Commercial foreclosures on the rise as economic turmoil lingers
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RICS Global Distressed Property Monitor Q3 2011
The global supply of distressed property* is set to rise through to the end of the year as economic turmoil in the Eurozone lingers. In Europe, while Germany and Russia and seem to weather the storm, commercial property markets find themselves facing increasingly downbeat conditions, says the latest RICS Global Distressed Property Monitor published today (28 November).
The report finds that negative sentiment is spreading across the globe, with almost three-quarters out of the 25 countries surveyed anticipating rising levels of foreclosure in the coming quarter. Most importantly, property professionals who answered the survey expect that supply will outstrip demand in 60% of the countries covered by the survey, a sharp 20%-increase compared to the second quarter.
On the bright side, commercial real estate markets in China and Brazil are still prospering, with both countries expecting the number of foreclosed properties coming to the market to decline over the near term. In Europe, Germany and Russia also remain fairly stable in spite of high levels of economic uncertainty. In Germany, interest in distressed properties slightly rose from July to September with respondents predicting that the number of foreclosures coming to the market is expected to stabilise over the coming months. In Russia, while levels of demand by specialist funds fell during the third quarter, the supply of distressed properties is also expected to decline from now until the end of the year.
Other European commercial property markets have again weakened amid fears of the crisis intensifying in Greece and the political instability in debt-burdened Italy further threatening the single currency. RICS members in France who answered the survey, continue to feel the effect of this highly volatile context, and they forsee a considerable rise in the number of expected foreclosures over the coming months as investor interest – while still positive – is slowing down.
Predictably, Italy, Portugal and Spain are worst hit with the number of distressed properties coming to the market expected to far outweigh demand until the end of the year.
Commenting on the survey RICS Chief Economist Simon Rubinsohn said:
“The deteriorating picture is most pronounced in the Southern European** countries, which remain at the centre of the euro crisis. Meanwhile, investor appetite for distressed assets is cooling in the face of continuing uncertainty in financial markets and the worsening economic news flow. This being said, the worst fears of the market have yet to be realised with banks generally managing down their real estate exposure carefully.”
Ends.
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Regional Highlights
Brazil
Supply of distressed property in Brazil is still expected to contract in Q4 at a pace little changed from the previous quarter, -41 in Q2 to -39 in Q3. Investor interest in distressed assets remains subdued. More generally, the real estate market in Brazil is still prospering, with capital values and rents expected to rise further over the coming months.
China
Investor demand for distressed property in China still far outstrips expected supply this quarter; continuing a trend which began 12 months ago. The pace of rising investor demand did moderate somewhat in Q3, but still remains strongly positive. Looking ahead, the supply of foreclosed property coming to market is expected to decline over the near term at roughly the same pace as seen in Q2, with the net balance score moving from -20 to -18. Despite some negative news flow regarding the residential sector more recently, the commercial sector remains reasonably well underpinned. According to the latest RICS Global Commercial Property Survey, property professionals expect rents and capital values to continue to rise in the coming months.
France
France has seen a considerable uptick in the pace of expected foreclosure. Net balance scores moved from +22 to +41, quarter over quarter. In terms of demand from specialist funds, levels of interest remain positive, but property professionals report a slight slowdown
in pace. Similar to last quarter, then, it seems likely that property supply will continue to outstrip investor demand through to the end of the year.
Germany
The distressed property picture in Germany improved somewhat in Q3, with the pace of demand rising slightly. In addition, the pace of distressed property coming to market in Q4 is largely expected to stabilise; from +15 to only +5. Therefore, and unusually for Western Europe, levels of demand are expected to outweigh levels of supply in the near term. This is broadly consistent with the more positive readings received for Germany on both the occupier and investment markets.
India
Property professionals in India report rising levels of investor interest this quarter, though the net balance has moderated from +51 to +20, suggesting the pace of rising demand is slowing. Expected levels of supply continue to increase for Q4 as well, although at a slightly slower pace than in Q2.
Russia
Reversing the trend seen last quarter, levels of demand by specialist funds fell in Q3, with net balance scores moving into negative territory (+17 to -3, quarter over quarter). According to the survey, a decline in the availability of distressed property is still expected in Q4, although at an even slower pace than seen previously.
Iberia
Agents in Portugal report a modest fall in investor demand this quarter with net balance scores falling to -5, reversing the rather strong surge seen last quarter. This, coupled with expectations for increasing distressed property supply in Q4 2011, leaves Portugal with a significant mismatch; one in which supply far outweighs demand.
While still in positive territory, Spain witnessed an easing in the level of interest from specialist funds in Q3 as net balance scores moved from +56 down to +38, quarter over quarter. That being said, agents also anticipate a slow down in the pace of distressed property coming to market. As the euro crisis continues to drag on, the supply of distressed property is likely to continue to rise in both countries.
UK
Levels of distressed property expected to come to market in Q4 look set to pick up from the previous quarter although, to date, this flow has been reasonably well managed thereby limiting the direct impact on pricing of real estate more generally.
Notes to Editors:
* Distressed property: A distressed property is defined as a property that is under a foreclosure order or is advertised for sale by its mortgagee. Distressed properties usually fetch a price that is below their market value. An increased rate of distressed properties entering a country’s market can be seen as a negative economic indicator while a decrease may signal recovery.
** Southern Europe: Italy, Spain and Portugal
Net Balances: Net balance percents are calculated by subtracting the numbers of respondents reporting ‘down’ from the number who reported ‘up’.
About the Survey: The RICS Global Distressed Property Monitor, a subset of RICS’ Global Commercial Property Survey, is a quarterly report that reveals distressed property trends in 25 commercial property markets across the globe.
Respondents were asked to compare conditions in Q3 2011 to conditions in Q2 2011. Responses for this survey were collected until 23 September 2011 and amalgamated, at a country level, across the three real estate sub-sectors of offices, retail and industrial property to form diffusion indices for the commercial market as a whole.
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