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Out look and Forecast 2009



Overviews:


With the New Year approaching, will the New Year bring an end to what has been a more than challenging time for many people in the US & the world?

The start of a new year often brings fresh hope, but as 2009 commences,optimism is in short supply in the all aspect of real estate market. The sector suffered through its worst returns in decades , and property values are expected to decline again in 2009 as the capital and financing is difficult to obtain. The swiftness of the decline was stunning, even in an environment in which bad news was expected.

Deteriorating economic conditions are likely to get worse before they get better and thus continue to undermine real estate fundamentals, prolonging the time when we begin to see a recovery. Deleveraging is working its way through the system as the market adjusts from a high-leverage system to one in which debt is scarce. Taken in combination, these conditions will make 2009 a very challenging year, but one in which an overdue cleansing of the system is likely to commence in earnest. Glimmers of hope come from the fact that interest rates and energy prices are low, good for both the consumer and business.

Again what is in store is certainly not a quick return to where we were in 2006 days. We have been in holding pattern since early fall of 2007 although the stock market was bullish and having the highs that preceded the real estate & credit crisis ,our President &CEO Mr. Kambiz Merabi believes that last quarter of 2009 we should see the beginning of a rebound ,albeit a slow one. That is our view at Merabi & Sons in the general economy and real estate in general, below are some of the key themes of our view for the real estate in 2009:


The commercial real estate market has followed the larger economy into a downturn that is likely to last through 2009 and possibly into 2010. With unemployment rising, consumer spending falling and home prices dropping, the recession will impact all sectors of the real estate market.

 It is not yet clear when commercial mortgage debt will be readily available. The CMBS market is out of the picture and traditional lending sources are trying to preserve capital. The lack of reasonably priced debt has made it difficult to complete transactions.

 Tarred with their association with financial firms and use of mortgage debt, shares of U.S. REITs fell amid unprecedented volatility in 2008. The sector should gain in 2009, but remains subject to the performance of the economy and the debt capital markets. Loan modification companies & bankruptcy attorneys are going to be busy for a while taking care of home owners and investors in the real estate.

 After falling to historical lows of roughly 5.4% in 2008, cap rates are likely to return to levels more in line with the 7.8% National Council of Real Estate Fiduciaries (NCREIF) historical average. Combined with declining net operating income, property values will drop sharply from their peaks.

 With distress comes potential for opportunities. The disconnect between the pricing of public and private real estate, and equity and debt, creates inefficiencies that can be exploited by investors with available capital.

Overview for Europe

In wake of the intensification of the banking crisis that started in mid-September, and the marked deterioration in economic fundamentals in recent months, many of Europe’s economies are in or on the brink of recession. Policy makers have responded by adopting aggressive and unconventional methods in an effort to restore confidence in the financial markets. While there are some signs of success, any timeline for economic recovery depends on financial markets returning to some form of normality, something that has yet to happen. The commercial real estate market relies upon much the same factors for its health, which means the worst is not over for the sector. A growing consensus believes European values are only halfway through a correction that could see a peak to trough fall of up to 50% by the end of 2010. Rents are under pressure and are likely to fall in the next year or two, not because there is an over-supply of space coming to market, but because flagging tenant demand has shifted the balance of power from landlords to tenants as vacancy rates rise.

Understandably, investor appetite for real estate over the short term has fallen sharply.

Overview Latin America

The year 2008 will be one of contrast in Latin America. Economic activity boomed for the better part of the year, while other regions of the world were way into a recession. Economies were buoyant until the eve of the financial crisis. Growth rates through September were above consensus forecasts in Argentina (6.5%),Brazil (6.8%), Chile (4.8%) and Mexico (1.6%). In the aftermath of the global credit crunch, however, it is now clear that the period of resilience has come to an end. Lower commodity prices and economic activity across the globe have hit the region. Countries such as Brazil, Chile and Peru all saw diminishing trade surpluses towards the end of the year. Mexico, which imports more than exports, saw its trade deficit widen by the end of the year. Still, the region has put its financial house in order in recent years and should emerge in relatively better shape than many economies around the world.

Overview Asia

The property market boom that began in Asia several years ago will end in 2008, due to the global credit crunch. Investors became much more risk-averse as a result of the erosion of market confidence that stemmed from the global stock market correction and economic downturn.

After a reasonable performance in the first half of 2008, Asia’s economy started to decelerate significantly in the second half, particularly due to declining demand for exports and services. The deterioration became particularly acute in the fourth quarter, dampening market sentiment in the region’s property markets and producing downward adjustments of rental income and property values. The drop in values combined with the tighter credit markets produced a dearth of real estate transactions.
 

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