Investors are pouring into the market faster than tenants
Mar 29th 2014 | BERLIN, MADRID and PARIS
AT LA D FENSE, Europe s biggest purpose-built office complex, workers are
putting the finishing touches to the Majunga Tower. The handsome 45-floor
building (pictured) in the business district west of central Paris is due to
open around August. There is only one drawback. The building, currently unlet,
will add 63,000 square metres to a park where the vacancy rate already tops
12%. Another big building is scheduled to open in 2014.
Vacancy rates can improve quickly, argues Olivier G rard, who runs the Paris
office of Cushman and Wakefield, a property consultant: these are big spaces
for big clients, and relatively few leases will fill a building when firms feel
more confident about the future. But only a few strides across La D fense s
wind-whipped main drag, the area s biggest office block, Coeur D fense,
fleetingly owned by now-defunct Lehman Brothers, is being sold again by its
financially troubled current owners for a reported 1.3 billion ($1.8 billion)
to an American investment outfit, Lone Star.
La D fense epitomises a paradox about Europe s commercial-property market: a
new boom has begun before the previous bust has ended. To generalise broadly
across a wide range of property and economies, the mismatch between investors
enthusiasm and the caution of occupiers has rarely seemed bigger. Investment is
pouring back in (see chart), but tenants are not. Outside Britain, Ireland and
Germany prime office rents were weak in 2013, says Knight Frank, another
consultant.
Promising, but empty
It is rock-bottom yields on government bonds that have nudged investors toward
property. As the price of prime assets rises and growth prospects brighten,
some are moving into second-tier cities, dicier properties and recovering
basket-case countries. The buyers are taking a gamble that economies will liven
up enough to fill buildings with paying tenants.
France has attracted less investment than Britain or Germany, where economic
growth looks steadier, and has seen a smaller proportional increase than
Ireland or Spain, which promise assets on the cheap. But even in the robust
German market there are signs that the bust is not over.
Creditors of IVG, once Germany s largest property company, voted on March 20th
to take over the firm in a court-supervised plan to restructure its $3.2
billion of debt. IVG also agreed to sell its asset-management business, which
manages a fund that owns half of London s Gherkin tower. It was another
building, though, that tripped up IVG, already wobbly from the effects of the
financial crisis. Construction costs spiralled on the Squaire, a complex built
on top of the railway station that serves Frankfurt s airport. Tenants groused,
vacancy rates were high. Overindebted IVG struggled to pay its debts.
Germany can shrug at this cautionary tale, though. DG Hyp, a bank, says rents
grew by 3.2% in seven prime cities in 2013 and by 2.3% in smaller centres a
strong result, given GDP growth modestly above zero. New jobs, especially for
office-workers, are driving demand for space. Vacancies are declining, as there
has not (yet) been a boost in new building.
Investors in property markets farther south are also drawn by relatively
attractive yields (the ratio of rental income to the price of a building). But
the worst of Spain s economic nightmare may be over, which bodes well for
prices, whereas for France the gloom seems unending.
Prices in Spain have fallen by 30-40% from their peak and many think they are
now near the bottom. Investors are swarming over the capital, looking for
bargains and betting on a (still shaky) economic recovery.
Banks with dubious property portfolios have been selling their real-estate
management arms to private-equity firms. Spain s bad bank , set up in 2012 to
house 51 billion of troubled property assets, began offloading them in 2013.
Amancio Ortega, founder of Zara, a big fashion retailer, has snapped up sites
in Barcelona and Valencia. Investors bought over 3 billion-worth of commercial
property in 2013, up 60% on 2012. This year they piled into two new real-estate
funds, with hedge-fund titans George Soros and John Paulson both taking stakes,
along with a Dutch pension fund, APG. Banco Santander is close to selling one
of Madrid s most famous buildings, Edificio Espa a, to a Chinese investor. For
many, Spain is the European commercial-property story of 2014.
France has less to cheer about, but optimists note that the gap between yields
on property and those on government securities is the highest in 20 years,
which should underpin prices. That bet will pay off as long as growth is not
too feeble, interest rates do not rise too fast and the supply of new space
does not swamp demand. No country in Europe can afford too many empty
buildings.