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The View from MIPIM: Germany Leads European Surge

American investors looking at investment in the European market may feel a bit like they’re peering into a mirror: Yields are down, the market is tight and alternative real estate plays are looking better every day.

“Perhaps the most notable feature of the European investment market remains the exceedingly high volume of transactions that we’ve seen in the investment market,” said Nick Axford, head of research and consulting for CB Richard Ellis, during a press conference at the 18th annual MIPIM international property conference that took place March 13-16 in Cannes. At the press conference CBRE released its annual report on European investment for 2006.

The volume, according to Axford, translates to around €227 billion worth of investment activity in 2006, a 46% increase over 2005, on top of a 47% increase the year before that. The geography of deal making, however, shifted dramatically. The U.K., dropped from about 50% to 36% of the investment total, while Germany moved up to take 23% of the total.

Where the Money Is Going Within Europe (2006 deals, excluding indivisible multi-city portfolios)

Sales (€ million) Percent of Total London 27,056.00 € 17.2 Paris 17,415.00 € 11.1 Stockholm 5,739.00 € 3.6 Munich 4,910.00 € 3.1 Frankfurt 4,565.00 € 2.9 Berlin 4,300.00 € 2.7 Hamburg 4,299.00 € 2.7 Milan 3,385.00 € 2.2 Madrid 3,012.00 € 1.9 Warsaw 2,560.00 € 1.6 * excluding indivisible multi-city portfolio transactions.

 

Germany’s growth is clearly seen in the Top 10 list of European investment markets (see table), with German cities taking up the fourth through seventh positions on the rankings. The cities are Munich (3.1%), Frankfurt (2.9%), Berlin (2.7%) and Hamburg (2.7%). Each boasted more than €4 million in transactions with office making up the bulk of the deals by value. Total investment in the country grew from €20 billion in 2005 to €51 billion in 2006, a 150% increase.

Foreign investors account for the lion’s share of the German volume in all sectors, with German investors most heavily invested in office, at roughly a quarter of the approximately €24 million volume.

What kind of properties is all this money going into? “Anything from single-asset properties all the way up to €2 billion to €3 billion portfolios,” according to Peter Schreppel, head of international investment Germany for CBRE. German yields are still tight at around 5% and Schreppel predicts that the number will drop a little lower, by at least 20 to 30 basis points.

The buying and selling spree was the direct result of German open-ended funds, which became sellers in 2006 disposing of €34 billion in property assets. “Foreign investors came in and bought up all the properties from the open-ended funds, which helped the funds to get their liquidity back again,” Schreppel explains. “The foreign investors are in Germany, not for a couple of months, they’re actually there to stay. They have their asset management there and they’re building offices there.” German investors, who have been putting money into the U.K. and other parts of Europe were also more active at home in 2006.

Increasingly, investors see Germany as a place of development opportunity, rather than mere asset acquisition. Indeed, the German government is optimistic about its economy. In its annual economic report at the end of January, officials raised the country’s forecast growth from 1.4% to 1.7% for 2007. The annual jobless rate is also projected to drop from 10.8% in 2006 to 9.6% this year. “We’re talking to developers and they’re actually seeing the market is going up and they’ve got to develop the market,” says Schreppel.

In a nutshell, CBRE predicts that development levels will rise as capital continues to flood the market, keeping yields under pressure. In spite of the enormity of the European market in general, Axford says that the U.K., Germany and France (primarily Paris), accounts for roughly three-fourths of all investment activity there.

It’s also notable that the two markets that actually saw the lowest levels of growth were the U.K. and Sweden. U.K. investors, in particular coming off a liquidity high similar to the U.S., are searching farther a field for yields in Central & Eastern Europe.

“Last year, the U.K. was the second biggest investor in Central & Eastern Europe,” says Andreas Ridder, head of Central & Eastern Europe for CBRE. “Three years ago, they were nowhere.” In fact, U.K. investors spent €2.2 million on property in that region in 2006, second only to Austrian investors (€2.7 billion).

The EU-15 — comprised of Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain, Sweden, United Kingdom — for instance, finished 2006 with an average investment increase of 46%. But central Europe — showed a 120% increase over 2005, or an astonishing €12.7 billion, more than double the €5.8 billion transaction volume the previous year.

“Poland so far has seen the highest investment volume, with €5.4 billion or 43% of the total [for CEE],” said Ridder. “The most interesting trend is Russian. Russia is coming and will definitely be booming over the next year. We believe that Russia will receive the highest amount of investment funds, taking over Poland and next year to account for nearly half of total investment into the region.”

Where will future capital come from to keep the European commercial property market zipping along? The answer is in aging populations in the region and from outside: To accommodate a flood of retirees across the industrialized world, pension funds are scouring the globe for reliable cash flows. And European real estate fills the bill. “We’re in the early stages of sustained increase in long-term savings,” says Axford. “As that long-term savings money from various sources turns up, a significant portion of that is also flowing into real estate.”

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