Real estate lending to pose threats to 2012 transactional volumes

But despite ‘debt threats,’ Jones Lang LaSalle still estimates volumes to be stable at around $400b.

According to Jones Lang LaSalle:

In our Q3 report we estimated that year end volumes could potentially come in below our revised forecast of $400 billion. As it was they came in above our expectations given the downward shift in sentiment that permeated the final quarter, but slightly below our start of year forecast of $440 billion.

We expect the first half of 2012 to mirror the second half of 2011 with investors focusing on
prime, core markets both in terms of asset quality and location. Secondary assets at present seem to have been relegated to third spot after debt and bank loan book opportunities, particularly in Europe.

Debt discussions are again set to dominate 2012 and pose a real and credible downside risk to transactional volumes in 2012. With the news that a number of high profile European banks have closed or will soon close their books to new commercial property lending, new debt and refinancing will become ever more challenging in 2012.

In addition the introduction of Basel III means real estate lending will become a higher risk activity for the banks, for which they will have to provision more capital. This may well open up the debt markets to new players, in the US insurance companies have long been active participants in providing debt to the property sector.

While the headlines are full of sovereign debt default, the level of personal debt in the advanced western economies is also a cause of concern. Generally if the level of government or personal debt exceeds 85-90% of GDP levels then it becomes a drag on economic growth.

Reassuringly as our buyer profile showed the level of private equity activity has picked up. According to figures from Preqin the amount of equity raised over the last two years was just over $90 billion, down from a high of $140 billion raised in 2008. While capital raising is more difficult, even with first closing discounts, it seems as though much of the equity raised in previous years is now being put to work.

The weight of capital committed to commercial property over the last two years shows that it remains a core asset class for many investors. At a time of almost unprecedented global economic uncertainty commercial property faces a balance of positive and negative drivers. Core yields at 5-7% are much more attractive than most government bonds at present and real estate does provide the attraction of a fixed asset with the potential of rental growth in years to come.

On the downside, the illiquidity of property can be an issue for some investors and the lending environment is unlikely to improve in the short to medium term thus keeping a lid on returns. Anecdotally, the level of activity we are seeing from under bidders is encouraging, particularly on the best quality assets, demonstrating the level of equity available remains high.

Given the uncertain nature of the global economy, with groups such as the World Bank and IMF continually downgrading their economic forecasts, we have forecast transactional volumes in 2012 to be stable at around $400 billion but with downside risks evident.