Much uncertainty’ in real estate

GIC Real Estate president Seek Ngee Huat believes the global property sector still faces much uncertainty and that more distressed assets in the developed world are likely to emerge in the next two years.

Real estate values in developed markets have been written down rapidly due to falling rents and rising capitalisation rates.

Further declines are expected, particularly as investors who face refinancing difficulties are forced to sell their properties, Dr Seek told an audience at the National University of Singapore’s Institute of Real Estate Studies public seminar at InterContinental hotel yesterday.

Professor Joseph Gyourko of The Wharton School, University of Pennsylvania, said: ‘There’s a lot of debt coming due across all sectors in the United States.’

He said housing prices should stabilise in the bubble markets of the US sunbelt region such as Arizona but sharp price downturns in key coastal markets including New York City can be expected this year.

‘Deleveraging has begun in earnest in the West and we are yet to see the full impact of that on commercial real estate,’ he said. ‘The next five years are looking even more challenging than what we have just gone through in the debt market.’

A number of over-leveraged markets have yet to bear the brunt of maturing debt that will occur in the next one to two years, said Dr Seek. Distressed private equity has yet to surface, he added.

Most of developing Asia has been hit by contracting demand but fortunately, as it is not as overly leveraged as the US, it will probably not suffer massive writedowns and depressed values, he said.

There are positive signs of financial markets stabilising but it is too early to tell if the global economy is out of the woods yet. ‘Until we see a sustainable economic recovery… (only then) will growth and rents rise again,’ said Dr Seek.

‘Opportunities abound, more immediately in undervalued Reits and distressed debt, and perhaps in the next year or two, in undervalued or distressed assets particularly in the developed world,’ he said.

Reits, or real estate investment trusts, without a sound asset base and manageable debt levels will continue to languish, and eventually some will fall or be absorbed. ‘I certainly do not want to leave you with the impression that real estate, even in developing Asia, is already on a growth path. There are still a great deal of uncertainty,’ said Dr Seek.

Source : Straits Times – 28 May 2009