Just like in the United States, the market for fully leased investment property is hot in Europe. One only has to look at the escalated prices in London to feel the heat.
“London has always out performed other European markets, but it keeps going up,” said David Perry, vice president of NAI Europe. “London is off the scale. Supply and demand there is enormous.”
NAI Europe is part of NAI Global, a managed network of commercial real estate firms. Based in Princeton, N.J., the group has more than 300 offices in 40 countries.
Other locations within the United Kingdom are positioning themselves for growth. In Wales, an initiative is underway that could see 1 million square feet of speculative office space during the next decade.
Unveiled in February, the new Welsh Investment Strategic Partnership is planning the first three-office schemes to be built in Swansea, Newport and Treforest. These developments will range in size from 30,000 to 40,000 square feet. Consortiums of banks, developers and building contractors are already being formed to bid on the projects.
Meanwhile, companies like France-based Sintel are opening subsidiary offices in Rome to take advantage of market opportunities there. Italy has a tradition of ICT (information and communication technology) innovation, yet it is also attracting businesses expanding in new areas such as biotechnology and nanotechnology.
Capital Flows of Money
Driving overall demand in Europe’s real estate markets continues to be capital flows with huge sums being invested from German open-ended funds, opportunity funds, institutional investors and other collective vehicles.
All this despite the fact that overall economic growth in the European Union (EU) remains sluggish, around 1.9 percent for 2004.
“There is still a lot of money worldwide seeking product,” Perry said. “Property funds are buying fully leased assets, but there is a serious shortage of Class A space.”
Despite the fact markets across Europe have been weak because of low vacancy rates, investment yields are improving.
“This is historically unusual but is fueled by poor performance in the global stock markets,” Perry said.
The largest amount of money is coming from major German open funds, which are active outside of Germany because of that nation’s poorly performing economy.
“Curiously, we are seeing investors from other countries invest in Germany because yields, which have been extraordinary stable despite Germany’s economy, are softening,” Perry said.
Market Boosts
Paris has become an attractive city for investment since prices there are significantly cheaper than London. According to NAI, rents there are bottoming, particularly for new, large space.
“But Paris is a much smaller market,” Perry said.
A survey by the Urban Land Institute (ULI) and Pricewaterhouse Coopers entitled “Emerging Trends in Real Estate: Europe 2005” pegs Paris to be the top European property investment market to watch in 2005. The reasons are diversity, low vacancy rates and rising office occupancy rates. Milan was ranked No. 2, followed by London, Lyon and Brussels.
The survey cited Athens and Dublin as top markets in which to sell.
Helsinki, Warsaw and Budapest were listed as attractive buys. High-risk investors listed Istanbul and Moscow as their top choices for property investment. Shopping centers are expected to bring the best returns in 2005, followed by retail parks and warehouses.
“Traditional investment markets have now been joined by increasingly interesting markets in Central Europe,” Perry said. “These have done exceptionally well for investors as they become integrated into the EU. What is occurring is an equalization in yields with values going up.”
Giving many Central European and Baltic nations a boost was their incorporation into the EU. Last year, the EU expanded its membership from 15 to 25 nations with the addition of Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia and Slovenia.
With Bulgaria and Romania expected to join in 2007, the investment climate is fast improving as investors see these two countries as safer, yet largely untapped prospects.
Following a hesitating beginning in the post-Communist era, the real estate market in Romania has undergone a spectacular development mainly during the past five to six years. Giving the market a particular boost are international companies with their need for both production and storage facilities, as well as office space.
During the past six years, the Bucharest real estate market has practically become consistent with European quality and professionalism standards, yet it still has a long road to cover before reaching the size of other relevant markets in Europe.
Moscow has the second-best real estate development prospects of any city in Europe, but as far as the risks involved are concerned it is at the bottom of the list, according to the ULI/PricewaterhouseCoopers survey.
“Moscow’s office and retail sectors have high numbers of both ‘buy’ and ‘sell’ recommendations,” according to the survey. “This may seem inconsistent, but it is probably indicative of the fact that you have to take a view on numerous political and legal issues in addition to the usual risk/return concerns.”
Also, while Moscow returns remain high by European standards, the survey pointed to the limited scope for investment activity in the city, given the fact there are very few investment-grade properties and the market is dominated by “huge domestic equity capital that does not require the same risk premium as Western capital, nor does it engage in the same level of due diligence.”
But while Moscow weighed in last for risk, the Russian capital ranked No. 2 by total returns, rent increases, capital growth and development, surpassed only by Istanbul. Moscow is undersupplied in all sectors, the survey said. It has the lowest office vacancy rate of all the cities surveyed, it is significantly under-shopped, has strong demand for residential real estate and hotels, while the industrial market is waiting to explode.
Overall, Europe’s real estate markets are not exploding at the seems, but interesting developments are taking place as it evolves and the EU expands.
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