21 agosto 2008

"The investment risks and rent risks on the global office markets have continued to show an upward trend

in recent months. Particularly in European office hubs such as London or Paris, risks have pushed upward. Similar, sometimes hefty increases have been reported from the United States. Thus, the cooling economy puts additional pressure on investment volumes and local letting markets. For the time being, Germany takes exception to the global trend, showing constant risk levels on the investment markets and an actual decline in rent risks. Between now and 2011, risks in Europe are likely to decline across the board, whereas in many US cities they will keep pushing upward. These are the key findings of the real estate risk trend that HSH Nordbank publishes twice a year.

Europe: Prices to Remain Stable on the Whole

“The risen interest rate and risk premiums in the wake of the financial crisis have strongly impacted the current investment behaviour of the market participants. On some European markets, such as London, the transaction volume dropped by more than 40 percent during the first semester of 2008,” elaborated Peter Axmann, Global Head of Real Estate at HSH Nordbank AG. “At present, the investment market is characterised by a sense of paralysis. Many sellers and investors currently refrain from closing deals in order to keep from selling too cheaply or from buying too dearly, as the case may be. Nonetheless, we expect transaction volumes to perk up noticeably again by the end of the year,” Axmann added.

Investment risks have risen everywhere in Europe, while remaining on a medium level. From a pan-European perspective, it is an adjustment of short-lived nature that will leave the overall stability of prices intact. The exceptions are London and Madrid: In these two cities, experts anticipate price drops of 20 percent before 2010. The year thereafter is predicted to bring down investment risks across Europe.

London has been harder hit by the financial crisis because of its dense concentration of banks. The investment risk in Central London has been rated as “medium,” causing it to exceed the pan-European risk level for the first time ever. Jobs are cut, and the call for office floor space is regressive. Investors, too, are turning their backs on London. Last year, the transaction volume shrank by 15 percent. Then again, even the investment risk in London is predicted to return to a low/medium level by 2011, that is, once the economic situation has revived.

Paris also reports a major investment risk increase since the beginning of the year, graduating from the lowest level of “low risk” to a “medium risk” rating. As a result of the regressing investor demand, prices have slightly softened. Unlike in London, the office market in Paris has been spared a slump in employment and thus in floor space demand. If anything, the letting market is impacted by the high construction volume at a time of declining take-up. In spite of the risen risk levels, Paris remains the market with the lowest rent and
investment risks in Europe.

Major Decline in US Transaction Volume

The US economy has clearly lost in momentum over the past six months. The loan crisis with all its ramifications and the soaring oil price have hit the United States particularly hard. The country is undergoing a painful adjustment process that will coincide, to a certain extent, with a decrease in terms of consumer spending and investments. What will save the United States from a permanent recession, however, are the country’s robust exports. HSH Nordbank
projects an economic growth rate of 1.4 percent for 2008. “As a result the transaction volume on the office real estate market sank as well.

Compared to the same period last year, office real estate sales dropped by 60 percent during Q1 2008 alone. Particularly the prices of larger real estate portfolios declined by ten percent, taking the year as a whole,” said Peter Axmann. Meanwhile, the investment market is no longer rated as “low/medium risk” but as “medium risk.” The example of New York goes to show, though, that even within a regional market the response to the financial crisis may show different levels of sensitivity. While New York Midtown South reports increased investment risks, New York Midtown North was actually given a lower rating.

The investment risks are expected to keep rising in some cities, most notably parts of New York, Washington D.C., and California. This means that these markets are following a different cycle than Europe. The US letting markets are also subject to elevated risk levels. Rather than “low/medium risk,” the Californian office markets now rate “medium risk” for example. The higher risk factor is attributable to a lower take-up that coincides with a higher volume of newly completed floor space. Moreover, rent rates have declined when compared to 2007 levels.

Stable Risk in Germany

Once again, risk levels on Germany’s investment markets have remained stable. On the letting markets they have actually declined. While the transactions volume admittedly decreased in the past semester, prices have remained stable on the whole. Forecasts predict a sinking investment risk between now and 2011, yet the “medium risk” rating will remain in place. “The decline in rent risks during the first six months of 2008 can be traced back to the fact that
the number of jobs keeps rising – if at a slower pace – and thus to the continued high-level demand for office space,” commented Axmann. However, since an increased volume of floor space will be completed between now and 2011, the rent risk will rise again during that same time. In Germany as a whole, it will nonetheless linger on a medium level" (CS della Banca).