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

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Deals that might have attracted
two or three bids in the past are now
attracting 30 or 50 or even more.
Hurricane
Europe’s real estate markets enter 2006 at levels where
investors are going to have to make some tough
judgement calls. Are we in a period of fundamental
change in the equilibrium value of real estate due to a “structural
change in demand for the entire asset class”—or are we
in the thrall of “irrational exuberance” that will “ultimately
lead to overshooting” and “end in a train wreck”? The 2006
survey and interviews for Emerging Trends show that market
opinion is both divided and undecided. But, if actions speak
louder than words, then the escalating appetite for European
real estate assets appears to show that the path of least resistance
for now is to keep buying.
More Buyers Than Sellers by
a Very Fat Margin
“The market has gone white-hot.” “We’re having to take on
more and more risk for less and less return.” “People are prepared
to pay what would have been considered crazy yields
only a year ago.” These comments are heard across almost all
of the major markets. Deals that might have attracted two or
three bids in the past are now attracting 30 or 50 or even
more. One investor said, “We lost an asset in Warsaw. If you
added up the bids for that asset, it was more than the total
invested in Poland in 2004.” This type of bidding war accelerated
yield compression in the final quarter of 2005, according
to those interviewed, and the acceleration came on top of
heady yield compression already documented in most of the
major markets during the first three quarters of the year.
“Has pricing gone too far?” “How do you price risk and what
is an acceptable rate of return?” These are the questions in
many investors’ minds.
The presence of debt-driven buyers particularly challenges
seasoned European real estate professionals. Bidding wars
over prime assets—and even secondary assets—are so competitive
that many investors who were formerly able to take
out an asset when they really wanted it have been beaten by a
wide margin in the past year, often to a debt-backed player
with leverage in excess of 90 percent or even 95 percent. It is
not uncommon to hear: “We bid on something and it went
for a price that was our year-three exit value.” The sceptics
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