“So far this year, European net absorption has been slightly positive and our survey shows half of Europe’s major cities now have business sectors showing signs of expansion,” a Jones Lang LaSalle November 2004 report states. “Exceptions are Germany (especially Frankfurt), Italy and the Netherlands, where net demand remains very weak or negative.”
Despite this news, vacancy rates are still high in Europe and are expected to reach a peak of 10%. However, developers appear to be picking up on the stronger occupier sentiment, moving forward with planned schemes in most markets, and looking for new opportunities. Large scale projects are also on drawing boards across Europe.
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In Barcelona, R&D is sparking the massive redevelopment of Poblenou, a neighbourhood that at the end of the 19th century was home to the greatest concentration of factories in Catalonia. Today, the area is about to become the city’s technological hub with the help of Plan 22@, an enormous redevelopment project aimed at promoting an area with a markedly scientific and technological character. Plan 22@ is an ambitious town planning project aimed at redeveloping and transforming old industrial areas of Poblenou into an innovative technological district. The aim is to supply more than three million square metres of quality space and to create between 100,000 and 130,000 new jobs. The new environment will be home to universities that foster the growth of companies and R&D centres.
Observers see the project as creating a new Mediterranean city model that is diverse and balanced by offering comprehensive urban services, facilities, green areas and the construction of residential, commercial and cultural areas, making the district attractive not only to work in but also to live in and to enjoy all types of services. Even without Plan 22@, many contend that Barcelona has already risen to become a preferred location in Iberia and southern Europe due to its extensive offering of space, infrastructure, technology and personnel.
“Barcelona is seen as the city doing the most to improve itself,” reported a recent Cushman & Wakefield, Healey & Baker, European Cities Monitor study. “The city is one of the best European cities in terms of office space availability and price-quality relationship, and it is the best city in terms of quality of life for employees.”
In addition, Barcelona maintains its prestige as the leading design city in Spain thanks largely to the host of universities and design schools, from which more than 400 design students graduate each year. Findings in a survey by the Urban Land Institute and PricewaterhouseCoopers, entitled Emerging Trends in Real Estate: Europe 2004, show that investors prefer Barcelona to Madrid, primarily because of an excess of office space in its periphery.
Madrid Xanadú
Madrid is home to its own landmark developments, most notably Madrid Xanadú, a $300m international retail and leisure development, jointly developed by retail real-estate investment trust The Mills Corporation, based in the US town of Arlington, Virginia, and the Spanish Parcelatoria de Gonzalo Chacón SA of Madrid. Madrid Xanadú is the largest snow, shopping and leisure destination in Europe with about 1.2 million square feet of space, more than 220 shops including retail services, leisure and dining, and the first-of-its-kind Indoor Snow Dome.
Spain seems to be able to support such projects because its overall economy has been good. It is the only EU country, with the exception of the UK, to have increased its GDP by more than 2% in 2003 and anticipates a 2.8% increase in 2004. Practically 60% of FDI that goes into Spain takes advantage of the incentives of the Foreign Value Tenancy Entity (FVTE). FVTE offers great tax advantages that make Spain competitive with The Netherlands and Luxembourg for international capital flows.
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Spain lacks high-class properties, debt-free tenants and long-term contracts. Yet, despite this, the investment has been significant while the demand for offices has been weak.
Welsh star rises
In Wales, Cardiff has been a rising star in the UK real estate market. Its latest big news is the December opening of the 33,000m2 Wales Millennium Centre at Cardiff Bay. The centre is a multi-theatre venue for international musicals, opera, ballet, dance and home to seven diverse cultural organisations. The project is expected to become one of the world’s leading performing arts venues. The centre makes the city a cultural destination and enhances its quality of life.
In short supply in Cardiff these days, however, is grade A office stock. This is due to a surge in office space leases in the past six months and the fact that developers have not been speculatively constructing new stock. Cardiff’s office market has performed reasonably well, compared to the rest of the UK, and in the second half of 2004 there was an up-take up of 250,000ft2. This has led to a serious shortage of high-quality office space in the city.
“There remains very strong interest among purchasers for commercial property of this type, as market conditions continue to be very healthy for commercial property purchases,” says John James, director of Fletcher Morgan, Cardiff property surveyors.
In October, the Welsh Development Agency (WDA) announced plans for a 50-acre extension to Cardiff Bay, the mixed-use urban renewal project of 500 acres of brown field land purchased by the WDA from Associated British Ports in 2002. The proposal includes 1.2 million square feet of offices to be built in four phases starting in 2006, and 120,000ft2 of shops, hotel and leisure space, 1000 waterfront apartments and 3000 parking spaces.
Regeneration rules
Regeneration is at the heart of development in the English county of Kent as well. According to Locate in Kent, the county is at the forefront of sustainable community development in the UK, with two areas – Ashford and Thames Gateway Kent – already designated as UK Growth Areas by the deputy prime minister. Thames Gateway Kent consists of Kent Thameside, Swale Forward and Medway Renaissance Partnerships, while Ashford’s Future is masterminding the programme in the central Kent town.
Kent Thameside is the most advanced of the delivery areas. Three sites there will provide more than 1.25 million square metres of commercial space when complete. Nearby residential housing development is also under way. Chatham Maritime is proving to be the jewel in the Medway crown with 11km of successful mixed-use development planned. The development includes a hotel, conference centre and cinema plus other leisure facilities along the River Medway on the former Royal Dockyard. The project is slated to result in 6000-8000 additional dwellings and 8500 new jobs.
“We are aiming to create an exciting development that sets new standards in design and quality of build, but we are very aware that this development has employment uses, public space and sustainability that will make it one of the most exciting projects, we hope, in the country,” says Medway councillor Jane Chitty, portfolio holder for planning and economic development. “It will bring about a major improvement in Medway and open up the riverside for public use for the first time.”
In Scotland, The Mills Corporation, which was involved in Madrid Xanadú, is expected to announce that it and a joint-venture partner have agreed to acquire a 715,000ft2 shopping centre in Glasgow, for about $524.2m. The agreement comes amid a broader move by US real estate investment trusts and other real estate firms to establish or expand their presence in Europe, despite the weaker dollar. Some of the push is driven by a belief that overseas markets offer more opportunities and higher investment returns than US markets.
Hamburg shapes up
A major urban redevelopment is under way in Hamburg. The project, HafenCity, is taking shape on the site of Hamburg’s deteriorated harbour community. It involves Hamburg’s waterfront and is considered one of Europe’s prominent urban development projects. It will increase the inner city by 40% and add about 75 acres to its central urban area for a mix of residential accommodation, offices, cultural and leisure amenities, retail facilities and restaurants. The site offers potential for the service industries, media and cultural industries, logistics/transport companies, legal, banking and consultancy companies and headquarters.
How the project will affect Hamburg’s real estate market is yet to be seen. The Media Harbour project in Düsseldorf’s once-derelict riverfront – designed by world-class architects including Frank Gehry and hailed as the must-move-to address for design, advertising, media and other image-conscious companies – proved to be slow to rent and an added drag on the city’s market. Much of the problem centres on Germany’s continuing depressed economy.
However, the World Economic Forum’s Global Competitiveness Report 2004 places the nation among the 10 countries with the highest global competitiveness. In that regard, Hamburg holds promise.
While well-known companies elsewhere in Germany are cutting thousands of jobs, Hamburg-based Airbus is proposing to expand its production capacities, although local residents strongly oppose the idea. How the government handles the situation will indicate whether Germany is swinging to a more pro-business stance.
Hamburg’s office market in Q3 2004 showed stability. Jones Lang LaSalle reports that by the end of the third quarter, the city’s take-up volume of 317,600m2 had already exceeded that of the entire year in 2003, although attributable to one specific real estate deal. Nevertheless, for 2004, business-to-business service providers formed the mainstay of leasing activity, accounting by Q3 for 14% of the take-up volume and about 18% of the number of deals.
Milan’s face lift
Milan is slated to take on a new look with a project that has been nicknamed the “Pasta Towers”. While still on the drawing board, the plan is to build three glassy skyscrapers on the former grounds of Milan’s outmoded Fiera Milano convention centre and will alter the skyline of Italy’s premier industrial and financial city forever. The twisted and curved steel skyscrapers will flank a housing and retail complex, adjoining what would become the city’s largest park.
Architect Daniel Libeskind, describes the unprecedented project as one that will “create a spectacular new sort of 21st century city” for a metropolis that is already linked to Leonardo Da Vinci’s Last Supper, Milan’s gothic cathedral and La Scala opera house. “This project represents an acknowledgment that Milan is a city that’s going to compete in the global economy,” Mr Libeskind says. “I think it will transform Milan. People will not look at the city in the same way again.” Mr Libeskind is the principal architect of the new World Trade Centre in New York City.
With a price tag of €1.5bn, the 60-acre Milan project is one of several important developments scheduled. Others include: a 3.7 million-square-foot convention centre; a 57-acre redevelopment of a blighted central area near the main train stations, which will include a new fashion and design museum by 2009; and improvements to Milan’s transit system. Transit improvements include imposing steep car-registration fees, digging underground garages, expanding the subway and commuter rail system, and constructing a high-speed train (scheduled to be finished by 2006 when the Winter Olympics will be in nearby Turin).
Milan is also attracting extensive investment in fibre optics by Italian telecom start-up e.Biscom. The city now has more fibre-optic cable under its streets than any other city in the world.
Jones Lang LaSalle reports that Milan increased its annual investment volume for direct single asset real estate investments in 2003 by 60%, compared with a negative 32% for Rome. Despite a general decrease in office investments in Italy, Milan notched up record investments with E1.9bn in total investments, Jones Lang LaSalle’s Italian Property Investment Market – 2004 reveals. Cross-border investments are in line with the national share, with almost €1.4bn (75%) of the total volume involving foreign investors. Italians remained Milan’s primary investors with German open-ended funds being the strongest foreign purchaser group with almost €465m.
While Europe’s economic record is mixed, there is still plenty of real estate action, especially with the arrival of the mega project.