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Promising outlook for commercial real estate in 2010 with Asia offering best opportunities

The 16th edition of the LaSalle’s Investment Strategy Annual says that the free fall in values has stopped in nearly all the major markets it follows and the early stages of restored investor confidence have begun.

The market is already seeing improved visibility on pricing and rising transaction volumes, it adds.

In 2010, LaSalle expects to see a further re-alignment in the pricing of risk with deal flow increasing modestly as sellers gradually come out of denial.

Investors should seek an appropriate balance between total risk aversion, which is already leading to a surplus of capital targeting a handful of ultra safe deals and inappropriate risk tolerance in a period of economic uncertainty, the report points out.

Markets are recovering in very different and surprising ways across the globe. In the UK while capital values will still increase a sharp rebound in prices mean that the best opportunities have passed, the report says.

In Continental Europe the investment environment continues to vary considerably. France and Germany are set to see most of the investment activity in 2010 while re-pricing in other countries continues at varying speeds and Central Eastern Europe continues to be paralyzed.

The report predicts a slower recovery in the US as, unlike the UK, the market has still to find a floor with weak economic fundamentals expected to push vacancies up and prices down until the second half of 2010.
Asia is expected to offer investors the greatest range of opportunities in 2010, as China and India grow rapidly and economies that have experienced a contraction in economic output reclaim lost ground by 2010.

‘Overall, investors in commercial real estate should be cautiously optimistic about the outlook in 2010.

However, as a late cycle participant in the general economic recovery, real estate will behave differently from other asset classes.

The income streams from leased buildings weathered the global recession in remarkably good shape, but as leases mature in generally weak markets, net operating income will be under downward pressure in many countries for several years to come,’ explains Jacques Gordon, Global Strategist at LaSalle Investment Management.

‘At the same time, in terms of stimulus packages and bail outs, commercial property has been treated quite differently from residential real estate, banking and other industry sectors.

And private equity prices have not yet recovered as robustly as stocks or bonds. All these differences mean that real estate’s diversifying power in a portfolio will be restored,’ he adds.

LaSalle acknowledges that investors have good reason to be risk averse but suggests that in 2010, and even more so in 2011, they can look forward to more rational pricing and, in cases of distressed properties and owners, some very compelling opportunities.