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

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Respondents often mentioned Paris and London in the same breath as tops for Exhibit 3-1 City Return/Risk Prospects Paris London Helsinki Madrid Barcelona Stockholm Dublin Lyon Copenhagen Edinburgh Prague Zurich Brussels Hamburg Rome Budapest Munich Milan Istanbul Vienna Lisbon Warsaw Amsterdam Berlin Athens Moscow Frankfurt ■ Risk-Adjusted Total Returns ■ Total Returns ■ City Risk Rating 6.22 6.05 6.39 6.2 5.98 6.42 6.11 5.89 6.33 5.95 6 5.9 5.91 6.07 5.74 5.89 5.57 6.2 5.83 5.7 5.95 5.76 5.9 5.62 5.74 5 6.47 5.7 5.36 6.04 5.52 5.89 5.14 5.49 4.67 6.31 5.45 5.13 5.77 5.42 5.03 5.8 5.41 5 5.82 5.38 5.81 4.94 5.37 5.12 5.61 5.35 5.14 5.55 5.29 6.54 4.04 5.28 4.79 5.76 5.23 5.18 5.27 5.15 5.67 4.63 4.98 4.48 5.48 4.84 4.75 4.93 4.83 5.32 4.33 4.8 5.73 3.86 4.28 3.95 4.61 0 5 10 1 5 9 Abysmal Fair Excellent Source: Emerging Trends in Real Estate Europe 2006 survey. 30 Emerging Trends in Real Estate ® Europe 2006 Exhibit 3-2 City Development and Market Balance Prospects Istanbul Moscow Paris Barcelona London Lyon Prague Milan Budapest Madrid Helsinki Rome Munich Dublin Hamburg Athens Warsaw Stockholm Vienna Edinburgh Lisbon Zurich Brussels Berlin Amsterdam Frankfurt Copenhagen ■ Development Outlook ■ Property Market Supply/Demand Balance 6.32 4.95 5.85 5.05 5.79 5.63 5.76 5.58 5.73 5.43 5.71 5.39 5.54 5.08 5.54 4.97 5.53 4.97 5.5 5.5 5.47 5 5.25 4.86 5.23 4.65 5.17 5.06 5.17 4.71 5.14 4.85 5.13 4.61 5.11 4.68 5.06 5 4.95 4.78 4.9 4.72 4.77 4.85 4.58 4.78 4.36 3.95 4.09 4 4.03 3.86 4 4 0 5 10 1 5 9 Abysmal Fair Excellent Source: Emerging Trends in Real Estate Europe 2006 survey.
opportunities in 2005 and prospects for 2006. ■ Although cities in the bottom ten have not significantly changed from 2005 results, average ratings for city risk and total returns increased for Frankfurt, Moscow, Athens, Berlin, Amsterdam, and Warsaw. ■ Buyers are on the hunt with little to hunt. Although yields are historically low and property values potentially peaking, it appears that only a minor segment of respondents believe that 2006 is a good time to sell regardless of property market or property type across Europe. ■ The lack of acquisition opportunities in primary European property markets and CBD submarkets will force domestic and foreign investors and developers to widen the scope of their strategies to include secondary European property markets and non-CBD submarkets in major European markets. ■ Urban regeneration, mixed-use development, and movement into noncore property types such as student and seniors’ housing will also increase in 2006 (and 2007) in most European property markets. The next section briefly provides an overview of the 27 European property markets covered in this year’s survey. The ranking methodology used remains consistent with last year’s Emerging Trends in Real Estate Europe. At the end of this chapter, we present a new cluster analysis of the European markets that provides an alternative view of the 27 cities. Rather than being ranked, cities are clustered based on several key buyhold-sell ratings in order to help readers create new, or challenge existing, investment and asset management strategies. The Top Ten Markets Paris Paris reigns supreme again, taking the top spot in our riskadjusted total return rankings for the second year running. Does it really have everything? Many survey respondents think so and are quick to praise its ability to offer “long-term investments in a consolidated city.” In this capital-rich, product-poor property environment, the city also gets top marks for its size and liquidity. “You can buy and sell at the same time depending on the opportunity,” says one respondent. Total return prospects for Paris are among the best in Europe (third in our survey), and this, together with its attractive risk rating (also third), pushes it into first place overall. Notes one respondent, “Assuming the economic growth in France will not stagnate, Paris is one of the structurally healthiest real estate markets in Europe.” At 1.8 percent GDP growth predicted for France in 2006 by Consensus Economics, it is just about in line with European averages. Respondents often mentioned Paris and London in the same breath as tops for opportunities in 2005 and prospects for 2006, but few speak with as much enthusiasm and romance about London. The relative yields of the two cities explain why Paris edges ahead on the office side: Paris is pretty steamy at 5.1 percent, according to CB Richard Ellis, but it is 60 basis points above London at 4.5 percent. Paris offices were in soft recovery last year, according to our respondents, and the city is now looking at certain submarkets experiencing strong recovery for 2006, with prices supported by actual and expected rental growth. Also, some development is expected to commence again (but not in La Défense submarket, where vacancy still exceeds 10 percent), and with supply having started to fall in 2005, this is looking to be a main trend for 2006. However, Paris’s popularity is resulting in some dissatisfaction among investors. With the capital a little too hot for some, there is a marked move towards second-tier French cities as investors chase apparent mispriced opportunities. “In provincial markets, rental growth is not yet reflected in prices,” commented one respondent. There is also sustained interest in industrial and retail property types, and Paris has retained its top-ten ranking in both these sectors as it relates to buying opportunities. Yet, competition is heating up with a short supply of shopping centres, with the 60 percent “buy” rating being a wish more than a reality. For industrial, the transport links and the density of the city make it a good bet for 2006, say respondents. Exhibit 3-3 Prospects for the Paris Real Estate Market in 2006 Prospects Rating Ranking Risk-Adjusted Total Returns Modestly Good 6.2 1st Total Returns Modestly Good 6.1 3rd Risk Modestly Low 6.4 3rd Rent Increases Modestly Good 5.6 5th Capital Growth Modestly Good 5.9 5th Supply/Demand Balance Fair 5.4 3rd Development Modestly Good 5.6 1st Investment Recommendation of Survey Respondents Office Retail Industrial/ Distribution Buy Hold Sell 53% 38% 8% Buy Hold Sell 61% 35% 4% Buy Hold Sell 55% 37% 8% Source: Emerging Trends in Real Estate Europe 2006 survey. Emerging Trends in Real Estate ® Europe 2006 31
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