direct Commercial Real Estate Market at a Glance With debt scarce and expensive, those buyers that
were active were generally equity funded and
H1 2008 H1 2007
included US pension funds as well as private
Total Transactions (USD bn) $75bn $172bn
capital from US high net worth individual tax
Cross-Border (USD bn, %) $23bn (30%) $43bn (25%) deferral funds. Inter-regional interest came from
Inter-Regional (USD bn, %) $22bn (29%) $38bn (22%) global investment funds as well as Spanish,
Major Markets (% of Americas transactions by value): German and Middle Eastern funds.
New York City $8bn (11%) New York City $26bn (15%)
While the bulk of sales came from local Fig 10: Direct Commercial Real EstateTransactions – Americas
US Miami
Middle Eastern investors remained active, Fig 12: Americas Transaction Levels by Sector
purchasing around USD 1 billion of assets in
the first half of 2008. Spanish investors were
13%
active as well. The Ferrado Group purchased a
portfolio of hotels worth USD 262 million while
Ponte Gadea purchased two properties (office
20% 48%
and retail) for a combined total of
USD 520 million. German funds continued to
be active, purchasing USD 536 million worth
of property. 19%
Canada Outlook
Like overall transaction volumes, Canadian Volumes and pricing to remain weak
cross-border volumes increased in H1 2008 Overall transaction activity is likely to remain
relative to H1 2007, reaching USD 1.8 billion relatively soft until the CMBS market recovers and
(up from USD 1.3 billion). Germany was the credit spreads narrow. This will keep transaction
main source of cross-border capital, with size and volumes down into 2009. However, it is
private German buyers making two significant likely the number of sales will increase as
purchases of office property in Montreal: refinancing from maturing debt profiles prompts an
Cité du Commerce Electronique Phase 1, and increase in distressed asset sales. While the US
Phase 1 Bell Canada for a total of economy is proving surprisingly resilient to the
USD 467 million. Other notable cross-border sub-prime mortgage crisis and credit crunch,
deals included ING’s purchase of an industrial economic growth is slowing in most markets in the
portfolio and LaSalle Investment Americas, though perhaps not as much as some
Management’s purchase of an office portfolio had predicted. The slowdown will continue to
in Calgary. impact occupier markets and, when combined with
an increase in distressed asset sales, will keep
Brazil and Mexico upward pressure on yields.
Cross-border activity in Brazil in H1 2008
included two major deals: the purchase of an Yields have now risen for the last 3 quarters.
office property in Rio de Janeiro by an However, price discovery is proving to be a
investment fund from the United Arab Emirates particularly difficult exercise for investors as
for USD 243 million and that of an office transaction activity, especially among larger-sized
property in Sao Paulo by a private Spanish assets, has slowed dramatically. Anecdotal
investor for USD 642 million. evidence points to an average increase of
70–100bps since the 3rd quarter of 2007. There is
US investors were the largest cross-border likely to have been an even greater shift in yields
purchasers of Mexican real estate in H1 2008. in secondary cities or markets that have weak
Notable transactions included American fundamentals, while pricing has remained more
Investment Fund’s purchase of an office resilient for core assets in top-tier CBDs. With
property in Mexico City for USD 230 million and economic weakness expected to continue through
the acquisition of the Meta-Helfon Industrial 2009, the upward pressure on yields will remain.
Portfolio for USD 90 million by the listed
REIT Prologis. German investment funds also The limited number of transactions in 2008 may
acquired three office properties for have slowed the pace of the pricing correction.
USD 123 million. Major offshore sellers of Many vendors are preferring to withdraw their
Mexican assets included Spanish and US firms assets from sale rather than accept market
BBVA Bancomer and Xerox which both sold prices. However, the stalemate will not last
office properties. indefinitely as an increasing number of sellers
have maturing debt profiles which will increase
their need to reduce gearing levels. This should
provide the catalyst for transaction activity
levels necessary for triggering robust price
discovery and establishing new equilibrium
levels. This will likely not occur, however, until
some point in 2009 at the earliest.
Global Real Estate Capital, H1 2008 17
On the buy side, a great deal of equity Other areas of the real estate capital markets
targeting real estate is accumulating on the that should remain active are certain alternative
sidelines. Debt availability is also increasing property types, especially those related to the
and, while it remains more restricted and more recession-resistant healthcare and
expensive than pre credit crunch, it is available education industries, including medical office
for smaller, quality assets. There are also buildings, senior and student housing.
signs that the least risky segment of the CMBS
market is beginning to mount a re-emergence. Interest is also rising in Latin American
Nevertheless, as the conduit lending market markets. The markets are generally
remains just a fraction of its former size, the underdeveloped and often very opaque,
overall amount of capital targeting real estate although they are expected to benefit from the
will remain much lower than it was during the region’s relative economic strength. Barriers to
boom of 2005–2007. entry are high and risks are greater than in the
more developed markets. This is leading a
While volumes are expected to pick up with number of investors to explore joint ventures
increased distressed selling, demand-led with local partners.
pricing trends over the next 12 to 24 months
are dependent on the pace of economic Reflecting the current global trend, there is
recovery. Should the economic outlook darken increased interest from multinational
and real estate fundamentals unravel, the corporations to do sale and leaseback deals
recovery in the capital markets would likely on their office facilities, for example the sale
stall. However, the US economy is proving and leaseback of General Motors headquarters
surprisingly resilient and if the economic in Mexico City.
scenario plays out to be at worst a short and
shallow recession as generally forecast, Yields in Latin America are also expected to
liquidity and pricing clarity will return to the come under pressure. Over the past 10 years,
market. As this occurs, market fundamentals ‘going-in’ yields have undergone significant
and property-specific cash flows will once compression (from 15% to 7.5%). However,
again emerge as the primary drivers of real this trend seems to be changing and new
estate capital markets activity. transactions might show a moderate rebound.
The main reason for this change is competition
Cash-rich buyers, including institutional and from the US where some investment
foreign buyers, are expected to increase their opportunities are offering returns close to
market share among all purchasers. Following those of the most recent deals in Mexico.
recent trends, foreign investors are likely to
continue to target the 1st tier US cities, while local
investors are searching for value in the smaller
US markets. On the sell-side, one segment of
owners that will likely increase are the corporate
occupiers. Many corporations see the current
time as ideal to monetize their real estate assets
and put that capital to other, more core business-
focused uses. Sale and leasebacks are one type
of corporate sale that will likely play an
increasingly prominent role in coming quarters.
18 Global Real Estate Capital, H1 2008
Spots to Watch policy has been enhanced by the The retail sector offers good exposure
Brazil: benefiting from the introduction of an inflation target of 4.5% to Brazil’s strong economic and per
commodities boom and a floating exchange rate in the late capita income growth. As a result
Blessed with abundant natural 1990’s. A privatisation process by the shopping centre development has
resources, Brazil has been a major Government in the 1990’s has boomed. Berg Marketing and Research
beneficiary of the commodity boom encouraged foreign investment in a range estimates that since 2000, the number
which has driven strong economic of transport, energy and of shopping centres in Brazil has grown
growth. While the current global telecommunications companies. by over 35%. Reflecting the market’s
slowdown presents some risks to the strong fundamentals, yields on
economy, the country is well placed to The country is on a resilient growth shopping centres in Brazil are much
experience relatively strong growth over path supported by commodity-driven lower than other sectors averaging
the long-term. This long-term potential current account surpluses and sound from 5–6%.
is highlighting the market to macroeconomic policies that have
international property investors. bolstered international reserves, Most of the industrial stock (65%) is
reduced public debt, and allowed a owner-occupied. However, the growing
With a population of over 196 million significant decline in real interest rates. economy is expanding the market for
covering only slightly less area than the In their July update to the 2008 more modern storage and logistic
US, Brazil is by far the largest and most Outlook, the International Monetary warehousing, especially within the
populous country in South America. The Fund noted that Brazilian economic Sao Paulo Ring Road, and investors
capital city Brasilia, though only the sixth growth was expected to slow from 5.4% have taken note.
largest city, still has a population of nearly in 2007 to a still strong 4.9% in 2008
2.5 million. The largest city is Sao Paulo and 4.0% in 2009. Like the currency of many commodity
with a population of over 11 million, driven economies, the Real appreciated
followed by Rio de Janeiro with its 6 million The confluence of these factors has led strongly over the past 12 months, rising
citizens. Brazil’s GDP is 50% larger than to a vibrant real estate market as a by over 20% between September 2007
the next biggest South American economy, growing workforce needs places to live, and its peak in July. This, along with
Mexico. The service sector-contributing work, shop and play. higher hedging costs (caused by a rise
two-thirds of the nation’s GDP-dominates in interest rates from commodity fuelled
the economy followed by industry (29%) Brazil’s office market is heavily concentrated inflation pressures), has been a
and agriculture (5%.) in Sao Paolo and Rio de Janeiro, with concern to offshore investors. However,
around 2.3 million square metres of top since July, oil and commodity prices
Over the last 25 years there have been quality office space in Sao Paulo and have retreated, causing the currency to
several important changes that have 835,000 square metres in Rio. Top quality fall by around 15% and taking some of
made Brazil more attractive to offshore stock represents around 25% and 19% the pressure off interest rates.
investors. These include the return to respectively of the office space in these
democracy in 1985 and the Real Plan of markets. Indicative yields for high end Further details can be obtained from
1994 which was instrumental in defeating Sao Paulo office property range from Jones Lang LaSalle Country Head
hyperinflation. Sound macroeconomic 8.5 to 10%. Fabio Maceira.
Global Real Estate Capital, H1 2008 19
Europe
Summary
The effects of the credit crunch have hit
Europe’s commercial real estate market hard
with transaction volumes falling to
USD 105 billion in H1 2008. This represents a
38% decrease in USD terms compared to
H1 2007 with an even greater fall in Euros
(44%) 7. Cross-border investment declined by
46% to USD 61 billion, but continued to
account for almost 60% of total activity.
Russian market and growing activity in Total Transactions (USD bn) $105bn $171bn
Romania and Bulgaria. Cross-Border (USD bn, %) $61bn (58%) $113bn (66%)
reflected some very large deals including the Netherlands $8bn (8%) Netherlands $8bn (5%)
49% sale of the Karstadt Portfolio for Major Cross-Border Markets (% of total European cross-border transactions by value):
USD 3.3 billion by Arcandor AG as well as the Germany $13bn (21%) UK $30bn (26%)
sale of the Unibail-Rodamco Portfolio in the
UK $12bn (19%) Germany $28bn (25%)
Netherlands to IEF Capital for USD 1.2 billion.
France $8bn (14%) France $16bn (14%)
Fig 13: Direct Commercial Real Estate Transactions – Europe Cross Border Activity
As a percentage of total transaction volumes,
UK
cross-border activity fell relative to domestic
Germany
transactions in Europe in H1 2008 (Table 7). In
France
Netherlands the UK, France, the Netherlands and Sweden,
Sweden investors focussed more on their home markets
Spain than at the peak of the market in 2006/2007.
Finland
Nevertheless, cross-border activity remains
Belgium
Russia fundamental to Europe’s real estate markets.
Italy
Denmark Purchases by global funds fell from USD 32 billion
Austria USD bn
in H1 2007 to only USD 8 billion in 2008 while US
0 10 20 30 40 50 60
investment in Europe more than halved from
H1 2007 H1 2008
USD 11 billion to USD 5 billion. UK funds were
Source: Jones Lang LaSalle the main investors. While UK funds invested
across 18 different European countries in H1,
Fig 14: Cross-Border Real Estate Transactions – Europe Spain was the predominant destination. This was
largely due to the USD 2.8 billion purchase by
Germany Propinvest of Ciudad Financiera del SCH.
UK
France
Spain
Gulf Cooperation Council (GCC) investors
Netherlands continue to review the market, seeking distressed
Finland sales and entity-level deals. Their aim is often to
Sweden
deploy capital quickly via platform deals rather
Austria
than through selective single-asset acquisitions.
Belgium
Romania Whilst such deals are excluded from our numbers,
Poland they do represent the change in ownership of a
Russia USD bn
significant number of assets. Following the failed
0 5 10 15 20 25 30 bid for Colonial by the Investment Corporation of
H1 2007 Cross-Border H1 2008 Cross Border
Dubai, Economic Zones World (a subsidiary of
Source: Jones Lang LaSalle the Government backed Dubai World) has
acquired Gazeley, providing a platform into
Fig 15: European Transaction Levels by Sector Europe’s logistics market.
6% Germany
7%
In H1 2008, Germany grabbed top spot from the UK
as the major destination for cross-border investors in
Europe. Investors with Global Sources of Funds were
57% the main buyers. Some of the larger deals included
30%
the Sony Center in Berlin to Morgan Stanley for
under USD 880 million and AXA’s purchase of the
retail Portfolio Elbe for USD 213 million. A group of
Italian investors including Pirelli RE, Borletti Group
and Generali were involved in the 49% purchase of
Office Retail Industrial Hotel Karstadt Retail Portfolio along with Global investor
RREEF for a total value of USD 3.3 billion.
Source: Jones Lang LaSalle
Global Real Estate Capital, H1 2008 21
UK CEE
Cross-border volumes in the UK fell 60% Cross-border investment in Central and Eastern
relative to H1 2007. Middle Eastern and Europe (CEE) fell by 18% in H1 2008, slightly
German investors were the most active. less than overall transactions which were down
Notable deals included the City of London by 20%. Whereas Romania and Bulgaria
office property purchases of the Willis Building, witnessed a strong rise in cross-border volumes,
51 Lime Street, by St Martins Property Group the Czech Republic, Hungary and Poland all saw
(Kuwait Investment Authority) for these halve. Germans were the most active
USD 789 million from British Land, One investors focusing particularly on Poland, while
London Wall by Hansa Invest from Hammerson Hungary had interest from a number of Israeli
for USD 269 million and 50 Finsbury Square investors. Some of the big deals that have stood
for USD 222 million by Deka from out are Carrefour Mall in Bulgaria, bought by
Standard Life. Irish investors were also active Assos Capital for almost USD 300 million from
in H1, Jaguar Capital purchasing the City of Marinopoulos; a 50% stake in the Rondo 1 office
London office property, 10 Queen Street Place purchased in Warsaw for USD 340 million by
for USD 289 million while Draco purchased the Macquarie from London & Regional; and the
West End office property Seven Dials Iris shopping centre bought by DEGI in Romania
Warehouse for USD 113 million. for USD 220 million from Avrig 35.
France Russia
German investors’ ascent to the top ranks of Russia has seen a significant increase in the
cross-border property investors in 2008 was volume transacted in the first half of this year
also seen in France. Degi purchased the Paris compared to the same period last year. Cross-
office properties River Plaza and CB16 for a border transactions, however, declined by 4%,
combined value of USD 625 million. Deka accounting for 43% of total transaction volumes
bought the office property Wood Parc in the in H1 2008 (down from 80% in H1 2007). The
Mid Pyranness for USD 347 million. largest number of transactions occurred among
unlisted developers. RP Capital Group
purchased the Silver City office from Delin
Development for USD 350 million,
Sponda Russia bought the Ducat Palace II
office from London & Regional Properties for
USD 185 million and E-Star Property acquired a
USD 90 million industrial complex from Agora.
22 Global Real Estate Capital, H1 2008
Spots to Watch constrained in the first half of the year possibility. Should quality product be
London by the lack of available finance as well released onto the market, we believe
Price corrections across Europe over the as uncertainty about pricing and the that Middle Eastern and German
past year have been far from uniform; occupational markets. Nevertheless, investors amongst others will
while in the City of London and London’s there was evidence of strong demand considerably step up their
West End yields have moved out by from investors with low levels of investment activity.
150 and 100bps respectively between leverage, keen to enter the market at a
Q2 2007 and Q2 2008, other markets time of historically high yields. Middle The extent to which the UK market
have so far been relatively slow to adjust. Eastern and German investors were performs will of course depend on the
At 5.75% as at the end of Q2, the City of particularly active, purchasing debt markets, the wider economy, and
London offered the same yield as USD 2.7 billion and USD 2.2 billion of the relative pricing that emerges after
Budapest and Warsaw. When one also UK real estate respectively. For these further corrections across the region.
takes into account London’s international investors, the key constraint was a lack Given current weaknesses in the
prominence and commercial importance, of quality product as there remained a occupational markets, some investors
its lower risk profile, the recent weakening reluctance among owners to sell at may find it too early to enter the market.
in Sterling and a narrowing in the reduced prices. Nevertheless, with City of London yields
differential between UK and Euro 5-Year 24 basis points above the 25 year
Swap rates8, London is increasingly With a number of loans due for average of 5.51% in Q2 08, and forecast
looking like an attractively priced market. refinance towards the end of the year, to reach 6.25% by end 2008, we expect
and UK retail funds coming under London to attract an increasing numbers
Just as in the other large markets, increased pressure to meet payments, of investors in 2009.
transaction volumes in London were an increase in forced sales is a strong
8
This was 140bps at the end of Q2 2007 versus 95bps at the end of Q2 2008. The differential has since narrowed further: It was only 67bps on 14 August 2008.
24 Global Real Estate Capital, H1 2008
Asia Pacific
While European and North American economies
stalled from the effects of the global credit crunch,
it was thought the developing Asian economies
would maintain robust growth and support was
expected to be maintained for commercial property
markets in the region. While this was true for many
developing markets, the more established markets-
Australia, New Zealand and Japan in particular-
suffered. Overall, Asia Pacific investment volumes
in H1 2008 were down by 5% to USD 52 billion
from H1 2007. However, holding exchange rates
constant between H1 2007 and H1 2008, volumes
were down by 12%9. Overall activity was supported
by domestic investors as cross-border investment
declined by 18% in H1 2008. At USD 21 billion,
cross-border activity accounted for 40% of total
activity (down from 46% in H1 2007).
Japan $10bn (49%) Japan $12bn (45%) As in the Americas and Europe, hotel
China $4bn (18%) China $5bn (18%) transaction volumes fell heavily in H1 2008
relative to H1 2007, down 47%, while retail
Singapore $3bn (12%) Singapore $2bn (9%)
volumes fell also, down 27%. Office and
South Korea $1bn (6%) Australia $2bn (9%)
industrial volumes, however, bucked the global
Major Cross-Border Investors (% of total Asia Pacific cross-border purchases by value):
trend. Office transaction volumes rose 21% to
Global $7bn (40%) Global $10bn (49%) USD 34 billion, industrial volumes rose 11% to
Germany $3bn (15%) Singapore $3bn (14%) USD 5 billion. Transactions in Japan accounted
Singapore $3bn (14%) Australia $2bn (10%) for almost half the volume of both these sectors.
Hong Kong $1bn (8%) Hong Kong $2bn (9%)
9
We convert transaction values into USD at the average daily
Source: Jones Lang LaSalle rate for the quarter in which the transaction occurred.
Global Real Estate Capital, H1 2008 25
Cross Border Activity Fig 16: Direct Commercial Real Estate Transactions – Asia Pacific
Fig 18: Asia Pacific Transaction Levels by Sector Fig 17: Cross-Border Real Estate Transactions – Asia Pacific
Japan
10% China
Singapore
10%
South Korea
Malaysia
Australia
14% Hong Kong
66%
New Zealand
Philippines
Taiwan
Thailand
Macau
Other Asia Pacific USD bn
0 2 4 6 8 10 12
Office Retail Industrial Hotel H1 2007 Cross-Border H1 2008 Cross-Border
Outlook
Asia was the last to suffer from the effects of the While the rate of office rental growth across
global credit crunch and with its generally strong the region is falling, around 65% of
growth characteristics will likely be the first region to Asia Pacific office markets monitored by
recover. However, while initially avoiding the Jones Lang LaSalle Research are expected to
slowdown, the investment environment changed maintain positive rental growth over the next
significantly over H1 2008. Between Q1 2008 and 12 months. These markets include most
Q2 2008, the region experienced a 33% fall in Chinese, New Zealand and Australian markets
volumes. The slowdown was precipitated by a as well as office markets in Hong Kong,
tightening of lending standards as banks lowered Taiwan, Malaysia, Vietnam and India. Markets
LTV ratios, raised interest rates, tightened lending where rental growth is expected to contract
standards and retreated to relationship based include Beijing, Brisbane and Bangkok, where
lending. Additionally, the global economic slowdown high levels of new supply are expected to
caused investors to reassess the short to medium impact the market, and Tokyo where the
term growth prospects of many markets in the economic slowdown is affecting demand.
region and raise risk premiums and required IRRs. Capital values are also broadly expected to
As in other global markets vendors were reluctant to rise across the region, albeit at a much slower
reduce expectations and a standoff resulted. pace than in previous years. Exceptions to this
include the more mature markets such as
The weakness is likely to continue for another 9 to Japan, Hong Kong and Australia that are more
18 months with further falls in capital values before dependent on debt financing.
markets recover. Markets most likely to move
ahead are those where debt is less of an issue Rental and capital value growth in most retail
and where rental fundamentals and economic markets in the region are expected to remain
growth prospects are strong. These include China stable or continue to rise. Chinese and Indian
and some of the smaller more opaque markets, retail markets are forecast to experience the
although increased risk premiums are currently strongest performance. However, the exception is
curbing interest. In the more mature, and generally the Beijing prime retail market, where an additional
more highly geared, markets such as Singapore, 1.3 million square metres of new supply is
Hong Kong, Japan and Australia, the recovery is expected to enter the market by the end of 2008.
likely to take longer. However, there are some This will increase the vacancy rate substantially
positive signs emerging in Australia as the and negatively impact rents and capital values.
currency and interest rates fall.
Industrial markets across the region are expected
to experience relatively flat rental growth. This is
particularly evident in the more mature markets,
such as Hong Kong, Japan and Australia, as
slowing economic growth as well as sustained high
energy costs limit demand. However, in Australia
high levels of new supply are also weighing on the
market. The softer rental growth is flowing through
to capital values which are generally expected to
be flat over the next 12 months and generally
weaker in Australia and New Zealand.
28 Global Real Estate Capital, H1 2008
Spots to Watch challenges, the government has limited demand and appetite currently
Vietnam: An area of growing interest lowered the 2008 growth target to for coastal opportunities as well as the
In the search for higher returns, 7% from 8.5% and to between 7% and second tier cities with their incumbent
international property investors are 8% in 2009 as well as giving top priority higher risk.
increasingly focusing on the more to controlling inflation.
opaque developing economies. One David Dudley of Jones Lang LaSalle Asia
area of interest in the Asia Pacific The macro economic situation, Capital Markets notes that Vietnam has
region is Vietnam. Foreign investment particularly the high prevailing inflation become increasingly prevalent on the
has been growing since the 1990s, rate, has stalled new entrants to the radar screen of property developers and
however, interest has been lifted more property market in 2008; however, investors seeking opportunistic returns in
recently by Vietnam’s accession to the those investors already committed Asia, alongside India and China. Active
World Trade Organisation (WTO) in remain active and hungry for more investors include those from Singapore,
early 2007 as well as its sustained high opportunities given the compelling real South Korea, Japan, Malaysia, Russia,
economic growth and a sizable, young estate fundamentals across all sectors. the Middle East and the United States.
and highly literate labour force. These are characterised by limited high While the current economic situation has
Additionally, the government is ceding quality supply and robust demand. meant that investors have become more
greater economic control to private Additionally these committed investors cautious over recent months, interest in
enterprise which further improves its are confident in the compelling medium high quality, well located assets with
investment attraction. to long term outlook for the country. strong promoters can still be seen.
Domestic and foreign property funds
Vietnam’s economy started its recovery Nevertheless, the real estate investing include: the USD 300 million
in 2000, two years after the investment market in Vietnam is still in CapitaLand Fund which has already
Asian Financial Crisis in 1997–1998. its infancy. The general lack of invested in more than four residential
Since then, Vietnam has had one of the transparency, underdeveloped legal development projects in HCMC;
fastest growing economies in the system, and poor administrative PruPIM’s raising of a second fund portion
region. Over the last decade, the efficiency, has made investment a for Vietnam with a target of
Vietnamese economy has achieved challenge for foreign investors. The USD 250 million; Pacific Star’s joint
high and stable growth with GDP primary consideration for investors is venture with Israeli firm Alony Hetz is in
growth averaging 7.4% per annum. the selection of good local partners who the process of raising USD 200 million
Looking forward, the IMF is forecasting have a credible pipeline of opportunities for the PS Arrow Vietnam Fund;
continued strong GDP growth of 7.3% (often land banks) as well as strong Indochina Land Holdings’
in both 2008 and 2009. However, rising government connections to help USD 200 million real estate fund and
inflation (which surged to an annual expedite the very lengthy and Dragon Capital’s Vietnam Property Fund
rate of 27% in July 2008) and the bureaucratic planning and approval which was launched in April 2008 having
slowdown in the United States and process. Most investor interest is raised USD 90 million. VinaCapital’s
Europe (Vietnam’s largest export concentrated on Ho Chi Minh City Vinaland which was established in
markets) are risks for the growing (HCMC) and Hanoi and their immediate March 2006 has net assets of
economy. Recognizing these surrounding provinces. There is more approximately USD 650 million.
Note: Additional sources to the data include Property Data (UK); Akershus Eiendom (Norway); Athens Economics (Greece); Wuest and Partners (Switzerland); Real Capital Analytics (USA)
September 2008
www.joneslanglasalle.com