Private equity real estate will go through ‘violent and volatile’ repricing

Private equity real estate will undergo a “violent and volatile” repricing mirroring the “value destruction” already seen in the securitised real estate realm, a report by LaSalle Investment Management said.

Releasing its annual Investment Strategy report, the Chicago-based real estate investment firm said the asset class was now caught up in the global financial crisis and would see assets repriced accordingly.

Recommending fund managers take a “back to basics” approach when dealing with portfolios – protecting income streams and working with tenants to renew leases and adjust rents – LaSalle said recession-resistant sectors and markets, such as healthcare, government and necessity-retail, would be good plays in the coming downturn.

However, LaSalle added opportunistic investments would emerge in 2009, including discounted REIT shares, discounted fund interests, non- and partially-performing loans as well as land and development deals in need of capitalisation or in default.

Jacques Gordon, LaSalle global strategist, said the correction in real estate valuations would “offer as many opportunities as threats”. For investors with capital, “2009 will provide some fantastic opportunities; the strategic approach is to distinguish between the assets that are genuinely attractively priced and those that should be even cheaper”, he added.

North America, the report said, would see fundamentals weaken significantly, although it would still remain behind the UK in terms of the scale of repricing. Canada and Mexico would outperform the US, although returns in those countries would decline. The report said the bottom of the cycle could be expected in 2010. With 23 percent of office tenants linked to the financial services industry, the office sector was expected to be very weak, with retail also experiencing rising vacancy rates. The most interesting investment opportunities during 2009 would be from distressed owners, borrowers and lenders.

European countries most at risk from the slowdown are Spain, the UK and the Netherlands, where commercial and residential property markets have over-heated, the report continued. Office projects in London, Madrid and Frankfurt markets were most at risk, with many projects set to be put on hold. Some of the best “target markets”, the report added, were France, Germany, Scandinavia and the UK, depending on pricing.

In Asia, Japan and China are expected to struggle with a weak export environment during the next two years, with India adversely affected by slower investment in IT. The report added that short leases would prevail in the Asia Pacific region. Tokyo offices would remain relatively resilient, although Hong Kong would see a greater correction. In the hotel sector, Chinese, Indian and Russian travellers are expected to become an important source market.