LONDON: A wave of forced sales is likely to pummel Europe’s wilting commercial property market in the coming months, despite a bevy of potential buyers on the sidelines, property experts have said.
In a note to clients, JP Morgan analysts said the market was braced for an “explosion” of property sales, with 340bn euros ($471.2bn) in assets potentially hitting the market, including assets offloaded by the European administrators of Lehman Brothers.
“As a result, we believe transaction prices may overshoot to the downside (and prolong the downturn), some sellers may postpone their disposals or roll over their funds, and buyers will be cherry picking,” the note said.
JP Morgan’s Harm Meijer told Reuters by email that a “large percentage” of these expected sales were likely to be forced by creditor banks or involve companies looking to act now in order to avoid future breaches of loan covenants.
Property sales linked to the financial industry’s ongoing convulsions were also in the mix, including $15bn of property assets in Britain and across Europe which had so far been identified by Lehman’s administrators.
In the case of listed property firms, about three-quarters of the estimated 20bn euros in assets prepared for sale were likely to be forced sales, JP Morgan said.
Nick Axford, head of European research at CB Richard Ellis (CBRE), said forced sales of commercial property had been limited to date but were set to pick up before the year was out.
“It is likely that we are going to see more products coming to the market where people really do need to find a buyer by the end of the year,” Axford said.
Any forced adjustment would be painful as investor losses were realised but also had the potential to re-energise flagging trade.
The amount of European commercial property bought and sold in the first half of 2008 - at 66.5bn euros — was almost half what it was in the same period of 2007, according to CBRE.
“It (forced sales) could push prices down further but equally it could have the impact of bringing some buyers into the market,” Axford said.
CBRE said around 250bn euros was potentially available for investment in European real estate from various sources, including sovereign wealth funds, pension funds, and real estate investment trusts (REITs).
“The positive thing is that there are lots of different investors out there with lots of different strategies and intentions, which means that anything that comes to the market would see more interest,” he said.
Much of the property currently on the market was of insufficient quality or being offered at too high a price to attract buyers, many of whom sensed that the downturn had yet to run its course and that forced sales were a matter of time.
“A lot of the equity we have identified is just going to sit there until the situation becomes clearer,” he said.
Britain has led a commercial property downturn in the wake of a global credit crunch, with UK property valuations on average down about 22% from their peak last summer.
In broad terms mainland European markets have lagged the fall as seller and buyer expectations have diverged and trading volumes have shrunk, depriving valuers of the deal-based evidence needed to mark down property values more aggressively. – Reuters |
