Commercial property price drop may hit 50%, says ULI’s Newsum

SAN FRANCISCO: Global commercial real estate values may drop 50% from the historic highs reached in 2007, said Jeremy Newsum, former chief executive officer of the UK’s Grosvenor Group Ltd and chairman of the non-profit Urban Land Institute.

“There is more pain to come,” Newsum, 53, said in an interview at ULI’s annual conference in San Francisco. “The economic situation of the world is very fragile.”

Vacancies for all types of real estate have risen 35%, Goldman Sachs Group Inc said in a Sept 30 report that forecast a peak-to-trough price decline of as much as 42%. Debt that fuelled the record rise led to “artificial” values and a destructive short-term perspective that “may well have damaged the global nature of real estate”, Newsum said.

The performance of property loans sold as commercial mortgage-backed securities is also worsening. The rate of defaults and late payments on CMBS increased more than fivefold in the third quarter, according to Reis Inc, a New York-based real estate research firm. About US$26.64 billion (RM91.3 billion) of CMBS loans were 60 days or more past due. The default and delinquency rate rose to 4.52% from 0.8% a year earlier, Reis said.

“Everyone needs to distinguish between fundamental value driven by rents and GDP and artificial value,” Newsum said. “The amount of leverage that got into the system was too high.”

Newsum was CEO of Grosvenor, a closely held London-based company owned by the Duke of Westminster’s family trust, from 1989 to June 2008. He helped diversify the 332-year-old family holdings into a global property company stretching across 16 countries, with owned assets valued at £5.96 billion ($40.38 billion) in 2007, the last full financial year before he stepped down.

The value of Grosvenor’s owned assets was £6.2 billion at the end of 2008, said spokesman Lorin Horosz. The firm manages a further £6.4 billion of real estate for outside parties.

Newsum said UK and China property values, which fell faster than those in the US and continental Europe, are also closer to recovery. The deterioration in values will stop only when commercial rents halt their decline, he said.

“A realistic view is what’s needed in these times,” Newsum said. “Real estate is a long-term game.”

In Europe, investors are more optimistic that the commercial market is near a bottom, CB Richard Ellis Group Inc said in an Oct 20 report. Sales of shops, offices and warehouses rose 34% in the third quarter from the previous three months as €17.3 billion (RM88.62 billion) of property was purchased. That was 44% less than a year earlier, according to the Los Angeles-based broker.

ULI, based in Washington, is a global real estate organization with almost 34,000 members including chief executives of property firms, developers, bankers, architects, city planners and researchers, among others. – Bloomberg LP