Real Estate Investors Will Need to Assess and Manage Risk in 2006, According to LaSalle Investment Management

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Real Estate Investors Will Need to Assess and Manage Risk in 2006, According to LaSalle Investment Management

Thursday January 5, 1:20 pm ET

2005 Edition of 'Investment Strategy Annual' Released by LaSalle Investment Management

CHICAGO, LONDON and SINGAPORE, Jan. 5 /PRNewswire/ -- With another strong year for real estate in 2005 behind us, investors are increasingly concerned about a number of potential challenges including the effects of rising interest rates and a possible slowing global economy, on real estate prices. Against that backdrop, LaSalle Investment Management LLC ("LaSalle") today released the 11th edition of Investment Strategy Annual, a comprehensive survey of, and outlook for, the global real estate markets during 2006 through 2008.

"After several years of yield compression in many real estate markets across the globe, it is not surprising that the most frequently asked question by investors, both real estate specialists and generalists alike, is 'Are we in a bubble?'," said Jacques Gordon, LaSalle Investment Management's Global Investment Strategist and co-author of Investment Strategy Annual. "Based on our analysis, we believe the ingredient that would turn today's high commercial real estate prices into a 'bubble' is the possibility of a total collapse in values. However, we do not see that element at work anywhere in the private direct markets today. In fact, we see a lot of very interesting places to invest next year, although our viewpoint is that most investors will have to take on more risk to secure a given unit of return."

Risk Watch

"Our analysis suggests that risk-adjusted returns in mature markets will continue to decrease over the next three years," said Robin Goodchild, Head of European Strategy and co-author of the Investment Strategy Annual report. "As a result, many investors will accept new risks in exchange for only marginally higher returns." The report evaluates a number of challenges -- including dealing with massive capital flows, moving cross-border, separating secular and cyclical trends and responding to economic shocks-and provides a framework for risk analysis.

"Our strategy is to look at the various sources of risk and capture them in a 'risk web' -- a multidimensional portfolio tool where each spoke represents a source of risk. We further differentiate between the fundamental sources of sources of risk and portfolio modulators that can amplify or dampen these sources of risk. By making the source of risk explicit, the web increases the chance of matching liability and optimizing the risk-return trade-off," said Gerald Blundell, Director of European Strategy.

Regional Outlook

Drawing on a global network of research professionals, LaSalle's Investment Strategy Annual provides an in-depth examination of the fundamentals that will shape the real estate markets in Asia-Pacific, Europe and North America in 2006. Each region covered faces a different mix of challenges and opportunities.

LaSalle continues to be excited by a number of prospects including high- return strategies for opportunistic investors in Asia, leveraged strategies in Europe, value-add and niche investing in North American and infrastructure plays across the globe.

Asia Pacific - Greater Breadth and Depth: With intra-regional economic cooperation gaining importance and continued strong economic growth as a backdrop, the outlook for the Asia Pacific region remains strongly positive, according to David Edwards, Director, Asia Pacific Research and Strategy. However, investors will need to reconsider what are appropriate and achievable risk premium assessments in light of increasing transparency and liquidity and changing risk profiles. The reassessment will enable investors to widen definitions of "core" and "growth," which will be necessary in order to compete for acquisitions. Meanwhile, opportunistic investors will need to focus on participating in markets where local capital is less active and will need to take on higher levels of real estate risk, such as development, to enhance returns. China and India currently lack transparency and remain challenging markets, although the size and diversity of both rapidly growing countries keeps them on our radar screen for opportunistic investing in 2006.

Europe - Stability with Upside: After a strong 2005, European commercial real estate is set to continue this performance in the Eurozone and the Nordics. Prospective returns are highest for the office sector because of the potential for return growth to surprise on the upside with an improving economy. Retail will continue to deliver steady performance while warehouses/logistics may disappointment because yields have compressed and the scope for return growth is dampened because new construction at today's prices is highly profitable. In terms of geography, the best performing markets include the French office sector -- where vacancy rates are the lowest in the region -- and German retail which has been buoyed by solid income returns with the potential for rental growth once consumer confidence is re-established. In the U.K., LaSalle forecasts returns slowing from the spectacular levels of 2004-2005, with offices, which have consistently disappointed in the past, being the top-performing sector through to 2008.

Restrictions on new buildings and less dynamic occupier demand make core and value-added investment the right strategies for Europe in 2005. The office sector offers the best prospects for value-add and opportunistic strategies, which should target markets where a rental recovery will occur first (Stockholm, Madrid, Barcelona and Paris). LaSalle cautions investors about overpricing in Central and Eastern Europe, where new supply will mute rent growth despite the fact that many economies there are growing much faster than the rest of Europe.

North America: Solid Real Estate Markets Despite Shocks: The combination of improving fundamentals and abundant capital argues for an expanded approach to investing new money in 2006. While LaSalle believes that value-add and other higher return strategies offer a better risk-return trade-off in the coming year, the diverse nature of the North American real estate markets also offer opportunities for investors looking for low-risk income-oriented core properties and strategies, according to Bill Maher, Regional Director, North American Research and Strategy, LaSalle. Among the most attractive higher- return opportunities are student housing and buildings in non-condo conversion markets with the need for moderate rehab, development in major secondary hub markets in the U.S. and Canada, partially vacant office buildings in high growth areas, mixed used retail redevelopment of failing malls in the U.S. and Canada as well as discounter-anchored centers in Mexico, and hotels requiring capital reposition or rebranding. Among the best core opportunities, LaSalle singles out apartments in high-cost suburban markets with limited condo conversion; industrial properties in port markets; medical office and office buildings in sunbelt suburbs; and selected tech markets, lifestyle retail centers and full-service hotel properties in urban locations.

Note: For a copy of Investment Strategy Annual, please contact Kim Dobbins at 312.482.8670.

LaSalle Investment Management, Inc., a member of the Jones Lang LaSalle group (NYSE: JLL - News), is a global real estate investment management leader with approximately $29 billion of assets under management. LaSalle Investment Management is active across a range of real estate capital and operating markets, including private and public, debt and equity. Jones Lang LaSalle is the world's leading real estate services and investment management firm, operating in more than 100 key markets worldwide. The company provides comprehensive and wide-ranging integrated expertise on a local, regional and global level to owners, occupiers and investors.