Consolidation is key for the real estate sector

Consolidation and restructuring will lead to a more balanced and mature property market in Dubai with strong long-term prospects, Jones Lang LaSalle (JLL) said yesterday.

The consultancy said in its global perspective report said that the Dubai government was committed to dealing with the real estate crisis, and this was evident from the cash injection in Nakheel.

"It [the proposed debt restructuring plan] has provided a degree of much-needed clarity and has shown that the government is committed to dealing with the real estate crisis, injecting up to $9.5 billion (Dh34.86bn) in new funding. The proposed debt restructuring forms part of a fundamental rethink of how real estate investment should be financed," JLL said.

It further said: "If Dubai is able to restructure, consolidate and commercialise the real estate market, the lessons learnt from the recent challenges could form the basis for a more balanced and mature market with strong long-term prospects."

According to the report, direct global commercial real estate investment volume will grow by 35 to 45 per cent in 2010 as investor appetite for realty grows.

"An abundance of capital chasing real estate from an increasingly wide range of investor groups, combined with significant capital raising activity, points to an upward trend in global real estate volumes. We project a 35-45 per cent growth in direct commercial real estate investment volumes this year," JLL said.

In the Asia-Pacific region, rising volumes are being supported by strong fundamentals and a recovery in their leasing markets. In Europe and the US, investment volumes are expected to increase despite continued uncertainty about the strength of the recovery in market fundamentals and continued tight supply of core product.

In the Asia-Pacific's commercial property market, a steady improvement in fundamentals, including stabilising/increasing rentals, is likely to underpin strengthening investment activity. Overall commercial investment volumes are expected to increase by 30-50 per cent this year. Asia-based private equity funds, sovereign wealth funds, insurance companies and pension funds are likely to continue acquiring prime quality assets, which offer stable and secure rental income.

There will be more portfolio and enbloc deals in the second half of 2010 as investor confidence bounces back. However, further interest rate hikes that are expected across the region may have a negative impact on buying sentiment, the report said.

In Europe, investment volumes are expected to increase throughout the year despite uncertainty about the path of economic recovery. A number of large transactions over €100 million (Dh506m) and several portfolio deals are currently under offer, which will help boost overall volumes.

"For the full year, we estimate that direct commercial real estate investment volumes will reach at least €90bn, representing a 30 per cent increase on 2009," JLL said. During 2010, transactions activity in the US will continue to build, but the recovery may feel muted as the prevailing tendency of banks toward loan extensions will likely continue for much of the year.

As a result, there will remain a shortage of suitable properties on the market for institutional, private and foreign investors. Given this imbalance, downward pressure will remain on yields and the trend could somewhat broaden geographically beyond the top eight to 10 markets in the region as the search for yield among large multi-asset class investors is likely to intensify.

While it is probable that banks will have at least begun a shift in strategy toward dealing with problem loans directly, this may be a gradual transition as extensions and amendments will still dominate. Many of these challenged owners may be allowed extensions until 2012 or 2013 in hope of finding a more permanent solution in the form of income growth or substantially changed credit markets.

Real Estate sector attracting more capital

Capital targeting the real estate sector is on the increase, Jones Lang LaSalle said in a report.

"The sector's performance is appealing to a broad range of investors as the world's economies emerge from recession. This is driving a weight of money in search of secure income today and upside potential as the leasing markets start to recover. This trend is evident worldwide and real estate investor confidence has returned," the report said

A wide range of investors are now active, with a notable return of the recapitalised real estate investment trust sector and resurgent interest from fund managers. Capital-raising is evident across all three regions, boosting the volume of funds targeting real estate.

Strong investor competition and a shortage of prime product in all core markets are pushing up capital values and encouraging some investors to move up the risk curve into second tier markets and value-added opportunities.

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