January 29, 2007 Interesting read....
Commercial Real Estate Investors Are Entering a New Era in 2007 and Must Consider an Expanding Universe of Options, According to LaSalle Investment Management
“Investment Strategy Annual” released by LaSalle Investment Management
CHICAGO, LONDON & SINGAPORE--(BUSINESS WIRE)--Investors can continue to earn relatively attractive returns in real estate by adapting to an expanded universe, according to LaSalle Investment Management LLC (“LaSalle”), which today released the 13th edition of its Investment Strategy Annual, a comprehensive survey of, and outlook for, the global real estate markets for 2007.
“Real estate investors must expand their horizons in 2007,” said Jacques Gordon, LaSalle Investment Management’s International Director, Global Strategist and co-author of Investment Strategy Annual. “Although capital pressure will remain intense for stable assets in large markets, investors should not count on further yield compression to drive future returns. Rather, their focus should be on rental income growth—either through leasing and development or through market selection. Nontraditional sectors and a broader mix of countries will be needed to maintain higher returns in a post-compression era. That’s why we’re urging investors to consider adding development strategies, cross-border assets and niches driven by long-term trends over the coming year.”
In a growing world economy, LaSalle’s strategy team believes that development projects can bring attractive returns, relative to the risks involved. “Properly structured, a pre-leased development agreement can be less risky than a standing investment,” said Robin Goodchild, International Director, and European Strategist. “Investment managers must apply their expertise to evaluating development risks and overseeing the developer. Managing development talent becomes part of our job description.”
“In our view, investors enter 2007 with little downside risk in occupational markets, but growing risk around capital markets,” said Gerald Blundell, European Director, Investment Strategy and co-author of the Investment Strategy Annual report. “The continued weight of capital has driven valuations up to the point where some markets are looking overvalued against trend. In 2007, we see no catalyst to reverse the strong capital support for real estate. That said, there are a number of potential triggers—ranging from a rise in longer-term bond yields, a contraction in occupiers’ demand for space to sector rotation as income-hungry capital moves away from real estate on to another asset class.”
“Risk in real estate is best understood as a multidimensional ‘bundle’,” according to Blundell. “The analysis and pricing of this risk bundle is key to finding good value in an expanding market. The international expansion for real estate has prompted us to reexamine hurdle rate analysis based on updates to our transparency measurement model. The results of the latest hurdle rate analysis suggest that un-leveraged regional hurdle rates for core office are 7%-8% in the U.S., Canada and Northern Europe while a slight premium is required in Asia and Southern/Central Europe.”
Drawing on a global network of research professionals, LaSalle’s Investment Strategy Annual provides an in-depth examination of the fundamentals that will shape the real estate markets in Asia-Pacific, Europe and North America in 2007. According to LaSalle, Asian markets offer the greatest heterogeneity of choices—from opportunistic development, redevelopment and leasing strategies in South Korea, Japan and China all the way to sold core and core-plus opportunities in Hong Kong, Singapore, Sydney and Tokyo. North American markets will experience favorable fundamentals, which favor leasing and redevelopment strategies. The European markets offer some of the world’s best value for core investors as well as opportunities for higher risk-return strategies.
Asia Pacific – Flying High: Against the backdrop of strong economic fundamentals, the outlook for real estate performance is strong for 2007 and 2008, according to David Edwards, Regional Director, Asia Pacific Research and Strategy. Among LaSalle’s recommendations:
In the office sector, LaSalle sees opportunities to take advantage of the shortage of modern stocks with professional management, specifically in Japan, Korea and Greater China.
In the retail sector, there are many opportunities to develop modern shopping centers and to do sale leasebacks with retailers shedding their owned premises.
In the logistics sector, a U.S. economic slowdown could weaken demand for deepwater port facilities, although interregional demand growth may offset that.
In the hotel/hospitality sector—which is in the midst of a massive expansion across the region—there are opportunities to develop new properties and to reposition older assets.
Growing capital pressure is an opportunity for owners of existing assets and risk for investors who are just getting started in the region
Europe – Growing Again: The European region’s economic recovery has increased occupier demand and, when combined with continuing strong capital flows, has created ideal conditions for property owners. Overall, this economic and property market momentum is expected to continue throughout 2007. As LaSalle views them, the main real estate opportunities and risks across the continent are:
The office rent cycle will deliver strong rental growth during the next three years, with the best markets being Paris, Stockholm and London suburbs (e.g., Thames Valley).
The risks around development are relatively low because of rising demand and are well rewarded in comparison with stabilized assets.
Germany is the single most interesting market because there are very few domestic buyers and product for sale from the open-ended funds.
The arrival of REITs in the UK, and, likely, Germany, will give the public markets a significant boost.
Yields in the UK are likely to stabilize during 2007, but there will be further yield compression in the rest of Europe.
North America: Smooth Sailing in 2007: Real estate markets across North America are generally well along in the recovery phase of the real estate cycle, according to William J. Maher, Regional Director, North American Research and Strategy. Although occupancies and/or rents are rising in most markets, competition for all properties—core as well as value-add—is intense and capitalization rates are near record lows. Among the investment themes and real estate opportunities LaSalle recommends are:
The core markets of Washington, D.C., Los Angeles, New York City, Chicago and Toronto continue to offer opportunities in every property type, each having large diverse economies and deep, liquid real estate markets.
Increasing world trade and changing logistics patters will create opportunities in the port cities in the U.S. and Canada, as well as Mexican markets such as Monterrey and northern Maquiladora markets.
The development of Alberta’s oil sands will drive demand for all types of real estate in Edmonton and Calgary in Western Canada.
Technology-oriented cities continue to recover from the “tech crash” of 2001. Boston and Silicon Valley will join already strengthening markets such as Phoenix, Seattle, San Diego and Ottawa.
Selected secondary markets will benefit from above-average job growth and improving real estate markets. Apartment investments in particular will benefit in markets such as Phoenix, Tampa, Orlando, Las Vegas and Sacramento.
LaSalle Investment Management, Inc., a member of the Jones Lang LaSalle group (NYSE: JLL), is a global real estate investment management leader with approximately $40 billion of assets under management. LaSalle Investment Management is active across a range of real estate capital and operating markets, including private and public, debt and equity. Jones Lang LaSalle is the world’s leading real estate services and investment management firm, operating in more than 100 key markets worldwide. The company provides comprehensive and wide-ranging integrated expertise on a local, regional and global level to owners, occupiers and investors.