Experts deliver a sombre world forecast

The company, which offers a regular commentary on changing economic and market conditions and their impact on the real-estate business, says that global financial market liquidity is a necessary spark for a sustained economic recovery.

While many indicators of liquidity have improved dramatically over the past five months - thanks to government programmes to buy commercial paper and guarantee short-term debt - the markets have tightened a bit in recent weeks and, at the same time, the world's economic landscape has continued to darken.

The company says a global property market recovery has yet to take hold. Debt markets remain congested and the securitisation market is at a complete standstill. Restored liquidity will reset property values through asset trades that provide accurate data points on pricing floors around the world. But there are currently few completed transactions to analyse, suggesting the bottom of the market is still ahead and values have further to fall, it says.

Jones Lang LaSalle's Global Real Estate Health Monitor analyses the leading health indicators of global commercial property-market activity. At present it shows that risks abound and that most indicators continue to point down.

The Global Market Perspective report says that against a backdrop of a weakening economy and somewhat tighter credit markets, financial institutions in the United States are facing an onslaught of commercial loan maturities with more than US$300 billion (Bt10.79 trillion) in commercial mortgages estimated to mature each year from now until 2011.

European shareholders have resisted attempts by Real Estate Invest- ment Trusts to launch new rounds of capital-raising. The market, which initially favoured these additional underwriting rights issues, has backed away. Offers for rights issues announced in February and March by companies such as Hammerson, British Land, Land Securities and Segro range from around 50 per cent to 90 per cent below the securities' previous trading prices.

The company says more than ¤50 billion (Bt2.33 trillion) in equity capital is targeting European commercial real estate in 2009. Institutions and third-party money managers, opportunity funds, international wealth entities and some German open- and closed-ended funds are waiting for distressed opportunities to enter the market.

Across Europe, outward pressure on yields remains for all classes of commercial real estate, from those still quoting prime yields at below 5.5 per cent, as in Milan, to the premium London city offices quoting close to 7 per cent today. In the UK, a further 15 per cent to 20 per cent capital decline in 2009 seems warranted. Prime assets of less then £30 million (Bt1.5 billion) are commanding cap rates from 5.5 per cent to 7.25 per cent, while all other assets in the country are trading at cap rates of 8 per cent and higher. For example, Jones Lang LaSalle recently advised Legal and General on the sale of Times Place, 45 Pall Mall, in London.

In Asia, Jones Lang LaSalle says, property conditions have continued to deteriorate. In fully developed markets such as Singapore, Tokyo and Hong Kong, which are suffering from heavy exposure to international financial services, landlords are drastically reducing rentals in an attempt to maintain occupancy levels. In the final quarter of 2008, net effective rentals fell by up to 20 per cent in these three markets, and the first quarter of this year is likely to see even more rapid declines.

Tier 1 cities in the emerging markets of China and India are facing a situation of major oversupply and are also likely to witness significant falls in rentals this year as vacancy levels climb. Office stock in Delhi and Mumbai is forecast to expand by about 50 per cent in 2009, while the Beijing office vacancy rate is projected to rise from 23 per cent to 36 per cent. Interest coverage rates - once viewed as being at very safe levels - will come under pressure over the next quarter and will further motivate banks to source new capital for many assets purchased in 2006 and 2007.

The company says that in the hotel sector, Asian sentiment is improving, with several groups beginning to actively review investments with the idea that as the markets start to bottom out, there will be less opportunity to pick through good quality stock. In a counter-cyclical pattern similar to the 1990s, Asian investors (typically high-net-worth individuals and property companies) are now viewing the key gateway markets as an attractive point of re-entry. The Global Market Perspective report says property markets around the world remain frozen because of uncertainty as economies convulse and governments grapple with questions about the scale of stimulus packages, the impact of quantitative easing and the creation of more effective, supra-national regulation of the financial sector. In many global markets, commercial property prices need to adjust to lower values - by as much as 20 per cent in some cases. More property can be expected to come to all markets as financial institutions de-lever and corporations recalibrate their space needs. For some markets, this deluge of supply could be quite destabilising.

Going forward, investors will likely emphasise covenant strength, local market conditions and a deeper understanding of the outlook for specific industry sectors.

Jones Lang LaSalle says that for investors, 2009 will bring a return to core global markets as they look to maintain liquidity in their portfolios and transact in markets with high levels of yield transparency and lower macroeconomic risks.

For corporate occupiers, the short-term game is one of survival and the continuous re-evaluation of property portfolios, rents, leases and space occupation to accommodate reduced head counts. Apart from those corporate occupiers who are currently cash rich, more opportunistic tenant behaviour will remain muted until the early part of 2010 at the earliest.