Real estate markets: How low could they go?

By William Kemble-Diaz

LONDON (Reuters) - How far could commercial property markets fall after the end of a golden era of sizzling returns and unprecedented cross-border investment? That is the key issue facing global real estate investors in 2008.

Negotiating, even surviving -- or in some cases exploiting -- a more challenging investment climate is the main theme for leading property industry figures at this year's Reuters Global Real Estate Summit. The event is being held in London, New York, Singapore, Dubai, and Moscow from June 23 to 25.

The U.S. subprime crisis and subsequent global credit crunch has cast a huge shadow over the asset class and slashed the amount of commercial property bought and sold, despite increased buying by some cash-rich investors such as Gulf sovereign wealth funds and German retail funds.

Data from property services firm Jones Lang LaSalle (JLL.N: Quote, Profile, Research, Stock Buzz) shows transaction volumes globally in the first five months of 2008 were 40 percent lower than in the same period last year, dragged down by weaker activity in Europe and the United States.

"The recovery of the debt market and the form in which the debt market comes back are key," David Church, senior advisor to the global investment banking division of Bank of America, said.

"It will drive not only values, it will dictate whether some companies go under, will be a key factor in the establishment of new investment vehicles and the reconfiguration of other vehicles," he said.

So far the default rate among commercial property landlords is low, although Manhattan property magnate Harry Macklowe hit the headlines in February by defaulting on $7 billion of loans.

Loan covenants have also come under pressure in the UK and some housing developers have filed for administration in Spain.

The underlying economy will also determine if some real estate markets achieve a soft landing or are condemned to a more prolonged bear market.

Weaker consumer spending, job cuts, and slower economic growth could exacerbate property investor woes by squeezing tenant demand for retail, office, and industrial properties and hitting corporate rents.

They could determine whether the malaise, demonstrated by an 18 percent drop in UK commercial property values since last June, spreads to markets that have either continued to show healthy returns or have yet to reflect the credit crunch.

"The longer it goes on, the greater the danger of contagion to markets which hitherto have seen no impact," said Joe Valente, who will head up property management and strategy at Allianz Real Estate in Munich from next month.

"Does it make sense for (property) yields in London to be at 5.5 percent, the same as in Bucharest?," asks Valente.

But so far the rate at which corporate tenants have defaulted on their leases has also stayed low.

SUMMIT HIGHLIGHTS  Continued...