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News release


Positive indicators signal a property market turnaround

Latest Jones Lang LaSalle Global Market Perspective shows early signs of a turnaround in the global economy

SYDNEY, 20 MAY 2009 –  The early signs of a turnaround in the global economy adds impetus to the task of identifying the timing for the trough of the commercial property market.
The May edition of Jones Lang LaSalle’s Global Market Perspective examines the recent evidence of a global economic improvement, as well as the confidence and credit factors that will determine when world real estate sales markets will recover from their cyclical downturn and begin their upturn.
Australian Head of Capital Markets, John Talbot said while it was too early to call the market bottom, investors seeking the best assets should position themselves early.
“The factors that our research indicate will determine a commercial real estate recovery include stable or improving economic data, a recovery in the market value of real estate investment trusts (REITs), institutional investors increasing allocations to commercial real estate and banks’ willingness to lend.
“These are the indicators investors should be studying and we are seeing some signs of global movement in relation to these factors.
“While economic data trends remain negative, financial markets are signalling that the trough may be close.
“Equity markets appear to have bottomed, credit spreads are narrowing, consumer confidence measures are rising and corporations are finding it easier to access capital. In Australia, the UK and the US, REITs have raised substantial amounts of equity finance.
“The performance of REITs is a critical gauge of investors’ perceptions of the commercial real estate markets. Globally, REIT market values declined 80 percent in the six-month period ending in February but have gained 60 percent since.
“Increased commercial property transactions will be at the heart of a recovery, as this will set a trading floor and provide investor pricing clarity.
“In Australia, as in offshore real estate markets, transactions volumes remain low. Through the second half of 2009 activity is likely to increase as distressed sales come to the market.
“However, as our latest Global Market Perspective research notes, fewer distressed sales have occurred than were first expected. This is partly because credit availability is being bolstered by programs such as the Public Private Investment Program (PPIP) in the US and potentially the Australian Investment Business Partnership (AIBP).”
Mr Talbot said recent Jones Lang LaSalle research predicted recovery times in the current property market downturn were expected to be quicker than in the 1991 downturn, which was another factor for investors waiting on the sidelines to take into account.
“The 1990’s downturn took three years, from peak to trough.  In comparison, we are just over a year into the current downturn and capital values look likely to stabilise in early 2010.
“Jones Lang LaSalle historical research into the behaviour of the property markets in London and Sydney shows that recovery in the property market lags improvements in the economy by as much as two years. However, recovery times in Australia are expected to be quicker than in the 1991 recession due to the better property fundamentals of lower vacancy rates and lower supply pipelines this time around.
“For investors seeking to position themselves for the next phase of the market cycle, the latter half of 2009 is likely to prove decisive,” Mr Talbot said.
The Global Market Perspective also examines what are likely to be the lasting effects of the GFC on property markets:
Once the property market recovers, conditions will be markedly different.  First, commercial real estate bank debt will be constrained for an extended period.  Banks have a lot of balance sheet repair work ahead and will be using their new pricing power on refinancing real estate loans to fund those repairs. In addition, most of their available real estate credit allocations will be used to refinance existing loans, not new originations. 
Both impacts are going to restrain property transactions for a period of time.
While securitized debt likely will return in some form, these instruments will be more transparent, more regulated, better underwritten and properly rated.  REIT boards of directors and shareholders are going to insist that they run their businesses with lower leverage and lower risk models.
Institutional property investors in property are also going to demand more transparency from their managers, better governance, improved risk management and better fundamental property knowledge.