View of the day: Real estate challenges

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Commercial real estate securities face another challenging year but the blanket sell-off seen in 2008 is likely to give way to more selective price action, says Jacques Gordon, global strategist at LaSalle Investment Management

He points out that last year’s falls in share prices of real estate investment trusts around the world were as steep as those seen in financial stocks - even though contractual real estate earnings did not drop as far as those of banks and insurance companies.

Mr Gordon notes that private equity real estate values weakened too, although the repricing was hindered by a backward looking valuation process that digested bad news only after it occurred.

Moreover, the steep drop in real estate securities pricing was highly correlated across sectors, countries and continents.

“Credit markets have been blind to differences between Australian shopping centres, Hong Kong office towers, French business parks and American apartment communities,” he says. “Sector-specific differences were rendered meaningless in the face of a financial market meltdown.”

This year, he expects the low correlations of income streams generated by local markets to begin re-asserting themselves through differentiated pricing. “Our advice to investors is to distinguish between overshooting in the securitised markets, while being wary of further falls in valuation in the private equity market.”

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