The report provides detailed trend data on sales and leasing activity across the world's office, retail and industrial sectors for the periods both preceding and following the onset of the global credit crisis. Newmark Knight Frank executive managing director Peter Kozel points out the subprime crisis in the US is not the only factor in the downturn and says resolving the US crisis will not necessarily improve the global pattern.
"The collapse of the US subprime residential mortgage market was the wind that resulted in the current rough seas, but eventual losses...are expected to total [only] $200 billion. This is a very small portion of the equity and reserve base of the global financial system," he says.
Looking regionally, the report says favorable conditions that preceded the current decline could soften the blow to the office, retail and industrial property sectors in North America. "The current downturn follows three years of robust gains in operating performance and market valuations," Kozel notes, adding that the pace of new construction also was not excessive in most property sectors. "These conditions should help to cushion the impact of declining demand.".
In Europe, Knight Frank says most markets continue to exhibit positive dynamics despite the climate of uncertainty and a continuing fall in vacancy rates. "Overall, the levels of takeup recorded across Europe during 2007 were very strong, with cities such as Madrid, Munich and Dublin recording all-time high volumes," reports Knight Frank partner Joe Simpson. Nonetheless, the firm predicts economic growth will slow significantly this year, dropping a full point to around 1.6%. It says downside risks stem primarily from weakness in the US economy, the continuing credit market squeeze, rising food and oil prices and lowered exports due to the strength of the Euro against other currencies.
The report says the outlook for South American is much stronger than elsewhere, as surging demand for industrial and agricultural commodities lifts the region's economies. According to the report, even though construction activity is up dramatically, it can barely keep up with demand. "The current rebound has touched virtually all of the countries in the region, most notably Brazil," says Kozel, but he adds that Argentina's economy has also staged a strong recovery, while Mexico has benefited from a growing level of foreign direct investment.
As for the Asia-Pacific region, Knight Frank says commercial real estate markets there have weathered the global credit crunch relatively well with robust demand, tightening availability and capital value growth. It projects China will continue to see double-digit growth, while India should record around 8% GDP growth for '08. The majority of other countries in the region are expected to grow at a slower rate over the medium-term. However, the report notes that further weakening of the US dollar has the potential to curtail Asian growth by slowing exports. It emphasizes this could be compounded by weakening consumer demand in other major Western economies.
In Australia, Knight Frank reports yields for commercial/retail/industrial properties appear to be at a cyclical low. It says a convergence of yields between sectors and grades of assets that has made many assets appear fully priced could subject them to greater price and value volatility if interest rate and the cost of debt continue to rise. "Given the financial market volatility, possible recession in the US and falling property values in Western Europe and the US, the Australian market is no doubt exposed to greater risk and volatility in 2008," says Matt Whitby, research director for the firm's Australian office.
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