The worldÆs commercial real estate sector will see a return to more normal leverage and margin levels in 2008 as easy credit dries up, and this will allow those who truly understand property markets to prosper, according to LaSalle Investment Management.

ôFundamentals will remain strong next year, but debt flows will fall to a level well below the record pace in 2007,ö David Edwards, LaSalle head of Asia Pacific Research, writes in a report on the 2008 outlook for the global property sector. ôFor those who do not rely on financial engineering and carry trades to generate returns, a return to more normal credit and margin conditions presents an opportunity for those who understand property fundamentals to invest.ö

A significant portion of LaSalleÆs report was devoted to the theme of sustainability. To LaSalle, sustainable property investment means anticipating the risks of climate change and managing property efficiently to save on energy costs. ôSustainable properties, from our perspective, offer the potential of superior risk-adjusted returns, are likely to be less prone to depreciation, and more likely to attract tenants.ö

LaSalle believes fundamentals remain strong in Hong Kong and while there is increasing potential for volatility in the real estate market, Hong Kong will remain attractive to investors with a higher risk appetite.

The report adds that Hong KongÆs economy continues to power ahead from its
closer association with the strong Chinese economy and inbound tourism from the mainland. ôGiven the restrained supply response to date, we expect this boom to spur sustained growth in the office and luxury residential markets.ö

For more risk-averse investors interested in balancing income returns and appreciation, however, LaSalle says caution is needed. ôWe would be underweight for core investments unless defensively supported by structured leases that mitigate against market volatility. For those willing to take on higher levels of risk, residential flats in Hong Kong remain attractive.ö

LaSalle expects returns from Asia-Pacific real estate to moderate slightly, but still outperform regions for the same level of risk.

ôThe region will continue to complement a global portfolio both for diversification and enhanced returns û two of the main reasons for crossborder investing,ö Edwards says. ôAs a result, in-bound capital will remain strong supplemented by a rapidly growing pool of domestic capital with a wide range of risk appetites.ö

Core investors, or those for whom appreciation and distribution income are more important than total return, should focus on retail properties targeting the middle class and on well-located modern industrial properties, LaSalle says.

Fundamentals for offices in central business districts remain strong, but they have already seen a strong run up and there is the threat of a cyclical correction in the sector in the medium term. Core investors should generally be overweight in Singapore and South Korea, neutral in Japan and Australia, and underweight in China and Hong Kong. The developing markets in China, India and most other countries in Southeast Asia present higher levels of risk than are appropriate for most core investors.

Risk-tolerant investors will see continued opportunity in China for many years to come, but new rules and regulations have increased execution risk, LaSalle says. They should also seek exposure to India, but need to remain diligent in evaluating risks and ensuring commensurate returns. These investors will also find opportunities in Hong Kong, Korea, Singapore and in most of Southeast Asia.

In the office sector, LaSalle sees opportunities to take advantage of the shortage of modern stock under professional management, specifically in Japan, Korea and Greater China.

In the retail markets, LaSalle perceives the predominant opportunities to fall into two broad categories û repositioning assets in Japan and Korea to capture the benefits of the evolution of consumer trends in those markets and producing new organised retail facilities in the large emerging markets of China and India.

In the logistics sector, LaSalle believes that opportunities abound. Slower growth in the global economy will dampen the market, but goods will continue to be manufactured and distributed within the Asian-Pacific region, which will partially mitigate any potential drop in exports to the US.

In the booming hotel or hospitality sector, LaSalle believes there will be opportunities to reposition assets in markets from Japan to Hong Kong, as well as in emerging markets of China and India.

LaSalle notes execution risk is rising and should be considered with existing risks of rising interest rates, tenant default, leasing vacancy and rental downside.

ôReal estate risk is back on the agenda. While the current turmoil in the credit markets veils a clear view of future conditions, it is likely that when we revert to æbusiness as usualÆ, the cost of real estate debt will be higher in Europe and North America and values will be lower,ö the report says. In a global context, ôreal estate risk is being repriced upwards and the drivers of returns are shifting to income and income growth rather than yield compression and leverage.ö

LaSalle Investment Management is a member of the Jones Lang LaSalle Group and has $47 billion in assets under management.