Copyright:David Lawson 1996
Home page'The European market has reached a critical mass which makes it very attractive,' says Christopher de Taurines of La Salle, one of North America's largest fund advisers. 'Unfortunately, it is hobbled by compartmentalisation of markets. Investors are puzzled why it has taken so long for Europe to move forward.'
This is particularly important when impatience is growing over the drawbacks of owning property. Funds like to spread risks and dip in and out of markets as they can with equities and bonds. Owning a few office blocks in Germany, a couple of factories in Italy and a clutch of Spanish housing might give a superficial appearance of diversity, but buildings are notoriously difficult to buy and sell quickly. And the more diverse, a portfolio, the more difficult to manage.
The problem is just as acute for Europeans. They would also like the equivalent of a US or Australian investment trust, providing arms-length involvement through tradeable - and preferably tax-neutral - securities. Inevitably, these would specialise in particular countries, but investors would at least be able to balance stakes in each one.
Some progress is being made in the UK towards unitised investment and Spain is about to set up its first property unit trust. Belgium has also quietly introduced the Sicafi, a fund which carries no capital gains or corporation tax. One called Befimmo has already been set up and the BFr23bn property company Cofinimmo is shaping up to to do the same, merging with Mancis and Cisman, two Co-operative Insurance Society subsidiaries.
But Dutch and German funds remain the real force in the market. 'There are only a handful of open-ended German vehicles but they have a disproportionate impact,' says David Bouch, European investment partner with property consultants Jones Lang Wootton. Net cash inflows reached Dm6.8bn last year, mainly fed by individuals desperate to gain fat rewards from buying outside their low-yielding homeland. This has grossly distorted markets in the UK and Holland. In London, for instance, only the Swedes challenge the German near-monopoly on landmark deals, such as the recent 180m-pound acquisition of the Lloyd's Building by Despa.
Rod Jones, chairman of consultants Drivers Jonas and manager of the cross-border valuation group Euroexpert, sees the build-up of hefty portfolios as 'intelligent opportunism' rather than portfolio strategy. But the new VV Real Estate Fund , which recently made its first inroads with the 9.5m pound purchase of a 1,560 sq metre office building at a 9% yield, is geared more to German institutional investors. It aims to expand into a more balanced portfolio, breaking out of the London office market.
Holland has also felt this force. 'If it is big and shiny, the German funds are in there,' says Mr Bouch. Ironically, the Netherlands is the other big player in this game. Rodamco, Wereldhave and Schroder played a similar role in the past to the Germans.
Property-backed securities have a bad name in France, as the paper organised by the banks some years ago is now practically untradeable because of the general fall in values. Yet this is perhaps the most attractive country to outsiders because billions of francs worth of property could come on the market as financial groups bite the bullet.
'A lot of people are knocking on doors but the future is in the hands of the banks,' says M de Taurines. His scenario does not involve asset-backed funds but single-property companies which are later floated. This would avoid the punitive 20% transfer tax.
That is not to say some form of securitised funds will not emerge from this chaos. None of these moves come close to producing cross-border portfolios but they may open the way to easier cross-border investment. Mr Bouch forecasts a sea change over the next few years as increasing pressure for liquidity sparks a greater diversity of funds in all the major European markets.
And the sheer pressure of money will lead to a breakthrough in the kind of research that overcomes all the variations in market transparency, liquidity, data and valuation techniques that have kept countries apart, adds Mr Jones.