LaSalle Investment Management today released the 2010 edition of their Investment Strategy Annual. A publication that provides an outlook for global real estate markets.

The report notes that the plunge in values has stopped in most major markets it follows and sings of increasing investor confidence are beginning to be seen.

LaSalle anticipates a further re-alignment in the pricing of risk with an increase in deal flow as sellers slowly move from denial to acceptance. Investors should seek an appropriate balance between total risk aversion and inappropriate risk tolerance. The former is already resulting in a surplus of capital targeting a handful of ultra-safe deals.

Jacques Gordon, Global Strategist at LaSalle Investment Management said: “Overall, investors in commercial real estate should be cautiously optimistic about the outlook in 2010. However, as a late cycle participant in the general economic recovery, real estate will behave differently from other asset classes. The income streams from leased buildings weathered the global recession in remarkably good shape, but as leases mature in generally weak markets, net operating income will be under downward pressure in many countries for several years to come.”

“At the same time, in terms of stimulus packages and bail outs, commercial property has been treated quite differently from residential real estate, banking and other industry sectors. And private equity prices have not yet recovered as robustly as stocks or bonds. All these differences mean that real estate’s diversifying power in a portfolio will be restored.”

The firm goes on to state that in 2010 investors can look forward to more rational pricing and, in cases of distressed properties and owners, some hugely interesting opportunities. As they develop investment strategies for 2010-2011, investors with a clear view of the returns they require can take full advantage, says LaSalle.

William Maher, Head of US Strategy, LaSalle Investment Management said, “Investment opportunities in North America will improve but are likely to remain limited in 2010, particularly in the United States and in Mexico. In the US, the best opportunities, both core and higher return, will evolve from the resolution of the large level of maturing and failing loans.”

La Salle go on to recommend that investors in the US focus on low-risk re-priced core properties. A large number of opportunities are expected to emerge from the problems caused by the excessive leveraging of the real estate sector over the past five years.

As regards high return strategies, the areas to focus on include distressed debt (public and private) and a wide range of structures that focus on the provision of “rescue capital” to private real estate funds, developers, individual assets, and lenders.

Not surprisingly, the major risks to Commercial Real Estate according to the report is with the capital markets, which are expected to be the main driver of performance, while economies are weak. Real estate capital markets could be quite volatile in the years ahead, says LaSalle. The unintended consequences of monetary and fiscal stimulus policies could lead to too much money flowing back into property ahead of a solid recovery in fundamentals. This excess liquidity risk is already building in China and, to a lesser extent, the UK. To manage this risk, investors should maintain a strict discipline that focuses on achieving a required return with realistic and diligent underwriting.

Equity Interface is an online real estate investment service designed to connect developers and accredited investors. By offering unparalleled research tools and information, Equity Interface empowers members to discover mutually beneficial real estate opportunities. For more information, please visit www.equityinterface.com

The acronym REIT stands for Real Estate Investment Trust.

This is a security that sells like a stock on the major exchanges and invests in real estate directly, either through properties or mortgages.

REITs receive special tax considerations and offer investors high yields, as well as a highly liquid method of investing in real estate. Essentially, it is a liquid, dividend-paying means of participating in the real estate market.

We can distinguish between a few differing types of REIT.

Equity REITs: Equity REITs invest in and own properties (thus responsible for the equity or value of their real estate assets). Their revenues come principally from their properties’ rents.

Mortgage REITs: Mortgage REITs deal in investment and ownership of property mortgages. They loan money for mortgages to owners of real estate, or purchase existing mortgages or mortgage-backed securities. The revenue is generated mainly through interest earned on the mortgage loans.

Hybrid REITs: Hybrid REITs combine both investment strategies of equity REITs and mortgage REITs by investing in properties and mortgages.

Equity Interface is an online real estate investment service designed to connect developers and accredited investors. By offering unparalleled research tools and information, Equity Interface empowers members to discover mutually beneficial real estate opportunities. For more information, please visit www.equityinterface.com

Still reeling from the large losses in Real Estate investments over the last few years it may seem futile to search for any ray of light to ease the pain.

But, wearing an optimistic hat, it is possible to see some benefits for the investor moving forward. The main positive is in the area of fee’s and how they are structured into the deal.

At the height of the boom, the general partner was soaking up a large chunk of the deal through exorbitant management fees. Everyone was happy, deals were going well, and people were taking the eye off the ball when it came to what was going to the sponsor. Figures got so out of hand that the sponsor was finding themselves with as big a piece of the pie as the investor, without having to stump up much cash, if any.

It was not uncommon to see 6%+ placement fees greeting investors at the door with an annual charge of 1%+ on Gross Asset Value thrown in for good measure. Not to mention the piece of the action at the back end which in many cases left the developer/sponsor with up to 50% of the profits.

When one looks at it logically, it simple did not make sense that those who are providing the equity were being left with a decidedly meager offering of the riches on offer.

This is no longer acceptable and developers need to start taking a long hard look at their investment model and ensuring that the fees are at an acceptable level. Investors are wiser as a result of their recent hard knocks and simply won’t accept a sponsor trying to take all the good out of a deal with unreasonable fees.

The institutional investment world is no different and managers here are also in for a serious wake up call.

Until recently, fund managers structured their funds with “2/20” fees. This meant charging investors a 2% fee on their contributions during the fund raising period, and then another fee of up to 20% based on a percentage of the fund’s total profits once it closed.

London-based private equity researcher Preqin, say that today’s fees vary widely and have come down from the old 2/20 standard. For example, most real estate funds now charge from 1.5% to 1.74% during their fund raising program.

Even more recently, managers have come under increasing pressure to trim their fees even further and to better align their fee structures to the actual performance of the funds.

Developers, and fund managers alike, are becoming incrasingly aware that they are now dealing with a whole different species of investor. One that has felt that wrenching feeling of a deal gone South and will not take that leap of faith so easily next time. Once bitten……

Equity Interface is an online real estate investment service designed to connect developers and accredited investors. By offering unparalleled research tools and information, Equity Interface empowers members to discover mutually beneficial real estate opportunities. For more information, please visit www.equityinterface.com

During the last number of golden years in the Real Estate market, the only word that investors wanted to hear was ‘returns’. Now, according to Ernst & Young, this is being replaced by another ‘R’ word: risk.

Ernst and Young are witnessing a marked change in the priorities of large Real Estate investment firms. When once, at the height of the real estate boom, they were focused on generating the highest possible returns for their investors now that attention is primarily targeted at managing risk.

In material documented from market research on over 40,000 client meetings globally, Ernst and Young said that firms should be developing a “plan of action” if they are to benefit from the downturn. That plan needs to focus on capital availability, reevaluating the business model and risk management.

With almost 75% of real estate executives anticipating a “permanent change” in the risk management of their organizations, Ernst & Young said everyone had to learn lessons as they tried to prepare for “success”.

In the ‘Lessons From Change’ report, the firm added that real estate companies need to be adept at controlling the expectations of investors who were used to seeing exorbitant returns in times past. They now need to “accept lower returns as some companies focus on lower yielding but lower risk investment”.

The issue of increased regulation is also something that the report identifies. Global Real Estate leader Howard Roth said this would be one issue facing all investors, particularly private equity and real estate funds. Here there is a growing demand and expectation for greater disclosure of investment plans and asset verification.

Dean Hodcroft, Ernst & Young’s Real Estate leader for Europe, the Middle East, India and Africa, continued by stating that: “Two years ago, real estate executives spent most of their time on new deals. Now they spend most of their time firefighting: protecting assets, controlling costs and, most importantly, managing cash flow.”

Equity Interface is an online real estate investment service designed to connect developers and accredited investors. By offering unparalleled research tools and information, Equity Interface empowers members to discover mutually beneficial real estate opportunities. For more information, please visit www.equityinterface.com

Lending conditions for the commercial real estate industry continued to worsen in the third quarter, according to an index by San Francisco based Banc Investment Group. The index is supported by data from the US Bureau of Labor Statistics, CB Richard Ellis, Grubb & Ellis and Reis.

The index dropped 10.6% to 63.67 in the third quarter from 71.24 in the second quarter, which was an 11.6% decline from the first quarter.

The BIG CRE Index is essentially a forward-looking measure of strength of Commercial Real Estate market conditions for community banks. Values are derived from third-party providers and data collected by Banc Investment Group’s consulting services group, which provides a loan pricing model for community banks nationwide.

In summary, conditions in the industrial sector fell 21.2% representing the largest fall, according to Banc Investment Group. Retail sector lending conditions dropped 7.7% while the the office sector dropped 7.1%. Multifamily fell 9%.

This data foretells a testing lending environment for the fourth quarter of 2009 and into 2010.

Retail

•    The retail sector of the index fell to 60.89 in the third quarter from 65.99 in the prior quarter, down 7.73%. Half as much as compared to the second quarter.
•    For neighborhood and community shopping malls, rents fell an average 0.7% during the quarter. Vacancy rates at neighborhood and community shopping malls exceeded 10%, while rates rose nearly 2.5% at regional malls. In both subsectors, the rate of deterioration is only about half that of the second quarter.
•    More than six in ten markets experienced a rise in vacancy rates, and more than 95% recorded negative rent growth.
•    Lending conditions benefitted from a modest improvement in retail sales (less gas and autos). Sales rose 0.6% in August and 0.4% in September.

Industrial

•    The industrial sector of the index fell to 43.97 in the third quarter from 55.84 in the prior quarter, which is a decrease of 21.27%. This was slightly tempered in comparison to the decline between the first and second quarter.
•    Vacancies rose again, up an average of 3.4% in the quarter.
•    With inventory levels sinking, industrial production has turned positive for every month in the third quarter.

Multifamily

•    The Multifamily sector of the index fell at an increased pace of 9.06% to 76.74 in the third quarter from 84.39 in the previous quarter.
•    Unemployment rose 30 basis points from June through September. The average vacancy rate increased 1.3% over the quarter to a 23-year high. The vacancy rate is expected to climb further, although at a slower pace. In tandem, rent growth dropped 30bps.
•    Across the U.S., about 65% of metropolitan locations reported a rise in vacancies, while more than five out of ten saw rent decline.

Office

•    The office sector of the index fell to 73.07 in the third quarter, down 7.19 % from 78.73 in the prior quarter.
•    The sector posted negative net absorption levels with vacancies rising nearly 4% over the third quarter, despite only half the amount of space coming online as the second quarter. Nearly 85% of Metropolitan areas experienced a rise in vacancies.
•    Year-to-date, average rents dropped 7%, with nine in 10 areas suffering rent declines.