“Institutional investors are generally increasing their allocations to real estate.  Fundamentals remain strong and are capable of weathering a slowing global economy, while tighter lending requirements in North America and Europe are putting moderate-leverage investors in a better position to secure deals at improved pricing”, said Jacques Gordon, Global Strategist at LaSalle Investment Management.

Commenting on the impact of the credit crisis, report co-author Robin Goodchild, Lasalle’s Head of European Research and Strategy, continues: “There is no doubt that the shutting down of cheap, easy credit will have an effect on real estate markets.  But for those who do not rely on financial engineering and carry trades to generate their pro forma returns, the future offers a return to more normal leverage and margin levels that will enable those who truly understand the property markets to prosper.”

LaSalle believes that the best investment opportunities going forward will be in defensive assets for cash-rich buyers who can afford to wait for debt markets to loosen up. Sovereign funds are in a good position to exploit this market as are other institutional investors willing to make the allocation.

Robin Goodchild continues: “We do not believe that markets are heading for an early 1990s-style hard landing as there is little risk of over supply; however, the recovery opportunity is not likely to be as compelling as 1993/94 either. There is no shortage of capital available to invest in real estate, as allocations continue to be increased and funds have unspent equity, so prices are not likely to fall significantly.”

LaSalle believes that risk must be more carefully priced in 2008, however, as nervous capital markets and inflationary pressures create a more uncertain environment. Residential real estate has become overheated in many markets around the world and, as this bubble deflates, underlying economies are also put at risk. However, fully leased commercial real estate has defensive characteristics that LaSalle believes will weather a slowdown well.

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 2008. According to LaSalle, real estate markets across most of Europe should see solid returns in 2008, as office markets benefit from strong fundamentals and keen demand from pan-European retail groups has continued to drive retail returns.  Asian and Latin American markets will continue to accelerate, driven by rapidly growing investor interest, a stable supply of debt capital and very strong fundamentals.

Europe – combining stability with opportunity: Property fundamentals remain robust thanks to strong economies growing at above-trend levels in virtually all markets.  While the credit crunch is starting to impact global financial centres like London and Frankfurt, markets are generally in a solid position to absorb shocks. With supply pipelines at moderate levels, the prospects for strong net absorption and rental growth are encouraging.
 In the office sector, the German and Swedish markets offer the best prospects in Western Europe because they are still early in their rent cycles.
 The effect of capital market turbulence on the region is much less uniform. Markets in the UK experienced the most yield compression prior to the credit crunch, although this has already begun to reverse with yield expansion expected into 2008. This will dampen short-term returns significantly.
 The rest of Europe is less vulnerable. While yield compression is likely over, cap rates are unlikely to rise for prime assets because capital flows continue to be strong and the cost of euro debt is much lower than for pound sterling debt.
 LaSalle recommends a shift to more defensive strategies as economic growth is expected to slow, with a greater emphasis on core and retail as office rents move towards cyclical highs. For risk-seeking investors, the credit crunch will present opportunities, as those who are heavily leveraged are squeezed and development finance becomes scarce.

Asia Pacific – a wide range of opportunities: From mature transparent economies to fast-growing developing markets, economic growth will remain strong throughout the region. Fundamentals in the Asian real estate markets remain attractive, with strong demand from occupiers and only modest levels of new supply in the near term.  
 Uncertainties in the global debt markets will instigate more prudent lending in Asia Pacific, although there remains a plentiful supply of debt and equity throughout the region.  A more judicious approach towards lending will be healthy for real estate markets and should produce more stable, sustainable growth.
 The office markets in major financial centres in Asia are experiencing a sustained period of strong expansion and vacancies are at very low levels. Fully leased “trophy” buildings will remain highly priced thus, unlike in Western markets, LaSalle can still recommend that investors take on near-term leasing risks successfully.
 Robust consumption based on positive confidence is boosting expansion by retailers, and the lower volatility of this sector will appeal to more risk-averse investors. Risk-tolerant investors will find attractive development opportunities in the emerging markets for both residential and retail projects underpinned by the rapid rate of urbanization, rising middle classes and expanding consumer credit.
 The scale of opportunities for logistics and warehousing is immense, and the sector is still at an early stage of acceptance as an institutional asset class across the region.  Pan-Asian trade will reduce any impact of a slowdown of global trade.
 Finally, LaSalle continues to recommend that investors seek exposure to the booming hospitality market in Asia Pacific, although market selection is becoming more important as a robust supply response is evident in some of the more traditional locations.

Americas – a mixed outlook:  The US housing market correction will further constrain US economic growth in 2008, however Canada, Mexico, and Brazil are likely to expand more rapidly. These countries, however, will export fewer products to the US and could therefore experience below-trend growth. The US, on the other hand, will see very strong export growth due to the weak dollar.
 While a full blown recession is unlikely in the US, the probability of a severe slowdown has risen and some combination of a pullback in consumer spending, tighter credit availability and high energy prices could tip the scales. The Federal Reserve will use its powers to limit the damage.
 Capital availability has tightened considerably in the United States. The virtual shutdown of the commercial mortgage-backed securities (CMBS) market is an overreaction given balanced market conditions, but the removal of cheap and easy credit is a healthy development, particularly for long-term investors.
 The real estate capital markets should return to normality by early 2008. Capital markets in Canada and Mexico have been less affected. Mexico’s credit markets are expanding—the country’s first CMBS issue took place this year.
 Brazilian capital markets are expanding rapidly on the strength of a booming stock market, rapid growth in foreign direct investment and lower inflation; however, access to commercial real estate debt is still a challenge.
 Given slower growth and greater downside concerns in the US, LaSalle recommends a greater tilt to low-risk core investments. Recession-resistant property types such as healthcare facilities and senior and student housing are particularly attractive.

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About LaSalle Investment Management
LaSalle Investment Management, Inc., a member of the Jones Lang LaSalle group (NYSE: JLL), is a leading global real estate investment manager, with $47 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.  LaSalle Investment Management is authorised and regulated for investment business in the UK by the Financial Services Authority.  For more information, visit www.lasalle.com.