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Global capital soars despite debt crisis

Global direct real estate investment hit a new record of $382 billion in the first half of 2007, rising 16% over the same period a year ago, according to preliminary results of a survey of 50 countries conducted by Jones Lang LaSalle.

Despite a global credit crunch linked to the subprime mortgage meltdown, JLL says that investors' appetite for property they own directly should stay strong through 2007.

Although leveraged players have dropped out, institutional investors are still in the game, says Steve Collins, managing director of JLL's international capital group. Buildings in a hot U.S. market that once attracted 15 offers now might draw six bids, and institutional investors are taking advantage of the lull. “They're making hay while they can,” Collins says.

In the first half of the year, investment in the Americas jumped 32%, to $170.7 billion, driven largely by investors buying assets that came on the market as many REIT portfolios were sold off. The majority of assets were sold to Americans, a big change from 2006 when foreign investors dominated the market. European investment climbed 4%, to $156.6 billion, with the UK, Germany and France, attracting the most volume.

Asian investment climbed 12%, to $55 billion. Japan and China were strong, but Singapore was hottest of all. Prime property values in the southeast Asian country increased by 50%, fueled by strong rent growth and yield compression.

But that kind of performance is likely to be the exception. Globally, cap rates are much more aligned than was the case even a few years ago, Collins says. “There used to be a large disparity in cap rates between Shanghai or Budapest or Washington, D.C. Now, in different sectors, it's actually lower than Washington, D.C.”

Money in Minsk

With Russia booming, investors in Eastern Europe may be forgiven for overlooking Belarus, home to one of the world's last government-controlled economies. So why has Colliers International just opened an office in Minsk?

Sandwiched between Russia and Poland, the country of 10 million has long underperformed its richer neighbors. But Mikhail Gradovitch, director of Colliers' new office, says that's changing now, as the government accelerates its property privatization program. Apartment prices soared 50% in the first half of the year, and now stand at roughly $185 per sq. ft. Less dramatic but solid, warehouse rents are up over 15% in the first two quarters of 2007 to roughly $2 per sq. ft.

Over 3 million sq. ft. in new office space and 2.5 million sq. ft. in retail space will come on line over the next two years. Russian investors have been the first to dive in, but Westerners are free to follow, according to Gradovitch.

Most property is acquired in state auctions, with strings attached. The buyer must use the property for a purpose mandated by the government at the auction, and must find new jobs for any workers displaced by the sale.

For investors willing to put up with such hassles, the rewards could be high, Gradovitch says. “Yes, it is a risky country, but the results could possibly far exceed your expectations on any other market.”

GE roars in Romania

Like most Eastern Europeans, Romanians are buying more consumer goods. To help meet pent-up demand, GE Real Estate recently undertook a $235 million joint venture with Helios Phoenix to build distribution warehouses in Romania.

Initially, the partners will build seven warehouses totalling 3 million sq. ft. located near Bucharest and four other Romanian cities. The projects are ambitious, roughly equal to the country's entire stock of industrial and logistics property, reports Cushman & Wakefield.

The GE/Helios venture is the “most important real estate industrial project announced for Romania,” says Gabriel Sfetcu, senior negotiator for Cushman & Wakefield ACTIV Consulting, which was not a party to the deal.

GE and Helios are not alone in sensing an opportunity. Another 4.3 million sq. ft. of logistics space is already in the pipeline in the fast-growing country, where vacancy rates are currently below 5% and rents average roughly 50 cents per sq. ft.

The deal is the first foray into the Romanian market for GE Real Estate but not for Helios Phoenix, which has already developed 600,000 sq. ft. of warehouse space in the country. Helios Phoenix is itself a joint venture between Helios Properties, a large UK warehouse developer, and Phoenix Real Estate, a Cyprus-based real estate company active in Romania since 2001.

Bennett Voyles is a veteran commercial real estate reporter and National Real Estate Investor's Paris correspondent. For questions or comments, e-mail [email protected].

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