The value of the real estate capital market reached US $12 trillion (approx. €7 trillion) in 2007, up 18% on the previous year, according to DTZ’s flagship Money into Property report. Global investment transactions also grew to US $730 billion in 2007, but, following the sea change in the global investment environment over the course of last year, DTZ expects a fall of 30% in 2008 to about US $500 billion. 

DTZ reveals that global direct real estate transactions were down some 50% in Q1 2008, compared to the same time in 2007. In the UK, transactions appeared to stabilise in Q1 2008, standing at £7 billion, 42% down on Q1 2007. The rapid correction in market pricing has seen yields move out by 123 bps since their trough in April 2007, and foreign-based investors, notably German funds, sovereign wealth funds and private equity from the Middle East and Asia Pacific, are now showing interest in the UK market. However, DTZ warns that the enduring disconnect in buyer/seller price expectations that has left many deals on hold or deferred suggests yield correction still has further to go in the UK and also Europe.

DTZ believes that, at best, the worst of the first phase of the ‘sub-prime’ crisis (a serious liquidity squeeze on the banking sector) may be over, but that the credit crunch proper (i.e. a marked tightening in the pricing and availability of debt) has much further to go, and will continue well into 2009. This is backed up by the results of the DTZ Lenders Survey which reveals that 75% of respondents in the European market anticipate tightening lending terms and conditions, and 45% expect a reduction in typical loan-to-value ratios. Furthermore, the majority of respondents expect no significant recovery in the European CMBS market until 2009 at the earliest.

Meanwhile, the Investor Intentions Survey reveals that 62% of respondents expect to increase funds allocated to real estate in 2008, with European and Asia Pacific investors significantly more positive than those based in the US. Overall, investors expect to increase funds allocated to global real estate by an average of 4% and Asia pacific investors expect to increase their allocation by 10%. The survey reveals that 56% of all respondents plan to increase exposure to Asia Pacific real estate (against only 15% wanting to reduce it), with China remaining the primary area for investor interest, whilst there was some shift in focus away from Japan, Australia and Singapore in favour of emerging markets such as Vietnam and Indonesia.

Meanwhile, the survey shows a marked shift in sentiment towards the UK market, with just 44% of respondents looking to increase their exposure in 2008 compared to 80% in 2007. UK commercial property capital values have fallen by around 18% since summer 2007. DTZ anticipates a further fall of at least another 5% in the second half of 2008 as rental growth in occupier markets turns more comprehensively negative, but value changes will be very asset-specific. The London City office market is particularly vulnerable, with rents anticipated to decline by 25% over 2008 and 2009 as a whole. However, deteriorating occupier conditions have been largely priced into property yields, which are forecast to stabilise by 2009, with the exception of some retail sub-sectors and secondary assets. DTZ warns that there is unlikely to be a substantial revival in UK investment transactions before 2009 and investment returns will remain weak until 2010.

Robert Peto, DTZ’s UK & Ireland Chairman comments: “With prospects for capital growth limited, investor focus has returned to occupier fundamentals. In the UK and US, a ‘double dip’ in investment markets remains a risk given the vulnerability of occupier markets to a weak economic outlook. In contrast, many Central & Eastern Europe markets will continue to see strong rental growth and the outlook for Asia Pacific is looking positive, with a buoyant occupier market outlook and improving investment access.”

Paul Sanderson, EMEA Research Director at DTZ concludes: “Globally we expect investment transactions to be around US $500 billion in 2008, down 30% on 2007. This shift reflects weakness over the first half of 2008 and a relatively modest pick-up thereafter, which is likely to be driven principally by the Asia Pacific market. Investment opportunities remain, especially in the indirect market, and are likely to grow in the direct market as we approach ‘fair value’ in the US and Europe, with equity-based investors in a particularly strong position to capitalise.”

Nicholas Spiro, DTZ’s regional investment director adds: “The commercial property investment markets of Central & Eastern Europe (CEE) and Russia are not immune to the turmoil in global financial markets, but have so far proved resilient to the credit crunch. The region as a whole faces (and benefits from) qualitatively different economic conditions than in the advanced economies, in particular rapid 'catch-up' economic growth rates and underleveraged borrowers, which help insulate the region from the worst effects of the credit crisis.

"The repricing of risk, which has been most visible in the widening of bond spreads in countries that are most vulnerable to the credit crunch because of their large external financing requirements, has yet to be fully reflected in prices for commercial properties. This is largely because of the relative immaturity of the CEE-Russian markets, with more scope for mispricing to occur when capital values are rising and a time lag for repricing to set in now that debt markets have tightened.

"Direct real estate transactions in CEE-Russia in the first half of 2008 are down relative to 2007, notably in Hungary and the Czech Republic. This is a reflection of repricing taking hold across these markets. However, transaction volumes remain robust in Russia, the largest investment market in the region, on the back of very strong occupier fundamentals. Investor interest in the region remains positive, driven by equity-led buyers, particularly German open-ended funds. Property fundamentals have come into much sharper focus, particularly in the 'core' markets, with returns now driven by rental growth and asset management opportunities."