Commercial Property Rebound in 2011? Study says Don’t expect it

Sentiment toward investment in and development of commercial real estate across Europe has improved for the first time since 2007, but 2011 won’t deliver the turnaround that industry experts had hoped for, according to a recent report.

Hope for a recovery has been replaced by acceptance that the weak conditions could prevail for a long time, the report said. "Today, the industry is undergoing far-reaching structural changes created by persistent weaknesses in European economies and in the debt markets," it said. "In addition, the threat of further shocks from stressed countries such as Italy, Portugal, and Spain loom large."

The report, produced by PricewaterhouseCoopers and the Urban Land Institute and based on interviews with 600 real-estate professionals across Europe, highlights the continued anemic conditions in debt markets but raises the prospect of investment from alternative sources, and refers to the market for secondary property, or poorer quality real estate in less desirable locations, as a ticking time bomb.

Titled Emerging Trends in Europe 2011, the report also identifies this year’s investment hot spots and destinations to avoid: London, Munich and Istanbul again topped the list for best performance and locations for property acquisitions. Among those at the bottom of those charts were cities in parts of Europe hit hardest by the economic crisis, such as Dublin, Athens and Lisbon.

The issue of finance continues to cast a shadow over the industry. Equity investors were ready to buy real estate again, the survey suggests, but debt providers remained unwilling to lend and the outlook was bleak. Part of the problem was Basel III, regulations that demand tougher capital-adequacy ratios for banks, which, according to some bankers interviewed for the report, made "it very difficult for banks to be aggressive lenders in real estate."

There were "slim flickers of hope" that new sources of credit could emerge, such as insurance companies, mezzanine lenders and even Chinese banks, two of which have leased space in the City of London, fueling speculation. But even if new lenders do come forward, it may not happen any time soon and they may only partially relieve the situation. Any investments they made would be targeted at the best buildings, or prime assets.

"The result is that values for secondary properties will remain at distressed levels and decline further in the months ahead," said the report. "Given that almost one-third of Europe’ EUR960 billion outstanding commercial real estate debt is secured against poor-quality property at high loan-to-value ratios…the real headaches for the banks are about to begin."

– Edited by Gust Gianos, CFE Media, Consulting-Specifying Engineer, www.csemag.com

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