Emerging Trends in Real Estate® Europe 2006 - Urban Land Institute

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Infrastructure is gaining increasing profile among asset-starved real estate investors in investors are even sourcing new premises for the former owner-occupiers to move to so that they can reposition the assets they acquire. Some buyers even offer a piece of the leveraged upside to the seller to induce them to sell. Governments are also starting to help free up corporate assets through legislation that lowers the capital gains tax payable when assets are sold. The French SIIC III legislation announced at the end of 2005 might lead the way, enabling corporate sales for cash to these REIT-type vehicles at reduced tax rates (previously, sellers were only allowed payment in shares). German G-REIT legislation is expected to contain similar tax concessions and Italy is considering giving substantial capital gains tax concessions for corporate real estate sales without any tie to a REIT. Given that well over 70 percent of commercial property in Europe is still in the hands of owner-occupiers, there is a lot of potential to increase the institutional stock if tax systems foster such transactions. Where central governments show fewer signs of helpfulness is in privatising state-owned properties. Many previously mooted programs have simply been put on hold. There is little prospect that 2006 will see any major initiatives in this sphere, although a trickle of sales will probably continue in the majority of European countries. The most high-profile privatisations have been in Germany at the Länder and city level with the sell-off of huge residential portfolios. These will no doubt continue as long as the financial arbitrage driving them remains to be exploited and the prices paid purportedly exceed the wildest expectations of the vendors. Infrastructure Gets a New Fan Club One area where governments are planning an important release of assets is infrastructure. Many fixed-income investors have already discovered the attractive attributes of bonds issued in connection with public/private partnership (PPP) financed projects. They have long duration, relatively high cash flow (often linked to inflation), and low correlation with equities and other types of bonds. In short, the risk-return profile is very much akin to that of real estate. 12 Emerging Trends in Real Estate ® Europe 2006 Infrastructure is gaining increasing profile among assetstarved real estate investors in Europe and is already an accepted extension of the real estate universe for those in the vanguard. “In a world with a wider definition of what is considered real estate, infrastructure makes sense.” “Reservoirs, tunnels, toll roads, [and] bridges can all deliver strong longterm cash flows with good residual values.” Germany, France, Spain, Poland, Sweden, Greece, and the U.K. all have PPP initiatives or ongoing programmes. Expect to see more real estate investors gain exposure. Sustainability Issues Barely Surface Awareness of E.U. sustainability legislation has a long way to go if our survey and interviews are anything to judge by. A significant proportion knew little and cared less about the issue. “Sustainability is just a slogan.” “A sustainable building is just a good building in a good location.” “Sustainability is just an additional layer of cost for developers.” Agents do not believe that tenants care enough about energy efficiency to pay more for a sustainable building (although some corporate premises managers might disagree). Likewise, investors tend to believe that overall good design is more important. Like it or not, the issue of a building’s compliance with sustainability requirements will rise up the agenda in the future. It could shorten the life cycle of many existing assets and alter the relative merits of refurbishment versus building new. In theory, it should also hit the relative pricing of assets, with sustainable products attracting higher prices. However, for the present, E.U. governments need to raise awareness of sustainability legislation because it appears to be woefully lacking. Going East for Opportunity The sustained downward shift in yields across most of the markets covered by this report has sent many investors seeking higher returns out to new markets—most of them to the east. A year or more ago, some opportunistic investors headed for the countries that will make up the next wave of E.U. entrants. They are now being followed by a surprisingly diverse set of investors, including a few that were once on the conservative end of the investment spectrum. In this regard, Romania is the most-often mentioned because it is relatively
Europe and is already an accepted extension of the real estate universe for those in the vanguard. large and Bucharest is thought to have the potential to achieve a transformation similar to that seen in Warsaw, Budapest, and Prague. At present, the assets are few, the legal and title risks are myriad, and there is a distinct gap in market professionalism, but none of this has deterred investors or stifled hefty yield compression. Other central and eastern European markets attracting interest are the main cities in Slovenia, Bulgaria, Croatia, the Ukraine, and a great many secondary cities in Poland, the Czech Republic, and Russia. These markets will no doubt become more interesting to a broader spectrum of investors as new development and refurbishment enhance their built environment. However, the amount of investment they can absorb at present is limited. The big movers are heading to the Far East and India, where rapid growth and big, expanding urban populations offer opportunities in larger scale. This may take a brick or two out of the “wall of money” trying to get into European markets, but it’s unlikely to bring that wall down. The major challenge for European real estate markets in 2006 is to negotiate the imbalance between investable funds and available assets without moving pricing to a dangerously unsustainable level. Emerging Trends in Real Estate ® Europe 2006 13
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Emerging Trends in Real Estate® Europe 2006 - Urban Land Institute

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