Having benefited from a virtuous cycle driven by cheap debt, commercial real estate in Europe is now caught up in a vicious cycle of value destruction, along with virtually every other asset class, thanks to the global credit crunch. The “Commercial Real Estate Reacts to Changes in the Capital Markets and Real Economy” chart below details the various facets of the two distinct market types, the virtuous cycle and the vicious cycle. Securitised real estate — both debt and equity — has already gone through several rounds of violent and volatile repricing. Private equity real estate is also experiencing this repricing, albeit through a more drawn-out process.

Academic research shows that during a financial crisis all asset classes become highly correlated. The risk-reducing power of diversification is temporarily lost. The good news is that research, carried out by Charles Kindleberger (Manias, Panics, and Crashes: A History of Financial Cri