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Demand for global distressed property predicted to slow, RICS says

Demand has, however, moderated in nearly 50% of the countries surveyed by the RICS Global Distressed Property Monitor in the third quarter, most notably in Brazil, Portugal and Russia.

Agents in the UK, Hungary and France also anticipate increasing levels. Notably, in New Zealand and Poland supply expectations moved from negative into positive territory this quarter.

Significantly, supply is expected to outstrip demand in 60% of countries surveyed compared with 40% in the previous quarter.

On the demand side, property professionals in 19 of the 25 countries reported a rise in investor interest in the third quarter compared to 21 in the second quarter, but the pace of demand reportedly fell in nearly half of these, most considerably in Hungary and Japan. Importantly, agents in Russia and Portugal reported swings in sentiment and net balance scores for investor demand moved from positive into negative territory.

That being said, bright pockets remain. The supply of distressed property in the fourth quarter is expected to contract in Brazil, Russia, China, Canada and Hong Kong, while investor demand picked up in Malaysia and the Czech Republic, where net balance scores moved from -13 to +29 and -7 to +5, respectively, quarter over quarter.

‘Around the world, a further rise in the quarter four supply of distressed property is widely expected. So far, however, the worst fears of the market have yet to be realised with banks generally managing down their real estate exposure carefully,’ said RICS chief economist Simon Rubinsohn.

‘The deteriorating picture in the latest RICS report is most pronounced in the Southern European countries, which remain at the centre of the euro crisis. Meanwhile, investor appetite for distressed assets may be cooling a little in the face of continuing uncertainty in financial markets and the worsening economic news flow,’ he added.

Regional Highlights

Supply of distressed property in Brazil is still expected to contract in the fourth quarter at a pace little changed from the previous quarter. Investor interest in distressed assets remains subdued. More generally, the real estate market in Brazil is still prospering, with capital values and rents expected to rise further over the coming months, the report says.

Investor demand for distressed property in China still far outstrips expected supply this quarter, continuing a trend which began 12 months ago. The pace of rising investor demand did moderate somewhat in the third quarter but still remains strongly positive.

Looking ahead, the supply of foreclosed property coming to market is expected to decline over the near term at roughly the same pace as seen in quarter two. Despite some negative news flow regarding the residential sector more recently, the commercial sector remains reasonably well underpinned. According to the latest RICS Global Commercial Property Survey, property professionals expect rents and capital values to continue to rise in the coming months.

France has seen a considerable uptick in the pace of expected foreclosure. Net balance scores moved from +22 to +41, quarter over quarter. In terms of demand from specialist funds, levels of interest remain positive, but property professionals report a slight slowdown in pace. Similar to last quarter, then, it seems likely that property supply will continue to outstrip investor demand through to the end of the year.

The distressed property picture in Germany improved in the third quarter with the pace of demand rising slightly. In addition, the pace of distressed property coming to market in the fourth quarter is largely expected to stabilise.

‘Therefore, and unusually for Western Europe, levels of demand are expected to outweigh levels of supply in the near term. This is broadly consistent with the more positive readings received for Germany on both the occupier and investment markets,’ the report explains.

Property professionals in India report rising levels of investor interest this quarter, though the net balance has moderated from +51 to +20, suggesting the pace of rising demand is slowing. Expected levels of supply continue to increase for the fourth quarter as well, although at a slightly slower pace than in the second quarter.

In Russia levels of demand by specialist funds fell in the third quarter, reversing the trend seen last quarter . According to the survey, a decline in the availability of distressed property is still expected in the fourth quarter, although at an even slower pace than seen previously.

Agents in Portugal report a modest fall in investor demand this quarter with net balance scores falling to -5, reversing the rather strong surge seen last quarter. This, coupled with expectations for increasing distressed property supply in the fourth quarter, leaves Portugal with a significant mismatch; one in which supply far outweighs demand.

While still in positive territory, Spain witnessed an easing in the level of interest from specialist funds in the third quarter as net balance scores moved from +56 down to +38, quarter over quarter. ‘That being said, agents also anticipate a slow down in the pace of distressed property coming to market. As the euro crisis continues to drag on, the supply of distressed property is likely to continue to rise in both countries,’ the report adds.

In the UK levels of distressed property expected to come to market in the fourth quarter look set to pick up from the previous quarter although, to date, this flow has been reasonably well managed thereby limiting the direct impact on pricing of real estate more generally.