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Changing trends in the European real estate markets in 2009

Direct commercial real estate transactions in Europe totalled €112.5 billion in 2008, down 54% from €244.1 billion in 2007 and back to a level between the volumes recorded in 2002 and 2003.

Tony Horrell, Head of European Capital Markets at Jones Lang LaSalle said: "In the first few months of 2009 we have already begun to see the beginnings of trends we expect to play out over the rest of the year.  We expect to see continued focus on core western markets as investors look to maintain liquidity in their portfolios and transact in markets with high levels of transparency and lower macro risks.  The swift movement in pricing combined with a weak Sterling has meant that central London office markets are now seeing the greatest level of investor interest, both in terms of sentiment and transactions completed—we have even begun to see competitive bidding for specific asset types. As pricing continues to move in the UK it is likely encourage further price movements around the rest of Europe."

He continued: "Despite difficult market conditions excellent buying opportunities will materialise in 2009 with equity investors in the best position to take advantage. In previous cycles we have seen the best assets traded on the downside of the cycle rather than the upside and we can expect the same situation to occur in the current cycle as vendors tighten their grip on their crown jewels once they see markets beginning to improve. Despite a lack of distress in the market, there will be opportunities generated by companies who are seeing their gearing ratios move too far, who will look to dispose of assets. Some of these will literally be once in a generation opportunities to acquire these assets at historically low prices."

Nigel Roberts, Chairman of European Research at Jones Lang LaSalle added: "Another key trend we expect for 2009 is large lot sizes trading at a discount. In 2007 and 2008 we saw a premium paid for the ability to place a large volume of capital in a single deal either via a large single asset or a portfolio. The absence of CMBS and tighter lending, particularly for large deals has resulted in a very limited number of investors able to play in the larger lot size market resulting in a discount for larger deals. Even where investors have the ability to transact they will not want to put large amounts of equity into a single asset. In the direct market we expect to see limited activity in lot sizes above €100 million, and only a handful of deals over €250 million."

Other 2009 Expectations

Raising capital remains difficult but some funds have been able to secure new sources of funding, as a result we simultaneously see some investors preparing to re-enter the market and others concentrating on managing their existing portfolios.

Many active investors will become focussed on stable, long term secure income.  Looking ahead their attentions will be focussed on covenant strength, local market conditions and a deeper understanding of the outlook for specific industry sectors. What were once asset management angles will be perceived as having a high level of risk.

There is a wide spectrum of investors shadowing the sector who will remain cautious. Several investors are collecting information and waiting on the sidelines before they play their hand. This group includes international wealth capital, opportunity funds, family offices and private equity.

Debt markets will continue to be constrained throughout 2009 and the impact will be smaller lot sizes and lower transaction volumes.
We are not expecting a flood of distressed assets to enter the market. Irrespective of LTV covenant breaches, banks do not want to crystallise losses and factors such as the low interest rate environment and less vacancy to date than in previous cycles are working in banks' favour.

Corporate occupiers are set to have a larger relative impact on the market in 2009. As in 2008 we will continue to see sale and leasebacks driving a significant proportion of the market and these are likely to be some of the largest deals in 2009 (although this will be dependant on covenant strength). Occupiers will remain net sellers but also expect them to be active purchasers with some seeking to secure long-term opportunities to acquire either headquarter locations or secondary locations at exceptional pricing levels.

2008: Key Facts
The slow down in the number of deals in Europe (2,500 transactions during 2008 down from 3,600 in 2007) was combined with significant falls in prices and lack of financing drove down the average lot size by 32% from €68.1 million in 2007 to €46.1 million in 2008 (a greater fall than the 20% fall in capital values).

Cross Border Investment
For the first time since 2000 cross border transactions declined in terms of total market share, accounting for 56% of total transaction volumes in 2008, down from 63% in 2007. We do not expect this to be the start of a broader trend of retrenchment in cross border investment. The reduction in cross border activity was limited to inter-regional investors (those who invest from outside the region). In contrast intra-regional investors increased their share of total activity from 27% in 2007 to 32% in 2008.

In 2008 the UK, Germany and France accounted for 51% of the market, down from 63% in 2007. However, they remained the most international markets with the UK attracting investment from 29 nationalities, Germany from 21 and France from 17. Generally many of the smaller markets increased their share despite falling volumes. This included Central and Eastern Europe, which increased its share from 4% in 2007 to 8% in 2008; the Nordics up from 10% to 13%; and the Netherlands up from 4% to 8%. Transaction volumes increased year on year only in a small number of countries. For example Russian volumes increased by 40% due to a number of significant deals which took place in the first half of the year.

The office sector was hardest hit with volumes falling 56%, although it remained the dominant sector representing 50% of total investment volumes. Retail and industrial declines were slightly less at 40% and 44% respectively.

UK based investors were the largest net sellers in 2008 with net sales of €6.4 billion. They were joined on the list of largest net sellers by Spanish, Austrian and French investors. The largest net purchasers were German investors (€3.4 billion), in contrast to 2007 when they were the largest net sellers. Other net purchasers in 2008 were US investors, Dutch and perhaps surprisingly Irish investors, where private investors continued to purchase assets in the UK, Sweden, CEE, Germany and at home.