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

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Business park/out-of-town offices rank at or near the bottom on prospects for total Exhibit 4-18 40% 35% 30% 25% 20% 15% 10% 5% 0% -5% IPD Office Property Total Returns for Selected Countries Ireland France Sweden Netherlands United Kingdom Finland Germany Portugal Spain 1999 2000 2001 2002 2003 2004 Source: Investment Property Databank (IPD). Note: For Ireland, 2004 figure was not available; figure shown is for the 12 months ending in third-quarter 2005. The U.K. is one exception to this, where there is more caution with regard to the regional markets, which tend to be more mature relative to continental second-tier cities. “It is very important to look at local supply in U.K. regional office markets,” says one, with others seeing office rental growth in London but “less evidence in the U.K. regions.” Avoid Germany and the Netherlands get the consistent thumbs down for 2006. For Germany, the caution is patchy; few will touch Frankfurt and Berlin, but the other cities may have some merit in 2006. “The German market is still a question mark and Munich may start to pick up while Frankfurt will continue to underperform.” Concerns over economic performance continue to underpin the lack of confidence in the German market, but where there is less of a supply/demand imbalance, markets could recover more quickly, say respondents. 60 Emerging Trends in Real Estate ® Europe 2006 Exhibit 4-19 Prospects for City Centre Offices in 2006 Prospects Rating Ranking Total Returns Modestly Good 5.6 8th Rent Increases Fair 5.3 7th Capital Growth Modestly Good 5.6 8th Supply/Demand Balance Fair 5.0 8th Development Fair 5.3 7th Direction in Which Prime Yields Will Move by Late 2006: Down/Stable Investment Recommendation of Survey Respondents Buy Hold Sell 47.4% 36.5% 16.1% Source: Emerging Trends in Real Estate Europe 2006 survey. Exhibit 4-20 Prospects for Business Park/ Out-of-Town Offices in 2006 Prospects Rating Ranking Total Returns Fair 4.9 9th Rent Increases Fair 4.5 9th Capital Growth Fair 4.9 9th Supply/Demand Balance Modestly Poor 4.4 10th Development Fair 4.7 9th Direction in Which Prime Yields Will Move by Late 2006: Stable/Down Investment Recommendation of Survey Respondents Buy Hold Sell 24.8% 36.0% 39.2% Source: Emerging Trends in Real Estate Europe 2006 survey.
eturns, rent increases, capital growth, development, and property supply/demand balance. Berlin and Frankfurt are near the bottom of our office “buy” list, while Hamburg and Munich fall more towards the middle. Office yields in the German markets as of the third quarter were generally in the range of 5.2 to 5.6 percent, but yields actually rose 20 to 50 basis points from third-quarter 2004 to third-quarter 2005, according to CBRE. The Netherlands’ poor rating is more a concern over supply. “We expect a natural balance back in the market in three to five years. There will be a shortage of high-quality office within two years.” Amsterdam, Rotterdam, and the Hague are highlighted by many as particularly poor prospects. At a stretch, good markets in the Netherlands are named as Zwolle, Breda, and Maastricht. Zurich, Amsterdam, and Vienna received the lowest “buy” recommendations for office in our survey, with Dublin, Berlin, and Frankfurt also near the bottom of the shopping list. However, such extremes do encourage contrarian investors. “Our targets are where rental growth prospects are poor but pricing is attractive, such as Germany.” Or: “With Amsterdam, Frankfurt, and Brussels there are relatively high yields, so depending on lease length/tenant you can underwrite on zero or even negative rental growth.” Emerging Trends in Real Estate ® Europe 2006 61
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