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

The decline in yields has to stop at some point, but few of those we interviewed believe
Exhibit 1-1
Real Estate Firm
Profitability Prospects
6.79
2005 2006
Source: Emerging Trends in Real Estate Europe 2006 survey.
are faced with a dilemma. Do they adjust their target returns
downward or do they sit and wait for a correction that may
not come? There are some—but not many—who are selling.
“These things run in cycles. There’s going to be disappointment
in a few years because things like replacement cost
eventually do matter.” “We’ve lost sight of residual values at
these levels.” “People understand risk and return—but not at
the same time. We won’t have lower returns forever.”
The decline in yields has to stop at some point, but few of
those we interviewed believe that it is going to stop in 2006.
The majority believe that there is simply too much money
pouring into European real estate relative to the near-term supply
of assets. “This is a liquidity hurricane.” “Capital is coming
out of every orifice.” “New investors are popping up every
day—U.S. investment banks, Middle Eastern petro dollars,
Australian REITs, hedge funds, and deep pockets of private
money from the Far East.” At the same time, “It’s a totally
product-starved market and people who are potential sellers
only do so because they think they can get an unbelievably
good price.” And of course, many of those who do sell then
have the dilemma of getting the money back in the market.
The shortage of product has meant that turnover has not
increased as much as it might have done in the past year and
there are lots of disappointed buyers with cash awaiting
deployment. Nevertheless, profits in 2005 were good and our
current survey anticipates even better profit growth in 2006
(see Exhibit 1-1). Much of this optimism is based on the sheer
weight of money coming into real estate, but there is some
fundamental comfort, too. Occupier markets have stabilised
in many major markets, vacancy has ceased its vertiginous
increases, and in a few markets headline prime rents have even
started to rise. However, for now the recovery is patchy. It is
4 Emerging Trends in Real Estate ® Europe 2006
7.1
Note: 6 = modestly good, 7 = good, 8 = very good.
Exhibit 1-2
Global Firm with
a Global Strategy
24.18%
European Firm with a
Pan-European Strategy
26.14%
Survey Responses by Geographic
Scope of Firm
Other 13.73%
Source: Emerging Trends in Real Estate Europe 2006 survey.
Exhibit 1-3 Survey Responses by Country
Source: Emerging Trends in Real Estate Europe 2006 survey.
European Firm
Focussed Primarily
on One Country
35.95%
Hungary 1.91%
Greece 1.91%
Belgium 1.91%
Sweden 1.91%
Other Europe
6.37%
Poland 2.55%
Netherlands 3.18%
Russia 3.18%
Turkey 3.82%
Italy 6.37%
Germany 8.92%
France
10.83%
United Kingdom
23.57%
Portugal
12.10%
Spain
11.46%
confined to particular pockets of the markets with the
strongest economies rather than across the board. Moreover,
most of the mainstream data do not reflect incentives such as
rent-free periods and thus overstate yields. Nevertheless, there
is some optimism that the worst may be over.
A look at our survey statistics on city markets reveals that
in each city and major sector, sentiment is hugely weighted
to the “buy” side. Even the lowest-ranked city markets have
much higher “hold” recommendations than “sell,” while the
vast majority of recommendations on even middle-ranked
markets are unequivocally “buy.” This is not a market that is
going to correct anytime soon in the judgement of most of
our interviewees and those surveyed. However, a minority
believe this is indicative of a market nearing its peak. Those
who are most sceptical of current market conditions say that
this is “just another cycle” and cap rates could correct as soon
as the second half of 2006. They point in particular to the
debt-driven buyers who “will disappear as soon as the arbitrage
between borrowing rates and yields disappears.” The