No real estate bubble according to LaSalle
January 2006
Investment Management Company LaSalle have released their "Investment Strategy Annual", a comprehensive survey of, and outlook for, the global real estate markets during 2006 through 2008.
The company notes that after a strong year in 2005 investors are increasingly concerned about a number of potential challenges including the effects of rising interest rates and a possible slowing global economy, on real estate prices.
"After several years of yield compression in many real estate markets across the globe, it is not surprising that the most frequently asked question by investors, both real estate specialists and generalists alike, is 'Are we in a bubble?'," said Jacques Gordon, LaSalle Investment Management's Global Investment Strategist and co-author of Investment Strategy Annual. "Based on our analysis, we believe the ingredient that would turn today's high commercial real estate prices into a 'bubble' is the possibility of a total collapse in values. However, we do not see that element at work anywhere in the private direct markets today. In fact, we see a lot of very interesting places to invest next year, although our viewpoint is that most investors will have to take on more risk to secure a given unit of return."
Risk
"Our analysis suggests that risk-adjusted returns in mature markets will continue to decrease over the next three years," said Robin Goodchild, Head of European Strategy and co-author of the Investment Strategy Annual report. "As a result, many investors will accept new risks in exchange for only marginally higher returns."
Regional predictions
Europe
LaSalle summarises the outlook for Eurozone and the Nordic real estate as "Stability with Upside" and sees most potential in commercial real estate. Prospective returns are highest for the office sector while while warehouses/logistics may disappointment because yields have compressed and the scope for return growth is dampened because new construction at today's prices is highly profitable.
Geographically the best performing markets include the French office sector, and German retail
In the U.K., LaSalle forecasts returns slowing from the spectacular levels of 2004-2005, with offices, which have consistently disappointed in the past, being the top-performing sector through to 2008.
North America
For North America they expect solid real estate markets despite shocks.
The combination of improving fundamentals and abundant capital argues for an expanded approach to investing new money in 2006. While LaSalle believes that value-add and other higher return strategies offer a better risk-return trade-off in the coming year, the diverse nature of the North American real estate markets also offer opportunities for investors looking for low-risk income-oriented core properties and strategies, according to Bill Maher, Regional Director, North American Research and Strategy, LaSalle.
Among the most attractive higher return opportunities are student housing and buildings in non-condo conversion markets with the need for moderate rehab, development in major secondary hub markets in the U.S. and Canada, partially vacant office buildings in high growth areas, mixed used retail redevelopment of failing malls in the U.S. and Canada as well as discounter-anchored centers in Mexico, and hotels requiring capital reposition or rebranding. Among the best core opportunities, LaSalle singles out apartments in high-cost suburban markets with limited condo conversion; industrial properties in port markets; medical office and office buildings in sunbelt suburbs; and selected tech markets, lifestyle retail centers and full-service hotel properties in urban locations.
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