EU rule changes have hit take-up, but investors still eye Belgium’s offices, shops and sheds
The Brussels property market is notoriously safe and stable. The presence of the European Commission guarantees take-up. The city is a bureau capital. “The market is not that exposed and is in many ways unaffected by the business cycle,” says Catella Belgium managing director, Cédric Georges-Picot. “There is certainly a cushion.”
Unlike London or Frankfurt, Brussels has in the past been well-insulated against financial instability. Prime rents in the European Léopold area, where most EU offices are located, stand at €300 per m2 a year. Last year, however, that stability was dealt a blow. The city’s office market was hit by diving take-up figures caused by a slowdown in the take-up of offices for European Commission institutions.
Figures by Catella show that take-up figures fell to 484,500 m2 from 562,100m2 in 2006, a drop of 13.8%. A new European Commission selection process for relocation that requires managers to look more closely at value for money when contemplating a relocation, coupled with an increased demand from private companies for office space, has changed the occupier dynamics of the Belgian capital.
The city has certainly felt the effect of the Commission’s reluctance to move at any cost. A mere 7,731 m2 was leased by the EU in the Léopold district in 2007, according to Jones Lang LaSalle.
Consequently, it is the now the private sector that dominates take-up figures. More than 75% of the total space leased in 2007 went to private occupiers. The financial and information technology sectors, which accounted for 99,800m2 and 84,600 m2 of last year’s take-up respectively, were the most active business sectors during the year. But the financial uncertainty of the past six months, caused mostly by the subprime crisis, could affect banks’ take-up levels during 2008.
Between 2002 and 2006, EC occupiers accounted for an annual average take-up of 128,000 m2 in Brussels. Whether that number is surpassed next year remains to be seen, but an improvement on 2007 is the minimum requirement if the Belgian capital is to stand a chance of matching its average annual 2002-2006 take-up level of 562,100 m2.
Political instability in Belgium may also affect take-up in 2008. In June last year, prime minister Guy Verhofstadt resigned after an election defeat. Belgium’s French-speaking Walloons and Dutch-speaking Flemish then squabbled for six months and failed to form a coalition. The country agreed on an interim government just before Christmas. It is ironic that Brussels, the European home of diplomacy and unity, was close to becoming the capital of a permanently divided nation.
Reorganisation boosts take-up
Reorganisation of the country’s federal justice services and the preletting of Brussels buildings near the city’s courts have so far, according to Jones Lang LaSalle, accounted for 23%, or 106,700 m2, of the total take-up of 484,500 m2 last year. But any planned moves by Belgian government ministries in 2008 most likely needed to have been made in 2007.
Investment volumes moved in the opposite direction. A record €4.84bn of Brussels property changed hands last year. Brussels office towers were the main attractions. With Germans accounting for 10% of the investment market, fund managers are looking again at Belgium as a good place to invest in the development of trophy assets.
Some big deals took place. Belgian developer Codic’s 30,000 m2 Zenith tower, due for completion in 2009, was sold to German fund manager MEAG for €125m in May. In October, Codic sold the 31,000 m2 Atlantis project to UBS for €100m. In the same month, Morgan Stanley paid developer Galliford €100m for the Blue Tower in Avenue Louise.
But it was privately held UK investment company Evans Randall that set the record for the top deal in 2007. The 72,000m2 Covent Garden office project, partly let to the European Union, was sold for €270m to the UK-based private investor by Immobilière Royal Rogier in September.
Investment in Belgium has reached record levels that are unlikely to be surpassed this year. With limited finished product and Belgians’ tendency to hold on to assets, land acquisitions are becoming increasingly popular among investors. Areas of Brussels, particularly in the north of the city, have attracted investment from the likes of domestic bank Fortis. More speculative projects are expected, leading to another shift in the dynamics of the Belgian real estate market.
Irish investors, meanwhile, have shown a healthy appetite for both Belgium and Luxembourg (see box on p36). Irish Life was recently thought to be considering investing €60m in the 23,000 m2 Kinesis project in north Brussels.
Thanks to demand for Brussels property, prime yields have fallen to 4.5% from 8% in 1998, according to Jones Lang LaSalle. Last year, investment volumes rose by 11% year on year, but nobody thinks that last year’s figure will be bettered.
“We will simply go back to the good old equity players and it will be a more regular market,” says Catella’s Georges-Picot.
Yves Moreau, a partner at law firm Linklaters, agrees. He says: “We are back to what we were used to a few years ago. It’s always a cycle. It will be another good year, but it will be hard to beat 2007.”
Deals are becoming scarcer and banks more critical. The capital has already seen the first impact of the credit squeeze, although on a smaller scale than other major markets. Befimmo’s sale of a €300m portfolio of non-core assets to an AIG/Rockspring joint venture hit the buffers in September. Both sides are still trying to resurrect the deal, which had fallen through at the 11th hour as the financing bank, Credit Suisse, was believed to have pulled out.
The ramifications are clear. Sellers in Belgium will need to be absolutely sure that buyers can finance deals. The Brussels market is full of foreign names and highly leveraged private investors have made their mark on the city. Last year, local investors accounted for just a fifth of real estate transactions. International joint ventures invested more than €600m in Belgium last year. A flow of German, Irish and UK money has truly internationalised the European capital for the past two years. UK investors now account for 17% of total investment in Belgium, with third-party fund managers, such as Evans Randall and New Star, leading the way.
Although the office sector dominates the Belgian property market, there is more appetite for retail and logistics, which account for 17% and 9% of Belgian investment respectively. Last year, retail investment volumes rose by 30% and warehousing increased slightly by 2% year on year, according to Jones Lang LaSalle. Local investors today have a firm hold on both sectors. A lack of good product has resulted in retail yields falling to their current level of around 4.5%.
The industrial sector has in the past attracted international players – Belgium is located within Europe’s geographical logistics “banana”. But the amount of foreigners investing in Belgian logistics assets fell from 53% in 2006 to 38% in 2007. Nevertheless, the California State Teachers’ Retirement System and First Industrial Realty Trust recently agreed a €323m ($475m) industrial venture for Belgium and the neighbouring Netherlands. The FirstCal Industrial Europe fusion will be 65% debt-leveraged, targeting mainly land for development.
UK-based investor Hansteen is still keen on the logistics markets of both countries.
“The occupier market is very healthy,” says joint chief executive Morgan Jones. “There’s a consistent flow of sale-and-leaseback opportunities from industrial and logistic occupiers.”
Jones believes that an increasing amount of investors will continue to be attracted to the Belgian logistical sector over the medium term, spurred on by strong warehouse take-up rates in non-prime areas with stable prices.
“The positive yield gap between warehouse investment and the cost of money will be a key attraction as the credit markets become tougher,” says Jones. “The Benelux area will be seen favourably by many people. It’s likely to provide more stable pricing compared to the UK, and without the inherent risk of Eastern Europe.”
The first purchase abroad by a Belgian company, Cofinimmo’s €419m deal in October for InBev’s chain of bars and pubs in the Netherlands and Belgium marked a change. Cofinimmo was also believed to be interested in the Dutch office fund KFN. The Netherlands may not be far from Cofinimmo’s headquarters, but by moving into a new market, the Belgian heavyweight could leave space for investment in its own back yard. In the end, the KFN portfolio was sold to ING. But the Euronext-listed company is beginning to show an appetite for alternative assets in new territories.
Despite all the political and financial uncertainty, 2007 was a case of business as usual for those with an interest in the country’s real estate market. GDP could slow slightly this year, and the market may have peaked. King Sturge does not envisage Belgian yields moving by more than 50 basis points either way. The country’s sound economics sustained its market’s reputation as a safe bet – a vital attribute in these post-US subprime days.
