Reuters Summit-Property revival buckling under economic strain

LONDON: After three years of freefalling values, 2010 recovery hopes for the recession-scarred commercial property sector are hanging in the balance as global economic woes and refinancing troubles threaten to re-open old wounds.

Fresh from staving off a global banking sector meltdown, governments are now mustering bail-out funds for entire economies, forcing investors to swap growth plans for survival strategies until panic over the global economy subsides.

At the Thomson Reuters Global Real Estate and Infrastructure Summit this June 14-17, leading industry figures will be asked how far such concerns could throw the market comeback off pace and what investments might provide respite from the storm.

Research by ING Real Estate Investment Management shows the global property market recovery unfolded faster than expected, but has now reached "a crucial inflection point" in terms of sustaining momentum.

In infrastructure, divergence in economic growth and the strength of public finances between developed and developing countries are creating as many opportunities as challenges for investors.

Strained budgets mean governments want to attract private investment to the sector, but the downturn has diminished appetite for assets exposed to GDP growth, notwithstanding the allure of steady inflation-linked cashflows.

ING favours the United States and some Asian property markets, such as China, where economies are forecast to grow by 3 percent and 11 percent, respectively, against the 1.2 percent growth it has forecast for the Euro zone.

As confidence in the global economy founders, many property analysts have stopped mulling how quickly the market will get better and started pondering how rapidly it could deteriorate.

Future transaction activity remains uncertain as sovereign debt worries swirl and banks show few signs of returning to the sector the financial system brought close to collapse in 2007.

Even though returns on cash are mired at record low levels, global property investor appetite remains fickle, leaving prices for lower quality or distressed assets well behind those for prime offices, upmarket malls and luxury housing.

Data from Real Capital Analytics (RCA) showed $124 billion of global property sales in the first-quarter 2010, more than double the volume seen in the corresponding quarter of 2009, but 62 percent down on the fourth-quarter 2007 peak.

Much of the slowdown in sales can be pinned to a lack of clarity in pricing and concerns that sluggish economies and possible bank fire sales could shunt values back into reverse.

Real estate adviser CB Richard Ellis estimates that about a third of Europe's 970 billion euro ($1.2 billion) outstanding real estate debt pile could run into trouble due to high loan-to-value ratios and weakening occupier markets.

Across the Atlantic, the Congressional Oversight Panel in charge of restoring stability to the U.S. banking system estimates about $1.4 trillion of outstanding commercial property loans need to be refinanced before 2014, about half of them already worth more than the real estate they are secured on.

The shaky state of bank balance sheets has forced many fund managers and property companies to scour volatile and costly public and private equity markets for financial support, a trend likely to continue for the foreseeable future, experts say.

Data from NAREIT shows investors pumped about $10 billion into the listed U.S. property market in the first quarter. The unlisted European funds sector is only seen attracting a total of 10.9 billion euros in 2010, estimates from INREV suggest.

Besides finance, pricing and economic stability, property investors are also starting to worry that increasing global political tensions may put their investment returns at risk.

An age of austerity has arrived, sparking riots, strikes and heavy government intervention into property markets through fiscal or regulatory reforms, giving investors even more reason to sit on the sidelines.

The world is also waiting to see whether China can cool its red-hot property market without alienating the developers it depends on to help meet huge demand for low-cost housing.- Reuters