Copyright: David Lawson – Property Week Feb 1997
Home pageAt the London end tower cranes sprout like weeds as developers bid to catch a surge of anticipated demand as the economy recovers. Even provincial cities are waking to the sound of international investors knocking on their doors. At the other, a deathly quiet engulfs an industry still trapped in recession.
But as Einstein said, time is relative - and never more so than in property markets. The UK is pulling out of recession while the rest of Europe lags a year or so behind. A few exceptions stand out: Brussels, Budapest, Amsterdam and the fringes of Berlin. A couple of major office developments are also stirring in Paris. But the X-Files affect dominates the rest of the continent.
'Speculative development remains very largely off the agenda, with major pre-commitments necessary in most cases to ignite enthusiasm and elicit finance,' says David Seddon of international consultant Jones Lang Wootton. One major problem is that occupiers are still going through a shakeout, consolidating into fewer buildings rather than expanding into new space. 'It will be another 12 months before occupier demand rises enough to spark significant activity,' says Stephen Webster, of the DTZ Debenham Thorpe Investment Advisory Group in Brussels.
As any novice knows, by then it could be too late. 'Property development is about timing, and now is the time to get started rather than be seduced by the safety of remaining at home,' he says. This could be an acid comment on the way UK funds have fled the Continent. Leading developers such as MEPC and Brixton Estate are also out of the market.
But the cupboard is not entirely bare of British interests. Hammerson is building offices in Paris, Slough Estates is extending distribution parks in Belgium and Grosvenor Estate is edging into France and Spain. Each scheme is based on special circumstances, however.
A potential shortage of modern offices in central Paris has encouraged Hammerson to build up its French holdings. But sites are hard to find. So the UK company spent almost 50m pounds acquiring 17,000 sq m (190,000 sq ft) in the Rue de Courcelles for a major refurbishment at the end of this year.
'It is very unlikely we would look outside Paris or Berlin for office development. We aim to concentrate on markets we know well and can see good growth,' says corporate affairs director Chris Smith.
Slough has doggedly held onto its European trading operations for more than 30 years, and went against the trend by adding a 12-hectare business park to its holdings on the edge of Brussels last year. But this underwritten by plans for a 12,800sq m headquarters let to DHL and presold to a Belgian fund. Another 75,000 sq m are feasible, but it seems unlikely this will happen until markets recover further.
'There has been no significant increase in demand over the last year,' says David Simons, general manager for overseas operations.
Similar circumstances in France, where Simons says there is a 'prodigious' amount of distribution space. Activity was limited to a 17,200 sq m office/warehouse at Marne la Vallee, east of Paris, pre-let to Sony and pre-sold to a French fund. In fact, the only speculative space being considered is a 5,800 sq m building in Dusseldorf. Other markets like the Netherlands and the Czech Republic are being researched but more buoyant demand has to be set against the risk of setting up in new countries.
This is a crucial barrier to recovery. 'It is hard enough to be successful as an investor. Getting things right as a developer in a new market is almost impossible,' says Jeremy Lewis, chairman of Schroder International Property Fund. Development sites are like gold dust in most major centres and massaging them into shape requires intimate local knowledge of planning regulations and tenant demand.
That is why even the biggest players opt for acquisition of existing schemes, relying on 'active management' as a proxy for development. Hammerson, for instance, has bought heavily into shopping centres as part of its international portfolio rebalancing. Last year it paid just under 20m pounds for the remaining third of 54 Boulevard Haussmann in Paris and around 80m pounds for the Markisches Zentrum[CORRECT]centre in Berlin.
Lewis points out that the vice-like grip planners hold on French shopping has produced a gold mine. 'We have only three shops empty out of 285 tenants. And average turnover rents rose 3% last year despite the supposed recession.'
An even brighter picture emerges when tapping the constant undercurrent of development done by local builders - particularly if you get in before the crowd. Schroder, which is run from London and listed in the Netherlands, calls on local knowledge from a network of its parent-bank offices. That gave Lewis an insight into 'undiscovered' northern Italy, where he spent Lira60BN on one shopping centre at a yield of 9.75% and recently raised 100m guilders in a rights issue to buy another.
It seems that Dutch money works well with British drive. Chris Bartram was brought in from Jones Lang Wootton to play a big role planning the strategy of Rodamco Europe. He has been selling out of 'too expensive' German offices but buying into shopping centres like the 30,000 sq m development with German developer ECE at Magdeburg. He, too, has had to buy existing developments in France, spending 300m pounds to take over CEGEP and its six retail centres.
Will this dearth of development ease in 1997? Healey & Baker points out that the slowdown in economic growth is coming to an end in most countries but rents may still take time to recover. There is also a threat from major investors looking to switch out of real property and into indirect vehicles. On the other hand, that may spawn country-specific funds with the resources to create their own investments.
Mark Dixon, who has picked up a first-hand knowledge of European capitals by opening 80 Regus serviced office centres over the last couple of years, believes recovery is spreading out of the UK and Netherlands. 'Benefits of the single market will be seen as economies move back into growth, just as happened in the UK,' he says.
The grit in the gears may not be a financial one, however. Markets depend on occupiers, and Steve Mallen, head of research at of Knight Frank, says these still have to decide how much space they need - and what kind. Their world may be fundamentally altered by new working practices like hot desking - one final mystery which is shifting property into the realms of the X-Files.
Two North American giants, Hines and Trizec Hahn, have become a major force in development on this side of the Atlantic. Both defy the coyness of Europeans, with several billion dollars' worth of business in the pipeline ranging from small housing schemes to giant office blocks. Philip Jones, European managing director for Trizec Hahn, says the attraction is purely one of profits. 'We demand a return of 20% and believe we can get this in certain countries,' he says.
That basically means eastern Europe, where the company can use its financial muscle in harness with local entrepreneurs to tap rapidly expanding markets. A partnership was signed late last year with Polus, which built Hungary's first modern shopping centre in central Budapest.
Trizec Hahn put in only a few million dollars - a tiny contribution compared with its 6 billion dollars worth of US assets. But Jones says this could lead to a string of other ventures in what he calls the region's 'tiger' economies - Poland, Slovakia and Hungary. Western Europe is on the back burner, however. The returns are just not high enough.
The central European connection was introduced when Peter Munk, a Hungarian emigre, merged his Horsham Group into the former Trizec group. He had learned the need for a local partner through its one billion dollar investment in Brandenburg Park, on the outskirts of Berlin. This took several years to take off, although Jones says it has always produced profits and is now taking off as companies like Coca-Cola begin building.
Hines, a 10 billion dollar private company built by veteran developer Gerald Hines, also has several major mixed developments in Berlin. But it has a more widespread presence across Europe, ranging from housing in Prague and Moscow to plans for a 75,000 sq m office tower in Paris.
The company acts as a bridgehead in Europe for multi-national occupiers looking for anything from staff housing to regional office headquarters. It is also a funnel for US institutions too nervous to make direct investments, although it taps European backers as well such as German banks and UK funds.
For these giants, Europe is still very much an emerging market. They see a big role for financially strong organisations working with local partners or their own regional offices. Despite the scale of some projects, both abhor risk. 'We don't grab deals for the sake of making a name,' says Jones.
But they are names likely to be heard more and more as the pace of recovery improves over the next few years.