Deutsche Bank Unit Sees Global Real Estate Recovery In 2009

Source : The Business Times, December 8, 2007

(LONDON) Global real estate investment is leaving behind an era of above-average returns and is set for leaner times but it will start to recover in 2009, according to RREEF, Deutsche Bank's alternative investments arm.

'There is some justification for the media hysteria but what we are seeing is a cyclical correction not the end of the asset class,' Peter Hobbs of RREEF said in a telephone interview ahead of a speech yesterday at a Reuters real estate event.

'We are expecting a cyclical slowdown, especially in more volatile and overpriced markets such as London, Madrid, Hong Kong, Singapore, Phoenix, and San Diego, but the long-term picture remains exciting,' Mr Hobbs told Reuters.

Mr Hobbs is head of global real estate research at RREEF, one of the world's biggest property fund managers. He also sits on RREEF's product development committee.

The firm has expanded into private equity, hedge fund, and infrastructure investment in recent years but remained committed to real estate, which had a longer and deeper track record of performance than other alternative asset classes, Mr Hobbs said.

'Real estate still has huge potential,' Mr Hobbs said. 'There are generational opportunities.'

The worst case scenario was a repeat of post-bubble Japan, where property investors got their fingers so badly burnt that they abandoned the asset class for much of the 1990s and beyond.

But that was unlikely due to several long-term positives, including the continued growth of wealth in Asia, Latin America, and eastern Europe which would lift demand for retail and residential property for years to come.

Mr Hobbs said total returns - rental income and capital growth - were set to slow across most markets in 2008, bringing the global average down to 6 per cent from 13 per cent this year.

But as aggressive real estate pricing was unwound, so money would be drawn back into the market, he said.

Pension fund allocations to property remained below target in much of Europe and Japan, while sovereign wealth funds with up to US$2 trillion at their disposal had yet to follow the lead of Singapore's GIC by committing funds to real estate.

Even debt-dependent players would come back into play, eventually, as funding costs eased and property was repriced.

The United States, where the economy was under a nasty cloud due to a savage housing crisis, was already becoming an attractive destination again for Europe-based property investors, given recent sharp falls in the dollar, Mr Hobbs said.

The fundamentals in key market New York were also in better shape than in rival financial centre London.

Excess new supply was an issue in London's City office market, even though speculative developments would be reined in due to the global credit crunch, housing market weakness, and a slowing UK economy, Mr Hobbs said.

British shopping malls faced similar problems, as did Madrid, Hong Kong, and some Indian cities, which would weigh on rental growth, he said.

Even red-hot Singapore was vulnerable. Having seen rents grow by 200 per cent in the last three to four years, a recent dip in local real estate investment trust (Reit) shares probably presaged a slowdown, as they had already in the UK, Mr Hobbs said.

UK Reits are down 36 per cent so far this year, predating a slowdown in the country's underlying commercial property market by six to eight months.

In contrast, the Singapore property index is 17 per cent up in the year-to- date period, but it had been 39 per cent up in early October. - Reuters