Property markets: How low could they go?

By William Kemble-Diaz

LONDON (Reuters) - How far could commercial property markets fall after the end of a golden era of sizzling returns and unprecedented cross-border investment? That is the key issue facing global real estate investors in 2008.

Negotiating, even surviving -- or in some cases exploiting -- a more challenging investment climate is the main theme for leading property industry figures at this year's Reuters Global Real Estate Summit. The event is being held in London, New York, Singapore, Dubai, and Moscow from June 23 to 25.

The U.S. subprime crisis and subsequent global credit crunch has cast a huge shadow over the asset class and slashed the amount of commercial property bought and sold, despite increased buying by some cash-rich investors such as Gulf sovereign wealth funds and German retail funds.

Data from property services firm Jones Lang LaSalle (JLL.N) shows transaction volumes globally in the first five months of 2008 were 40 percent lower than in the same period last year, dragged down by weaker activity in Europe and the United States.

"The recovery of the debt market and the form in which the debt market comes back are key," David Church, senior advisor to the global investment banking division of Bank of America, said.

"It will drive not only values, it will dictate whether some companies go under, will be a key factor in the establishment of new investment vehicles and the reconfiguration of other vehicles," he said.

So far the default rate among commercial property landlords is low, although Manhattan property magnate Harry Macklowe hit the headlines in February by defaulting on $7 billion of loans.

Loan covenants have also come under pressure in the UK and some housing developers have filed for administration in Spain.