Tuesday, June 05, 2007


Europe: Commercial Real Estate Sizzles

Despite a stagnant economy, inefficient governments, EU growing pains and rising ethnic tensions, western Europe does have a red-hot commercial real estate market.

The growing popularity of REITs are certainly helping matters.

While residential housing markets across Europe are starting to cool, commercial real estate is sizzling. IPD, a London-based research group, says the value of investment property in Western Europe—retail and office space, as well as big residential developments—rose 7.8% in 2006. Growth last year topped 20% in Ireland, and was over 10% in Britain, France, Spain, and Scandinavia. By contrast, the average increase across Europe was 5.9% in 2005, 3.6% in 2004, and less than 1% during the three preceding years.

What turned up the heat? Europe's recovering economy is one explanation. Growth in the euro zone was 2.8% in 2006 and is expected to hit 2.7% this year, ahead of a projected 2.1% in the U.S. Interest rates also remain near historic lows. "You can borrow at 3% to 5% and get a property that's yielding 6% to 10%" annual returns, says Sabina Kalyan, IPD's chief economist.

At the same time, money is pouring into Europe from big institutional investors and private-equity funds that are trying to diversify their holdings. Many of these players have set up special funds targeting European real estate that they are marketing to investors. Britain, Germany, and France all recently have enacted legislation allowing real estate investment trusts (REITs), which also makes it easier for investors to get into the market.

Until recently, there were relatively few vehicles for foreign investors wanting to get into the European property market, says Nick Tyrrell, head of European real estate research and strategy for J.P. Morgan (JPM) in London. But now, Tyrrell says, "There are a whole bunch of funds. The whole asset class has opened."

There's certainly no shortage of property to buy. To strengthen their balance sheets and concentrate on their core businesses, big European companies are selling off real estate as never before. German insurer Allianz (AZ) has unloaded some $4.1 billion worth of property this year, including the Frankfurt headquarters of the European Central Bank.

Often, activist shareholders are the instigators of such sell-offs. After taking a major stake in French hotel group Accor in 2005, for instance, U.S. real estate-investment group Colony Capital has pushed Accor to sell off more than $1 billion worth of hotels in sale-leaseback deals. Now Colony has teamed up with French luxury magnate Bernard Arnault to exert pressure on French retail giant Carrefour to trim its real estate portfolio (see BusinessWeek.com, 3/8/07, "Scent of a Bargain for European Tycoons").


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