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Continental European property markets:
the euro effect
The rising prices in commercial property in recent years have made it unfeasible for many potential investors to look at the Irish market. Timely, then, is the arrival of the euroland economy, whereby since January 1999, it has been possible to look at investment in ten other countries in Europe without having to consider the question of exchange risk. David Bouch offers a guide to what is available.
F or institutional investors such as pension funds and insurance companies, the most important change this year is that they can now obtain a far greater spread throughout a range of markets with varying characteristics and outlooks, without currency considerations severely limiting their ability to safely offset their liabilities against the assets they hold.

For private investors, the extra cost of exchange risk cover when comparing an investment in their home market to one elsewhere, is now a thing of the past.

But the effects on property markets of the introduction of the euro go much further than the elimination of exchange risk. It has introduced a uniquely low interest cost with base rates reaching as low as 2.5 per cent by early April 1999, and it has opened up international perspectives, giving them a boost which can already be seen in a wide variety of interconnected ways:

l In direct terms, the euro has increased the willingness of institutions to look beyond their borders to build portfolios which take advantage of attractive market situations and help diversify their risk.

l Many funds, whilst acknowledging these advantages, recognise the dangers of making direct property investments in markets they do not know well enough, and have chosen to allocate funds for indirect investment in specialist property companies or funds with a locational or sector specialisation.

l Major fund management groups and property companies have perceived this growing interest in indirect investment and are creating an ever-widening number of funds and vehicles to respond to the need.

l Investors from outside Europe, seeing the growth of activity in the property markets are allocating far more resources to them. Most notably this applies to the surge of real estate investment money entering Europe for the first time from the United States. Last year the Americans bought more commercial property in France than the French.

l The greater market scope brought about by these aspects has strengthened the market in individual properties and portfolio situations as they form the underlying basis of all such activity.
l With this greater scope has come the development of more sophisticated advisory services on whom investors and others increasingly rely for specialist services in research, assistance in searching out and negotiating transactions, and asset management to ensure that the maximum return is obtained.

The interweaving of these different forces has occurred against the backdrop of very low interest rates making property yields more attractive than bonds or many other forms of investment. Investors have felt increasingly secure about the markets in a number of countries whose economies have been strengthened by the measures taken to make them eligible for membership of the single currency.

Notably, France, Spain and Italy are showing good growth potential from economies which appear far more stable now that they have inflation and borrowing deficits under control. Property markets in these countries are now stronger than they have been since the late 1980's, with rents rising and yields falling as the volume of capital seeking buying opportunities has increased rapidly.

The outlook is for this process to continue in the medium term as, despite vacancy levels coming down in most major cities, considerable restraint is still being shown in allowing speculative development.

The move to indirect investment by many institutions has caused the creation and development of indirect vehicles to gather pace in various ways: and this can be expected to continue to be a dominant market movement. In Belgium the US REIT-style SICAFIs have grown in number to after a slow start and are now the major domestic investment force. France does not have tax-exempt funds for institutional investors but the quoted company sector has been consolidating to provide some major players which offer an attractive option to international investors to gain representation in different sectors of the market. Unibail and SociÈtÈ FonciËre Lyonnaise now have a high level of international recognition with a large part of their shareholding held by international institutions. In Spain a number of groups are making plans to create a variety of specialist funds.

The following is a brief overview by country


Rents are rising in central Paris as a shortage develops for large units of modern office space. To a lesser extent this situation is reflected throughout the Paris region with the exception of the east. There is strong investor interest for all sectors of the market in France with American money much in evidence, and yields are falling. A number of large-scale warehouse developments are being undertaken. The retail sector is still in considerable demand from investors but severely limited by the strict planning procedures. The reduction of stamp duties from 18.6 per cent to 4.8 percent at the beginning of the year has had a very positive effect on liquidity in the market.


The Madrid office market is now under considerable pressure with the vacancy in the CBD less than 2 per cent. Rents are rising sharply in response. The absence of space in the central areas has accentuated the move to more decentralised locations but the shortage of good space is general. There are substantial plans for further development but in the 2-3 year mid-term the shortage is likely to continue to put pressure on rents.

Elsewhere in Spain the Barcelona office market is active, but a great deal of investor attention has been focussed on the retail sector as this is seen to have considerable growth potential
from a low base with a young generation in a growing economy likely to spend more freely.
International investor activity is strong and there are signs of increasing domestic investor interest in the commercial sector.


Market interest and activity is mostly concentrated on Brussels where the intended expansion of the European Union is likely to increase demand for offices. In recent times the corporate sector has been an active one and has favoured the growth of the area close to the airport where there is considerable building activity. With the recent improvement in the economy, rents are starting to increase again and investors of many nationalities are actively buying. The Belgian SICAFIs are growing in number and have diversified into warehousing and other sectors. Retail development and investment is limited by very strict planning policies.


The northern part of Italy has been increasingly targeted for investment by international investors in recent times - particularly shopping centres. The office markets of Milan and Rome remain relatively inactive, but recent sell-offs of major portfolios of property to create funds in their own right have introduced an element of liquidity into the market which has never previously existed.


City centre office markets mostly have low levels of vacancy but the problems in the German economy are reflected in a generally static rental market. Frankfurt is responding to its new role as home to the European Central Bank with a major programme of development.
Some international investors have been attracted to look at the market in the belief that this is a good point at which to enter, but the level of yields has remained low due to the continuing substantial weight of private money invested through the medium of the German property funds.


Most markets in the Netherlands are in good balance due to the successful economy and office rents have been rising. Investor activity is broadly based although the advent of the Single Currency has given alternatives across Europe for the investment of the large sums generated by the major Dutch Pension Funds and other institutions.

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