Commercial real estate values have been spurred by a “lack of caution” on the back of an “astonishing” rebound in lending to the sector, according to one of the largest global fund managers.
LaSalle Investment Management, which manages $45 biilion of real estate assets across the world, will this week warn that the recovery in commercial real estate is well ahead of what fundamental economic activity in some markets should support.
LaSalle believes investors could be ignoring the distinctions between low-growth and high-growth countries.
“The relative lack of caution in the real estate capital markets is a concern,” said Jacques Gordon, global strategist at LaSalle. “It is remarkable how quickly capital has returned to real estate. The re-emergence of a competitive credit market, so quickly after the bursting of the credit bubble, is also astonishing.”
He added that LaSalle was not predicting the end of any bubble or further significant falls in the market. However, he said good value was becoming harder to find.
The return of investors to certain more “prime” parts of global real estate – such as London and Paris – has pushed prices to near pre-boom levels given the view that these represent safe havens during current market volatility.
The fund manager’s Investment Strategy Annual, which will be published on Monday, said that there was still justification for the perception among lenders and investors that real estate income streams are now at, or just past, trough levels and are once again climbing, even in the low-growth countries.
In growth markets, it said, real estate rents and cash flows have been moving upwards rapidly for 12 to 24 months, depending on the property type and market. LaSalle believes that the capital markets are generally pricing several strong years of continued growth in the future.
“I am not so sure that some of the growth that has been underwritten into the forecasts will come true,” Mr Gordon said.
Continued low interest rates were the “greatest positive feature” for commercial real estate, which typically is funded through bank debt, but Mr Gordon added that the biggest risk would be if interest rates rose in the medium term ahead of any major improvements in the market.
He said: “Real estate yields would then have to rise to maintain the traditional risk premium for real estate, relative to government bonds. And yet landlords might not yet have the power to raise rents, especially if they have locked-in long-term leases at historically depressed rental rates.“
LaSalle identified a number of investment themes around the world. In Asia, it predicts the Japanese market will see a sharp recovery over the next two quarters on the back of the reconstruction effort.
The central markets and secondary coastal market of China looked attractive, it said, although warned in the short run there was a risk in China that overheated eastern property markets were at risk of policy changes to reduce or eliminate speculative activity.
In Europe, LaSalle said Germany, France, the UK and the Nordic countries offered the best insulation from the financial turmoil in peripheral nations.
U.S. real estate fundamentals were still gaining momentum, it said, after “a devastating two-year stall”.