RCA: Troubling Times Ahead for Property Markets

September usually sets the pace of the investment market through the end of the year, and if this September is any indication, the property markets are in for some troubling times, according to Real Capital Analytics’ Global Capital Trends September/October 2008 report. “The credit crunch that has been impeding deal flow in the U.S. and Europe is now spreading throughout Asia and erupting into a full-blown financial crisis in the West,” the report indicated. “In the course of the month, some of the largest lenders to the commercial real estate industry have fallen: Lehman, Hypo, Wachovia, Fortis, AIG, HBOS, Merrill Lynch. Their downfall not only leaves a void for those seeking to finance a property, but represents tens of billions of dollars in property and mortgages that must be liquidated. Those assets will join tens of billions of other properties currently for sale by owners that are under increasing financial pressure.” Sales of significant commercial properties worldwide totaled $388 billion through August, representing a 57 percent decrease compared to same period in 2007, the report stated. The pace of transactions continues to slow and preliminary data for the third quarter shows an even steeper decline of 64 percent from the third quarter 2007. One consequence of tightening credit conditions may be a proliferation of equity joint ventures. With significantly more equity needed to get deals done, investors are teaming up or taking on equity partners to complete transactions. Currently, approximately 20 percent of all property acquisitions worldwide are made jointly between two or more equity partners, according to the report. Joint ventures have been frequently covered by CPN in recent months. On Oct. 9, CPN reported that real estate investment firms, Los Angeles-based LandCap Partners and Kennedy Wilson of Beverly Hills contributed $100 million in equity to a joint venture that plans to purchase newly completed or partially completed homes and condominiums in inventories held by builders and financial institutions. On Oct. 7, CPN reported on Behringer Harvard’s continued efforts to expand its presence in Central Europe with the acquisition of seven additional assets–a retail property in Hungary, five retail properties in the Czech Republic and a Czech logistics facility–via Wenceslas Behringer Ltd. – the joint venture between Behringer Harvard Opportunity REIT I Inc. and St. Wenceslas Property Fund, which was formed in July. “Partnering is extremely important for deals that stretched beyond continents: 39 percent of intercontinental transactions involve JV partners. However, once inside continental boundaries, investors seem equally comfortable doing national deals as intra-continental deals without a partner; 25 percent of domestic acquisitions and 22 percent of intra-continental deals involved a JV,” the report stated. “The desire–or more likely, the need–to hook up is most evident, and most urgent, in the largest deals: 42 percent of all transactions above $250 million are done with JV partners, but that number drops to 17 percent for deals between $100 million and $250 million. Real Capital Analytics Inc. is a global research and consulting firm focused exclusively on the investment market for commercial real estate.