Claret Capital, the private investment firm based in Dublin, Ireland, in September 2007, announced that it has executed a purchase and sale agreement for the acquisition of a 90% interest in the 5 star St. Regis Hotel in Washington D.C. The St. Regis was acquired in an off-market transaction from a joint venture between Brickman, a New York based real estate private equity firm, and New Valley LLC. The sale price was not disclosed but is believed to be about $170 million (€121 million).

Global commercial property transaction volumes in H1 2008 have fallen 41% from the record levels seen in H1 2007.  At just $236 billion, investment volumes were almost back to H1 2005 levels. Despite the lower volumes, the trend toward the globalization of real estate ownership was maintained with cross-border investment activity continuing to account for almost 45% of total transaction volumes. There were however regional variations with the share of cross-border activity rising from 25% to 30% in the Americas but falling from 46% to 34% in Asia Pacific and from 66% to 58% in Europe.

Tony Horrell, CEO European Capital Markets at Jones Lang LaSalle commented: “The fall in volumes was driven by global credit conditions which made debt both less available and more expensive. As a result, many purchasers are unwilling or unable to transact at prices seen in 2007, while vendors are unwilling to reduce expectations.  This has caused a stand-off between buyers and sellers, particularly for large lot sizes.” 

The record transaction volumes in recent years were driven by the availability of relatively cheap debt. With the collapse of the global CMBS (Commercial Mortgage-Backed Securities) market as well as a general increase in the cost of debt, highly leveraged investors have exited the market. At the same time, a sharply slowing global economy as well as falling values and expanding yields is causing investors of all types to be more cautious. While equity based investors are still active, they are selective. Many are waiting on the sidelines for pricing movement.

 Looking to the year ahead, Horrell continued, “It may well take another year before debt markets stabilize and in the meantime we are likely to see increased distressed selling.  High growth markets or core markets perceived as oversold are likely to attract the most attention from buyers. With high velocity of pricing change comes opportunity for buyers. The range of opportunity will increase for those able to commit equity in the next 12 months.”

Investors are also seeking out markets with lower transparency but solid growth fundamentals. These include Latin America, with particular focus on Brazil, Central and Eastern Europe, and markets in Asia Pacific such as Vietnam. Jones Lang LaSalle expects investment volumes in 2008 to be at least 35% down on 2007 with risk on the downside, bearing in mind that the market was already showing weakness in the second-half of 2007.

H1 2008 Regional Highlights

During the first-half 2008, transaction volumes in the Americas dropped 56% from a year earlier to approximately $75 billion. Cross-border investment was also down significantly, falling by 47% to $23 billion. However, as a proportion of total activity, cross-border investment increased from 25% to 30%.

Declines in volumes in the region were led by the United States, which experienced a steep 61% fall from H1 2007 to roughly $64 billion. The most impacted types of transactions have been large portfolios and M&A activity, which really supercharged the U.S. market between 2005 and 2007.  These deals have dried-up to the point of becoming practically non-existent during 2008. In Latin America, transaction volumes were also down in the first half. However, poor product availability was the main factor in falling activity as opposed to the credit crunch or economic concerns. Canada unexpectedly defied the overall trend of early 2008 with volumes rising by 54% to $7.4 billion in H1 2008. Canada has thus far remained relatively immune to the credit squeeze due to its traditionally conservative banking and financial sectors.

United States: Domestic Cross-Border Impact

While total cross-border transaction volumes in United States dropped by 53 percent from $37bn for H12007 to nearly $19bn for the first six months of this year, the share of cross-border transaction activity in the United States has grown indicating a revived interest from international investors in domestic product given the stalled debt markets and weakness of the U.S. dollar.  For the first-half 2008, cross-border transactions grew to 27% of the total volume, up from a strong 23% the previous half-year.

Having just completed a four-city international investor road-show through New York, Washington, D.C., Chicago and San Francisco, Steve Collins, Jones Lang LaSalle’s Managing Director of the International Capital Group commented on the renewed state of foreign interest.

“What surprised us is that a lot of the domestic investors and owners have woken up to the fact that there is limited domestic capital available today.  The United States is now open to an international capital insurgence,” noted Collins.

Collins points to an emergence of new foreign investors in the United States market in the first-half of the year including Spanish investors who have purchased major retail and office product in CBD Chicago, Irish investors like Vico Capital’s D.C. purchase of 2099 Penn Avenue, as well as an active German investor base noted by Jones Lang LaSalle’s recent $147.9 million sale of Paseo Del Mar in San Diego on behalf of KBS Realty Advisors to German Metzler North America. Collins also noted the emergence of Korean investors who purchased in One Sansome Street in San Francisco and have shopped in Los Angeles and competed for property in New York.

“The change in the Korean tax law has enabled Koreans to look favorably to the United States as an attractive investment area,” commented Collins.

Middle Eastern investors are also keying into opportunities to invest through joint ventures, mezzanine positions and in equity ownership, but many remain “ego buyers” looking for marquis assets that have impressive curb appeal and locations that quite simply can't be replicated, and little in between.

A number of foreign investors are still seeking a domestic “fire-sale” in the United States, but the domestic market is not showing signs of severe distress.  Collins expects to see an uptick in cross-border activity in the second-half 2008 as there is no lack of capital available and it needs to be invested into prime real estate to meet allocation requirements.

“In the past 120 days, we have met with or talked to more than 25 investors looking to invest in United States real estate this year and beyond,” concluded Collins.

Heading across the pond, the effects of the credit crunch have bitten into Europe’s commercial real estate market with transaction volumes totaling $106bn in H1 2008; this represents a 38% fall in USD terms compared to H1 2007, and an even greater fall in Euros (44%). Cross-border investment declined by 46% to $61 billion, but continued to account for almost 60% of total activity.

Activity in Europe’s largest markets of the UK, Germany and France totaled just $53 billion in the first half of the year, a fall of over 50% on the same period a year ago. Some of Europe’s second tier markets, in contrast, proved more resilient. For example, Belgium, Finland, the Netherlands, and Spain all registered increases in dollar terms (although volumes were slightly down in Euros). These markets were supported by a number of significant portfolio and corporate deals, notably in the first quarter. Similarly investment volumes in Central and Eastern Europe remained resilient, supported by the continued strength of the Russian market and growing activity in Romania.

Asia Pacific remained robust in H1 2008 with investment volumes almost unchanged at $55 billion (down 0.3% on H1 2007). However, in local currency terms, volumes were down by 9%. Overall activity was supported by domestic investors as cross-border investment declined by 25% in H1 08. At $19bn, cross-border activity accounted for 34% of total activity (down from 46% in H1 07).

South East Asia witnessed the strongest investment volumes across the region with its strong growth profile continuing to draw investors. Singapore in particular saw a significant rise in investment with total volumes reaching $4.8bn (up 20% from a year ago). In China and Japan, investment volumes grew in USD terms, up 3% and 8% respectively in H1.  However, holding exchange rates unchanged between H1 07 and H1 08, both markets fell by about 5% with both deal size and the number of deals down under the impact of the credit crunch. In Australia, similar to the core European and US markets, rising borrowing costs led to an investor/ vendor disconnect. As a result, volumes in H1 2008 were down 52% in USD terms and 57% in local currency. 

Historic Global Direct Commercial Real Estate Volumes