REAL estate used to be the ultimate all-weather asset class, with low correlation to volatile stocks and unexciting bonds. But in today's debt-starved market, property is not the safe haven it once was. Trusted property market tenets have been deformed by an acute shortage of debt and a worldwide souring in economic fundamentals, leaving the sector in a deep rut - awash with equity and rich with discounts but bereft of buyers. Before, property rental income could rise even if values fell and as one regional market sagged, another flourished. But now property market misery is universal and many of the world's biggest investors are standing on the sidelines. “Things are going to be difficult for quite a while,” Robert Houston, chairman and chief executive of ING Real Estate Investment Management, told Reuters. “Everyone wants to know when the bottom of the market is. I have a good record at calling these things and all I'm prepared to say is that we haven't reached it yet.” Like the majority of its peers, ING has slowed the pace of its real estate investments in recent months, refusing to gamble capital when the only thing it feels sure of is that property prices worldwide will continue to fall. Data from Real Capital Analytics show average global commercial property yields - the proportion of income generated by a property relative to its price - have risen from 6.13 percent in the final quarter of 2007 to 6.53 percent in the third quarter of 2008. Biggest casualty The listed real estate sector is seen by many as the biggest casualty of the worldwide property market slowdown. Hamstrung by barren mortgage markets, investors unable to offload bricks and mortar assets have deserted property stocks in droves. The EPRA/NAREIT Global property index has slumped to a lifetime low of 861 points at market close on November 21 from an all-time high of 2,897 on February 23 2007, but bargain-hunters have yet to be spurred into action. Jacques Gordon, global strategist at LaSalle Investment Management, said many property stocks were now compelling investment buys but only those who could stomach another nine months of volatility should wade in. “Which is the best security to buy? They almost all are ... Almost all the large caps have healthy underlying businesses and vast portfolios that you can gain access to via shares priced at a fraction of what the assets are truly worth,” he said. These massive share price discounts to net asset value have failed to spark a stock-buying spree because investors are concerned property net asset values are lagging a long way behind real market pricing. Third-quarter global commercial property transaction volumes have plummeted 58 percent year-on-year to $84.2 billion, making it even harder to identify fairly priced shops, offices and warehouses, according to Real Capital Analytics. Many investors find it easier to identify places they will not put their money in than finding places they will. “From what I see, very few have been able to make money from real estate in India and China and I suspect people who bought there are today suffering a little bit,” said Olivier Piani, global head of real estate at Allianz Alternative Assets. Recovery postponed ING's Houston continues to steer away from Russian and Indian real estate markets, citing concern over the security of ownership and the level of returns on offer relative to risk. LaSalle's Gordon said emerging markets would show big swings in growth because they depended on a robust global economy, but he was also wary of the United States, where the commercial property price correction was only one-tenth complete. Some bombed-out markets appealed more to some investors than others but all agreed any meaningful recovery in global property markets remained a distant prospect until credit market liquidity was restored. Mat Oakley, a director of European commercial research at consultant Savills, said commercial property downturns in developed economies typically lasted between 1 and 3 years but the unprecedented lack of debt had made it virtually impossible to predict when recovery might begin this time. “The past is not a good guide to the future right now because of the credit crunch. Pricing has become attractive in several markets - not least in the UK, where values have already corrected beyond 1990s levels. But few can buy because the majority of buyers are debt-backed,” Oakley said. “Until that debt comes back, all bets on when a property market recovery might begin are off,” he said.
