Innovative architecture like London’s Gherkin, Amsterdam’s ING Group headquarters, Bilbao’s Guggenheim and Prague’s Ginger and Fred is adding new character to Europe’s real estate landscape and drawing attention to these once-tired cities. Europe has long benefited from signature monuments and structures that give locales a trademark. When Paris comes to mind, how many people first visualise the Eiffel Tower?
These days, other venues, such as urban renewal projects, technological parks (see page 25), retail centres, and up-and-coming residential developments, hotel developments (see page 24) and infrastructure improvements are also drawing interest to locations throughout Europe. Some are fostering economic development benefits (or have the potential to do so); others do not.
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Economic slant
Regardless of real estate type, business sector or locale of the project, ultimately the success of all real estate is affected by economics. And for Europe, most real estate professionals regard that multi-faceted market’s overall economy as an improving one. Its likely strength and timing of recovery remains uncertain, however.
As of Q3 2003, the EU’s GDP growth rose to 0.4%, bringing the annual growth rate to 0.6%, reports the Economist Intelligence Unit. The source of the improvement was an increase in net export growth, although domestic demand did not show signs of improvement. Consequently, the improved economic outlook has not yet translated to better conditions in leasing markets, although analysts expect that when all of 2004’s economic data is analysed, the market will show further improvement.
“The discontinuity between relatively weak conditions in leasing markets and strong investor demand continues to characterise the European, as well as other, real estate markets,” suggests a statement by Prudential Real Estate Investors. “How this dislocation is resolved will principally determine European real estate performance this year.”
Factors indicating that economic growth will continue in Europe are reviving industrial output, improved business and consumer confidence and tax cuts – which have been or are being implemented in Germany, France and Italy. Europe’s stock markets are also performing well, thereby reducing the cost of capital for many companies and thereby possibly spurring private investment. The propensity of Germans to save money, combined with German open-ended funds, has also led to wide investment in real estate across the continent, although deteriorating returns have led to a decline in volume of new capital inflows.
Business expansions are good indicators of where the economy is headed. Since 2003 the number of FDI projects has increased, halting the decline experienced since investment peaked in 2000. This is a positive sign, although Ernst & Young’s European Investment Monitor 2004 Report states that much investment last year was driven by intra-European activity.
Commercial space
Jones Lang LaSalle reports that while prime rents fell by more than 75% in 2003 in the 23 major office markets in Europe, in the first half of 2004 rents stabilised in more than half of these markets and rents increased in London’s West End, Brussels and Moscow.
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The Q3 2004 report by Colliers Commercial Real Estate indicates that take-up levels remain encouraging across central London, with West End and City markets showing demand for office space in prime locations. The City market experienced the highest quarterly take-up of second-hand space since 2000, suggesting the two-tier market could be coming to an end.
Yet IVG Immobilien’s Investment magazine proclaims that Paris has better growth prospects than London, based on the fact that it has more office space and a better infrastructure. Other surveys indicate that the most active countries for real estate investment are the Nordic region, the UK and France. The UK and France total more than 50% of Europe’s real estate investment.
Logistics advantage
Vacancy rates in the office sector remain high in Germany and the Netherlands. Both countries fair better as logistics locations – a category that falls under industrial product rather than real estate. Overall, the levels of investment in industrial product in Europe increased, with a growing proportion of the investment deals concentrated on large logistics and distribution units.
The eastward expansion of the EU, combined with the fact that the new markets of eastern Europe were hitherto hardly exploited, represents an important new marketplace, particularly for companies from the transport and logistics sector. Consequently, Germany is in a good position for logistics operators. Private investors and institutions have maintained their interest in the warehousing sector, which continues to place a downward pressure on yields. In some markets, investors are willing to take product on yields close to the level for offices if the location and tenant are strong.
Speculative indicators
The amount of speculative building indicates market confidence but, if overdone, can saturate a market. In Dublin, for example, developers are undertaking speculative development based in part on the wide success of information technology (IT), insurance, legal and finance industries there. The renewed confidence in the Dublin office market in Q3 2004 is reflected in increased activity as enquiries translated into deals, with take-ups totalling 42,500m2.
“Total take-up stands at 131,000m2, up from 124,000m2 over Q3 2002,” says James Nugent, office director at Lisney, a leading Irish commercial and residential real estate agency. Mr Nugent points out that year-end take-up is expected to reach 162,500m2, a 9% increase over 2003.
Significantly, the city centre featured strongly, representing 44% of all Q3 Dublin deals and 56% of transactions since the beginning of the year. Notable deals concluded in Q3 include the pre-letting of almost 10,000m2 to the mobile phone operator O2 in the city centre and 3715m2 by eBay in the suburbs.
The increased activity in the market has led some developers to consider commencing construction, according to Mr Nugent. “Where, previously, speculative development was limited to the city centre, the suburbs are now also beginning to play a role. But activity is limited to strategic locations where occupier demand exists and supply of good quality, modern offices is tight. We anticipate strengthening occupier demand, underpinned by healthy economic growth of around 5.2% in 2005,” he says.
Overseas interest
A renewed interest is expected to come from overseas companies, either choosing Ireland as a European headquarters location or expanding their operations. A vote of confidence in that market came last year when IBM decided to invest an additional €22m in the significant development of its Irish research and development (R&D) software facility in Dublin. Lucent Technologies, through Bell Labs, is spending €69m on the creation of a global headquarters for research into telecommunications and supply chain technologies and the collaborative creation of an academic Centre for Telecommunications Value Chain Driven Research (CTVR), which is to be located at Trinity College Dublin.
“Our decision was influenced by the availability of high calibre graduates, the growing emphasis on scientific research by organisations such as Science Foundation Ireland and IRCSET [the Irish Research Council for Science, Engineering and Technology], and the strong support of the [Irish government agency] IDA,” says Elaine Stephen, IBM’s director of Lotus Workplace Collaborative Learning.
Eastern attraction
Cities in eastern Europe, like Hungarian capital Budapest, are also attracting speculative development, although Ernst & Young reports that some projects are being postponed or waiting to be pre-leased before construction begins. Prague and Budapest are still considered growth markets that will gain further prominence as the economic centre of Europe continues to move east.
Dirk Kadel, manager, corporate finance real estate at PricewaterhouseCoopers in Vienna, says that Prague and Budapest have reached almost the same level of investment as Vienna. But when it comes to quality of life, Vienna excels.
Thierry Delvaux, managing director of Jones Lang LaSalle Budapest, says: “In terms of construction activity, we have seen significantly lower speculative completions in Budapest compared with the previous years. In the first half of the year, 47,100m2 of office space was handed over, of which only 14,600m2 was built on a speculative basis.”
Total modern stock in Budapest is 1.7m square metres, of which 14.5% is unoccupied. “Vacancy rates have been decreasing for two years now and we anticipate a further decrease in the next 12 months,” says Mr Delvaux.
In terms of take-up, Budapest has been quite active. Take-up in the first half of 2004 reached 96,700m2, an increase of almost 65% compared with the same period a year before and 30% higher than in 2001, when the highest take-up was recorded. Business-related companies took the most space: 27% of the total take-up. IT companies took 23%, manufacturing 14%, and banking and finance 14%.
While the office market is still developing, Mr Delvaux reports a slowdown in Budapest’s general shopping centre market. This is because new types of retail elements have already started to appear, such as specialised shopping centre developments, retail parks and factory outlets and department stores. Material, the first specialised shopping centre – dedicated to home furnishing and design – is due to open this March.
International developers are continuing to construct various projects while others are monitoring the market. “We expect to see them enter the market during 2005,” Mr Delvaux says.
Hungary has received more than 90% of its capital from foreign companies investing in eastern Europe. Taking advantage of the country’s low wages and skilled labour base, European, Asian and North American companies have established automobile-assembly plants, high-tech electronics factories and light manufacturing works in the country. As a result, unemployment has dropped to just over 10%, though most of the jobs are in relatively prosperous Budapest and Transdanubia.
Growth zone
London-based Knight Frank, a division of Grubb & Ellis Property Solutions Worldwide, reports in its 2004 Global Real Estate Forecast that in the period 2004-2007, central and eastern Europe is forecast to experience economic growth averaging 4.2% a year, making it one of the fastest-growing economic zones in the world. At the other end of the spectrum, a large quantity of speculative development in Munich – a city that is well identified as an international centre for the automobile and electronics industries, manufacturing, trade fairs, tourism and the arts – is being postponed to 2005 or later.
Despite the large proportion of industries that have been hard hit by Germany’s economic downturn, the average unemployment rate in Munich rose to 6% at most in 2003 and thus has the lowest rate of all major cities in Germany. Still, business sectors are not expected to expand and leases are already demanding three to six months’ free rent on a five-year lease. To compare, recent incentives in Dublin hover in the 12-15 month free-rent range for a 25-year lease.