Opinion: Owners haven’t recognized the price shift

CIJ Blog asked Philip Wood of Cushman & Wakefield’s Capital Markets Group about the investment market. If you agree or disagree, the comments box is the place to say so…

The investment market has been extremely slow in 2009. Do you see any causes for optimism yet?

The negative press surrounding the  CEE region has abated recently, and there have  been transactions closing in the last few months across the region on prime offices, secondary offices, shopping centres, and redevelopment opportunities.  Whilst these transactions might not necessarily represent green shoots of recovery, it is evidence that the market is still functioning if pricing expectations are realistic.  Those buyers have been both domestic and internationally based.

In terms of causes for optimism, I think that a number of things need to happen before confidence starts to improve. Firstly, those few remaining building owners who have not recognised price corrections need to accept that the market has changed. Secondly, in light of price corrections, lenders across CEE need to continue to constructively assess the status and quality of the assets that they lend on, identify where the problems might be, and try and adopt pragmatic approaches to asset management of those buildings if at all possible rather than start foreclosures on loans. And thirdly, the available debt needs to become more accessible and affordable to new investors in the region – there is already equity out there waiting to be allocated into real estate in the CEE region. None of these occurances are insurmountable, and it’s clear that they beginning to happen, which is a good thing for the market.

Will Czech assets struggle until they fall to assumed levels in the UK?

The traditional buyers for prime real estate in Czech Republic are also looking to other markets in Europe and beyond, and the UK is being used as a benchmark as a market that has re-priced quickly, realistically, and significantly. But there is also still a currency play with the strength of the EUR on the pound, so there is a double benefit in price shift for EUR denominated funds. The shift in pricing in Czech is beginning to crystalise now, but until there is a widespread recognised re-pricing by owners, I expect there to be fewer traditional ‘sale’ transactions in the coming months, and more structured finance deals with creditors where investors are dealing directly with lenders looking to avoid foreclosure, rather than direct deals with the building owners.

Would you expect 2010’s first six months to be better than 2009’s?

It’s difficult to say at this stage, but I would hope that it is, but that is not the same as saying I expect it to be.

If credit markets are continue to loosen, why isn’t this translating into deals yet?

Across CEE there is still debt finance available for new transactions, but as with the rest of Europe there are specific and restrictive qualifying criteria for obtaining that debt, and lenders are attracted only to deals underpinned by longer lease contracts on properties in established commercial locations, with sustainable rental levels, and healthy financial covenant strength of tenants.

Loans are now being capped in a comfort zone of around €50m, and at a maximum of  c.65% LTV, and the most competitive terms tend to be only available to established investors with strong track record in the region, and on prime assets. This is where it proves challenging for new investors to transact in this market currently, as to meet their required returns there needs to be a significant shift in pricing of those prime assets to reflect increased margins on borrowing. That shift in pricing is beginning to happen now, but there are still people out there who are still not recognising that the market is a very different place to where it was 24 months ago. There are a small number of deals at an advanced stage currently in Czech Republic, but we need a couple more of those to transact to re-benchmark the true level of the pricing.


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