Copyright: David Lawson/Financial Times 1998Home page
This was the year when real estate markets were set to bloom right across Europe as economic growth and the anticipated strength of a single currency kicked in. But property is no longer a boom and bust sector. Investors nursing recession-burnt fingers now show far more caution in commissioning builders before they have found an occupier.
Developers are doing what they should always have done - matching supply to each individual market. That means tower cranes have risen over office centres like London, Paris and Brussels while others have remained remarkably silent, according to property consultant Knight Frank.
New shopping malls are emerging in central Europe but are more rare in the mature markets. Warehousing and industrial activity is more widespread as rationalisation, new technology and rising consumer demand lead to reshaping of distribution networks.
The UK, which led Europe out of recession, is naturally the furthest into the development cycle. Central London has seen office construction rise above 8m sq ft, which is beginning to worry some observers fearing the impact of Asia, Russia and Latin America on the financial markets.
Property consultant CB Hillier Parker is sanguine, however, pointing out that supply is well below boom levels. Most new space is already pre-let and demand of more than 9m sq ft far exceeds output. Canary Wharf's owners are convinced enough to commission another giant office block every time one is let. Renovation could play a bigger role than new building in future, however, as a flood of older space is released.
Paris is almost a mirror image of London. The strong French economy, tax reforms, low interest rates and influx of US investors has fuelled a surge of building and renovation, says consultant Jones Lang Wootton. Goldman Sachs, for instance, paid Credit Lyonnais a reported Fr350m and will spend another Fr500m developing 13,000sq metres on one central site. La Defense is set for a surge of both newbuild and renovation following a clutch of investment deals in the last year.
Other hotspots reflect similar local shortages rather than macro economic cycles. Prague is seeing a rash of major developments driven by private overseas investors and a take-up which doubled in the first half of this year, says JLW. Brussels has responded to falling vacancy rates with a spate of speculative developments, says consultant Healey & Baker. Madrid is more circumspect, with developers ready to exploit supply shortages but not enough to start without pre-lets. Amsterdam is in the same position, although planning regulations rather than lack of confidence keep builders off-site until offices are let.
Regulation has also been a crucial factor in retailing, with governments taking fright in most countries at the proliferation of regional malls. Major UK schemes near Manchester and at the London end of the EuroTunnel rail link are unlikely to be repeated elsewhere. France has also tightened planning restrictions again, although JLW points out that almost 600,000 sq m of development approvals still squeezed through the system last year.
Central Europe is on the upward slope of the mountain, reaping the benefit of release from formerly restrictive political regimes. Budapest, Prague and Warsaw are in the middle of a retail revolution, says Paul Orchard-Lisle, senior partner of consultant Healey & Baker.
The Czech economy is only just recovering from last year's crisis and may yet face economic fall-out from Russia, but foreign retailers and investors are scrambling to build a string of centres based around hypermarkets. Hungary is seeing similar pressure building, with retailing and leisure - particularly multiplex cinemas crowding in to an enthusiastic new market which had not previously tasted the luxury of true modern development, says JLW's annual European Property Investment Report. Major developments are expected to continue over the next couple of years.
The less developed economies of western Europe such as Spain, Portugal and Ireland are also feeling this rise towards levels set by leading nations. Jeremy Lewis, head of the Schroder Europe property fund, saw a gap in northern Italy, a rich region poorly served by retailers. Now he is watching income soar from five shopping centres bought early in the cycle.
But he is sceptical about any overall rise in the tempo of development towards levels seen at the turn of the decade. David Simons of Slough Estates, one of Europe's biggest developer investors, agrees that these hotspots have not ignited a surge of activity across the continent.
'Building prices are not rising, and that is a sure sign that activity is restrained,' he says. Neither is too concerned, as restricted development helps maintain investment values. Slowly rising rents eventually make further development feasible rather than turning into an avalanche of bricks and mortar which sends the sector back into an over-supplied slump.
JLW sees most European markets on an up-cycle. They are attractive to US investors, particularly the cash-rich real estate investment trusts which can no longer get the yields from a home market much further up the cycle. They are also following the bidding of large customers seeking new premises inside the Single European Market. Security Capital, for instance, has paid millions of dollars for small UK companies like Akeler and Kingspark with instructions to scour Europe for development sites
The crucial factor for growth, however, is how much economic problems elsewhere will stultify recovery. Simons sees no sign of falling demand for the warehousing he is building in France and Germany and offices in Belgium. 'But these are early days,' he admits.