The prospect of European Monetary Union is already having a profound influence on pan-European property investment.
“Until you have experienced your first currency loss, you don’t really understand what currency risk is.” This was the painful truth shared by Daniel Neidich, the Goldman Sachs partner who heads up the bank’s $5bn Whitehall Street Real Estate funds at last month’s meeting of the Urban Land Institute in Paris.
From a US perspective, the advent of the single currency is a fundamental ingredient for pan-European investment. By removing the great uncertainty and cost of exchange rate fluctuations, EMU will generate more willingness among European and US investors to buy property. The increased liquidity in a market where money rates are converging will lead to a harmonisation in price, believes Neidich.
“We do think it will create far greater intra-Europe investing and will affect real estate pricing. Cap rates will converge to accompany the convergence in interest rates,” he said.
Jeremy Lewis, chairman of Schroders International Property Fund, believes “property markets have already begun to align themselves in terms of rents and yields over the last three years”. The range of values that has traditionally existed in mature markets such as France, Germany and the UK is an “historic accident that will change as EMU occurs”.
“We are looking at property at 6% in Amsterdam, Paris and Barcelona,” he adds. “There will be more cross-border investment when the euro happens.”
Robert Gilchrist, a director of Pricoa Property Investment Management, which runs Pan-European Property Unit Trust and the TransEuropean funds among others, says: “The euro is already here. There is harmonisation in interest rates and European currencies move in a block against sterling and the dollar.
“If long term interest rates for the euro remain relatively close to current levels, that is around 5% for 10-year money, that has great implications potentially for those [property] markets that have been typically higher yielding or lower yielding. Is it right that you can buy properties in one country at significantly higher yields than in another ? Especially where all other things remain equal – the same tenants, the same leases,” adds Gilchrist.
He anticipates that a correction in values could occur at both ends of range.
But Simon Barrowcliff, a director at Richard Ellis in London, expects substantial differences to persist in European property markets. “As a concept, a pan-European fund is still viable. There’s certainly the ability to spread risk and go into different markets at different points in the cycle,” he says.
“We may be headed for an integrated Europe in two years’ time, but property markets are still very diverse indeed” adds Barrowcliff.
The UK’s position outside of EMU, at least initially, may have a “slightly adverse” impact on overseas investment decisions, says Barrowcliff. But investors “might consider UK property to be a hedge”.
In the medium term, and on the larger lot sizes, the impact of a common currency and interest rate will be all the greater as debt securitisation makes its mark on property financing.
Landmark deals such as the £550m refinancing of Canary Wharf in London last year, and the FFr 2bn raised by the Canadian Caisse de Dépôt et Placement du Québec at La Défense in Paris, are bringing international money rates to bear on European real estate. In the most recent deal of its kind, UK property group Capital & Income Group raised £343m.
All three issues attracted international investors who were basing their decision to buy the paper on the rating provided by international agencies, rather than on underlying property market conditions. As developers and investors increasingly tap into this international source of finance, the yields at which they buy property will become even more closely allied to prevailing yields on other financial instruments.
10-year Government Bonds v Property Yields
|
Bid yield (%) |
Year change |
Prime office yields |
Year change (%) |
|
|
Belgium |
5.04 |
-0.48 |
6.65 |
-0.10 |
|
France |
4.98 |
-0.41 |
6.25 |
+0.25 |
|
Germany |
4.96 |
-0.4 |
85.00 |
– |
|
Italy |
5.31 |
-1.90 |
6.00 |
– |
|
Netherlands |
4.91 |
-0.46 |
6.25 |
– |
|
Spain |
5.17 |
-0.31 |
6.00 |
– |
|
UK |
5.92 |
-1.19 |
5.00 |
Source: Financial Times, Jones Lang Wootton
