UPDATE 1-German property prices seen down amid distressed sales

(Rewrites with Jones Lang LaSalle report, adds analyst comment)

By Peter Starck

FRANKFURT Jan 14 (Reuters) - Disposals of real estate by sellers in distress are expected to increase in Germany this year and commercial property prices could fall by as much as 15 percent, according to two reports released on Wednesday.

German property prices are expected to fall less, however, than in more volatile markets such as Britain, Spain or Ireland, accountancy firm Ernst & Young (E&Y) said in its annual survey of real estate companies, funds and banks active in Germany.

Property consultancy Jones Lang LaSalle (JLL) said it expects German office property prices to fall by up to 15 percent this year.

Yields, which move in the opposite direction to prices, for office properties in Germany's top six cities widened by 85 basis points last year, corresponding to a price fall of 16 percent, JLL said.

"In this difficult and uncertain market phase potential sellers are sitting on their losses, potential buyers are waiting and speculating about a further fall in prices," said Markus Lemli, head of capital markets at JLL in Germany.

The value of transactions in German commercial properties would be "slightly below" the 2008 level of 19.7 billion euros ($26.1 billion), Lemli said in the report.

E&Y estimated that the value of transactions in German real estate -- commercial and residential -- would drop by as much as 23 percent, primarily due to difficulties in obtaining deal financing, to between 20 billion and 24 billion euros from 25.9 billion euros last year and a record 65.3 billion euros in 2007.

Almost all, 98 percent, of the over 100 respondents to its survey expected a "significant increase" in distressed sales.

Debt refinancing difficulties would be a key driver of such sales, Managing Partner Hartmut Fruend at Ernst & Young Real Estate in Germany told a news conference. Distressed deals were more likely in the second half of 2009, he said.

DEBT MORE EXPENSIVE

Nine of 10 survey respondents said property transactions would require more equity than before and three out of four said the cost of debt for deal making would rise.

"Property is a capital intensive asset that has thrived on cheap debt in recent years yet is now facing a rather unaccommodating environment with the cost of capital going up for everyone and where debt funding is increasingly hard to come by," U.S. bank Merrill Lynch said in a sector research note.

Foreign investor interest in German property increased considerably in 2004-2005, triggering a strong pick-up in investment market activity, driven above all by highly leveraged Anglo-Saxon funds betting that Germany's accelerating economic growth at the time would boost real estate prices.

"We wonder what appetite there is amongst local banks to help those U.S. private equity players that need capital. Not all of the private equity investors have sold out of German residential," Merrill Lynch said in a European real estate sector research note.

Banks, opportunistic investors such as private equity funds and stock exchange listed property companies were expected to be among prominent sellers, the E&Y survey said.

Private investors such as family offices and other long-term investors, notably insurance companies and sovereign wealth funds, were expected to be the most active buyers.

More than three-quarters of the survey respondents expected mergers and acquisitions in Germany's fragmented listed property company landscape. Most German real estate stocks trade at bigger discounts to net asset value than the European average, mainly, say analysts, due to higher debt loads. (Editing by Elaine Hardcastle and David Cowell)