International Property Journal - News and information on global property markets

In 2004, faced with a “flood of capital” into real estate markets, the directors of the CalPERS investment fund, one of the largest pension funds in the country, made a fateful decision.

With yields plummeting, CalPERS sold off $16 billion of core assets and decided to shift $30 billion of the portfolio into “higher risk” real estate. At the same time, the fund, which represents California public employees, moved toward “a less formal authorization process,” giving staff less control of the risky investments, according to a new report.

Needless to say, the new strategy didn’t go well.

The long-predicted commercial market disaster in the U.S., which was supposed to dwarf the impact of the residential collapse, hasn’t materialized, according to a panel of industry executives.

“The failure we were all anticipating didn’t really happen,” said Richard LeFrak, chairman of the LeFrak Organization, during this week’s Milken Institute Global Conference.

On a panel entitled “Reviving the Commercial Real Estate Market,” executives agreed the U.S. market has likely reached a bottom, even though vacancy rates in office and retail are close to 20 percent in some markets.

International money has helped stabilize the market, said Barry Sternlicht, c.e.o. of Starwood Capital Group.

After a year-long hiatus, investors and developers are ready to increase their spending in real estate, according to two unrelated surveys.

More than 70 percent of investors and developers polled by Jones Lang LaSalle said they planned to bump up their commitment in real estate compared to 2009. Twenty percent said they would increase their spending by more than 75 percent.

Noting a decline in the number of yachts parties, pundits described this year’s MIPIM conference in Cannes as a “muted affair” and “losing its fizz.” Attendance was about 18,000, according to event organizers, about the same as 2009 but a steep drop from the 29,000 that swarmed the croisette in 2008.

Nevertheless, MIPIM remains the premier European gathering for the commercial property industry, the one event sure to attract all the top players.

By an overwhelming margin, investors chose London as the world’s top commercial property market, according to an annual survey by Washington D.C.-based Association of Foreign Investors in Real Estate.

London moved past Washington D.C. and New York, with Paris and Tokyo rounding out the top five. In the 2009 survey, London was second, in a virtual dead heat with New York and Washington, but this year respondents chose London by a wide gap, the association reports.

Fifty-one percent identified the U.S. as the best opportunity for capital appreciation, compared to 37 percent in 2008 and 26 percent in 2007. Two-thirds of respondents said they planned to increase their U.S. investments in 2010.

The annual survey reflects the responses of 200 AFIRE members, who control more than $842 billion in real estate.

Although 2010 will be a “boom year” for property investment in the U.K., it could lead to sharp declines by 2012, consultancy King Sturge warns in its latest report.

“There are clear signs the property investment market has started to recover,” the firm reports. But a wide variety of economic factors could create a “false dawn” and the “collapse” of capital values by 2012, King Sturge forecasts.

“All commercial occupational markets across Europe will remain soft” for two to five years and “rents will continue to fall,” the firms predicts. “In the office market the worst rental falls will be in Germany, Ireland and Spain,” King Sturge writes. “In the industrial market Spain and Hungary will do particularly badly.”

Headlines from the world of property:

U.K.: Commercial Loans Dry Up

Billions in troubled loans has lenders wary. (Financial Times)

Telstra to Float Chinese Real Estate Portal

The Australian company plans a public offering for SouFun. (The Australian)

U.S. Retirees Revive Mexcian Market

Latin American portal sees uptick in inquiries. (OPP, free registration required)

While commercial markets around the world show signs of stabilizing, evidence is mounting that the worst is still ahead for the United States.

Commercial property values in the U.S. are already down more than 40 percent since 2009, according to Moody’s Investor Services. And Goldman Sachs predicts commercial prices could fall another 17 percent through the fourth quarter of next year.