Global demand for distressed commercial property soars

Global demand for distressed commercial property increased dramatically in the second quarter of 2011 and is expected to outstrip supply in the next three months, according to the latest report from the Royal Institution of Chartered Surveyors.

Over 80% of the countries surveyed in the RICS Global Distressed Property Monitor reported heightened levels of interest from specialist funds in the second quarter with three quarters of these reporting even greater levels of demand than last quarter.

Indeed, in over half of the countries covered, the net balance figure for second quarter demand for distressed property outstrips the comparative number for the third quarter expected supply, most noticeably in Japan, China, Singapore and Hong Kong.

Investor demand rose most dramatically in Japan and Hungary this quarter, where net balance scores moved from +6 to +68 and +3 to +64 quarter over quarter, respectively. In Italy, Poland and Russia agents reported noticeable shifts in sentiment with demand swinging from negative into positive territory.

The survey does, however, suggest that the supply of distressed property continues to outstrip demand in some countries, most noticeably in the Republic of Ireland, Italy and the UK.

The RICS Global Distressed Property Monitor is a quarterly report that reveals trends in 25 commercial property markets across the globe. A distressed property is defined as a property that is under a foreclosure order or is advertised for sale by its mortgagee. Distressed property usually fetches a price that is below its market value.
 
An increased rate of distressed properties entering a country's market can be seen as a negative economic indicator while a decrease may signal recovery.

Property professionals in the majority of countries surveyed expect the level of available distressed property to rise in the next three months. Ireland, Spain and Italy have the highest readings for the levels of foreclosure, while Brazil, Malaysia and Russia have the lowest. Interestingly, agents in South Africa report a dramatic shift in sentiment and now expect a substantial rise in distressed property for the third quarter, in contrast to the negative net balance score posted in the firs three months of 2011.

‘It is interesting to see agents reporting such a dramatic rise in investor appetite for distressed assets, quarter over quarter. To some extent, this may be seen as an encouraging development reflecting a measure of confidence in the outlook for the real estate sector despite the softer tone to the macro news flow,’ said RICS chief economist Simon Rubinsohn.

‘However, it needs to be borne in mind that the results are very country specific with generally negative numbers coming from those markets where the economic pain is most intense,’ he added.

In the UK the expected supply of distressed property in the third quarter looks set to far outweigh investor demand as supply continues to increase at an even faster rate and investor demand contracted slightly this quarter. This is despite the Bank of England's stance on keeping interest rates at just 0.5%. The current uncertainty regarding the economic picture should mean the Monetary Policy Committee continues to sit on the policy sidelines for some time to come giving some breathing space for the property sector.

Investor demand fell in Brazil this quarter, from a net balance of 0 to one of -23. Looking ahead, agents expect the supply of distressed property to fall dramatically in the coming quarter as well, in contrast to last quarter's expectations for increased listings. That said, the real estate market still remains firm with capital values generally thought likely to rise further over the coming months.

Levels of distressed property coming to market in China are still expected to decline in the third quarter, although somewhat less so than the previous quarter, with net balance scores moving from -34 to -20. Looking ahead demand for distressed property is still expected to far outstrip supply in this country which is consistent with the projection for further price gains in the commercial market.

According to the survey, demand for foreclosed property in India looks set to surpass expected levels of supply in the third quarter with demand from specialist funds appearing to rise dramatically in quarter two. Meanwhile, the pace of supply is anticipated to rise only slightly.

Property professionals in Russia anticipate a continued decline in the level of distressed property for the third quarter, albeit at a slower pace than in seen previously. In contrast, agents report a full scale positive swing in investor demand as net balance scores moved from -11 in Q1 to +17 in quarter two. It therefore looks likely that distressed property prices in this country will stabilise over the course of the coming quarter.

Spain witnessed a rather strong surge in investor demand this quarter, moving from a quarter one net balance score of +24 to +56. Portugal saw an even stronger surge in the rate of demand, however, as net balance scores moved from +4 in quarter one to +53. Both Spain and Portugal are in the top five in terms of expected levels of distressed property supply for the third quarter of 2011, however, with net balance scores of +70 and +60, respectively. Not surprisingly, therefore, property professionals in both countries report that expected third quarter supply will outstrip current levels of demand by specialist funds, which could add to the existing downward pressure on prices.