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Austerity Measures Hit Commercial Markets

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Commercial property  Austerity Measures  Emerging Market Investment 

By - Wednesday 28 July 2010

Commercial real estate in emerging economies is outperforming that of more established markets.

The latest RICS Global Commercial Property Survey for the second quarter of the year has found that countries located in South American, Asia and Eastern Europe are outperforming UK and eurozone destinations.

Demand for office space outside of the UK and eurozone has been increasing on a global scale, with RICS claiming that tough fiscal measures enacted by various European governments are to blame for the stuttering recovery.

According to the property and construction body, the need for certain countries to reduce national debt is having a profound impact on the appetite of businesses to take up new space.

RICS chief economist Simon Rubinsohn explains that there is now a clear divide in real estate recovery.

Split Recovery

"The real estate world continues to be split broadly speaking between the emerging and developed economies," he confirms.

"In many of the latter, fiscal retrenchment allied to bank deleveraging continues to place significant obstacles in the way of a meaningful recovery in the commercial property market."

Indeed, this apparent slowdown in recovery should be viewed as a concern to those looking to invest in property in certain destinations.

Andrew Burrell, a partner in research at UK-based King Sturge - a supplier of property and related services in the commercial sector - believes that the problems can be attributed to a degree of political uncertainty in the country.

He adds that, despite the real estate market in the UK boasting strengths, there are weaknesses present; stating that outside of London there is not much opportunity for commercial investment.

For the first time in a year demand for commercial property in the UK turned negative, with the net balance falling from a positive 14 per cent to a negative four per cent, RICS said.

In addition, the net balances in Spain, Germany and Greece are all in negative territory.

Mr Burrell's comments would indicate that it would be advisable to give the country a wide berth at the moment and look further afield for viable real estate investment opportunities.

This is a view shared by Mr Rubinsohn, who notes that currently a number of emerging destinations are showing the strongest potential for investment.

Strong Growth

"Strong growth in many of the former, including the likes of Brazil, Hong Kong and India, is continuing to boost demand for new space from occupiers as well as encouraging investment activity," he explains.

Brazil in particular is leading the way, with the majority of surveyors questioned by RICS reporting a rise in occupier demand.

In addition, an increasing number of new development starts are taking place within the South American destination, indicating that long-term growth prospects are also positive.

Meanwhile, Peru and China are also reported to be doing well.

Indicators in China suggest that the market remains strong despite measures introduced by the Chinese government to address the property boom.

Among the restrictions introduced were the demand for higher down-payments on house purchases, stricter lending rules for property developers and limits on the ability of investors to buy more than one home.

However, occupier demand, rental expectations and the number of investment bidders per property all remain positive.

Elsewhere in Asia, the latest numbers from India suggest a strong showing from real estate in the second quarter despite the increase in interest rates.

Commercial Property 'Top Concern'

The RICS-backed study follows research recently released by RBC Capital Markets which suggests that the majority of asset managers are wary about commercial real estate in their respective home markets.

In total, 46 per cent of those surveyed said that commercial real estate risk is higher this year than last and just 24 per cent plan to increase their allocation to commercial real estate in the coming year.

Marc Harris, co-head of global research at RBC Capital Markets, explained: "Asset managers are concerned about a demanding macro-economic environment that could feature not only inflation but also slower-than-historic growth during the next couple of years.

"Such an environment would place a premium on the basics of identifying sound investments amid uncertainty, managing higher levels of risk and adhering to a disciplined, long-term strategy."

Uncertain Climate

Generally speaking it is clear that the European economy has taken a hit in recent months.

The fallout from the recession combined with spiralling national debt has created an uncertain climate for investors.

In particular, the commercial market has been affected. A lack of new developments and unwillingness on the part of organisations to move into new office space has meant that the sector has slowed.

However, on a more global scale recovery has been stronger, with Asian economies and other emerging destinations around the world showing potential as good long-term investment prospects.ADNFCR-3415-ID-19909274-ADNFCR

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*This page is provided for information purposes only and should not be construed as offering advice. IPIN is not licensed to give financial advice and all information provided by IPIN regarding real estate should never be treated as specific advice or regulations. This is standard practice with property investment companies as the purchase of property as an investment is not regulated by the UK or other Financial Services Authorities.

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