Profiting from Change: euroland is here, offering cross-border investment opportunities and the prospect of pan-European alliances. In the second part of our investigation into operating in the new low-inflation economy, Anna Minton tests key property players’ attitudes to the euro
According to its supporters, the euro will bring a wealth of benefits, from an end to currency risk to long-term low inflation and increased cross-border investment. Its detractors, including a sizeable portion of the UK’s political and business community, are not so optimistic.
Predictions about the impact of the euro are analysts’ new stock in trade. Will the currency hold up? Will deflation hit Europe? Will we see a new superleague of pan-European property companies?
High on the analysts’ list of predictions is the development of a Europe that is not a single market but instead a panoply of economic hot spots and cold spots where rents and values are high or depressed.
Instead of the nation-state, the city-state, with its transport links and its concentration of expertise and power, will flourish. London and Frankfurt are tipped to remain Europe’s key financial centres, with Brussels and Strasbourg the administrative centres. Edinburgh, Barcelona and Lyon also look assured of rosy futures. But other cities, such as Liverpool and Leipzig, will not participate.
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Cross-border office investment by country of destination, 1998 (m) |
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France took the lion’s share of the 6.5bn of cross-border money put into offices last year |
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Source:Jones Lang Lasalle |
Monetary union will create an increasingly crowded and competitive market. The number of retired Europeans is expected to double by 2006, and much of their savings will have been poured into property-owning pension funds.
The EU is also likely to seem a relatively safe haven for investors compared to the volatility of emerging markets in South America, Asia and Eastern Europe. And property, because of the stability it offers compared to gilts and equities, is expected to attract more investors.
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Ron Spinney Hammerson “We’ve firmly set out our stall as a European but not a pan-European company. We operate in certain limited markets with good quality management teams and the critical mass to attract the best people. Our aim is for economies of scale and to be a significant player in the local marketplace. “We got into Europe in a significant way four years ago and moved towards quality shopping centres. The UK is a relatively crowded market. It has tended to be more liquid, but the more mature European markets are catching up. “We have shopping centres in Berlin, Frankfurt, Essen, Saarbrucken, and in Paris and Strasbourg. The euro has provided an extra fillip for us, offering the ability to match our funding between France and Germany. And it’s maintaining low interest rates and enhancing transparency in the market. “Every property company will have to select their activity and type of investment. Analysts are now becoming sector rather than country based. “Some companies will choose to restrict their operations to the UK. But the challenge for all operating in this period of subdued inflation will be to establish ways to maximise growth. No-one can rely on inflation, which is good for the industry: it means management teams will have to become much more professional.” |
Challenge for the smaller players
Membership in a competitive pan-European investment market will be a challenge for the smaller players, both in the UK and in every other European state, as investors turn their attention to the larger European stocks.
In Italy, insurance giant INA spun off its property into UNIM, Italy’s largest quoted property company and a prototype of the giants that are expected to emerge. As well as more demergers similar to UNIM, a raft of privatisations in Southern Europe involving Fiat, Telecom Italia, and Telefonica are set to create large property portfolios that can be transformed into liquid companies attractive to pan-European investors.
Just five UK property companies are big enough to compete on a European stage this size: Land Securities, British Land, MEPC, Capital Shopping Centres and Hammerson. And of these Hammerson is the most openly pro-European, while the UK’s largest property company, Land Securities, remains committed to its home market.
As the institutions begin to switch their focus from the national to a pan-European stock market, smaller players may struggle to attract investors, be forced to merge or go under. Only Land Securities and British Land are big enough to make the FTSE Eurotop 350.
Property analysts at HSBC, for example, recently decided to stop covering three of the smaller UK companies – Grantchester, Frogmore and Bradford Property Trust – in favour of six European stocks: Rodamco, Simco, Unibail, UNIM, Vallerhermoso and Metrovacesa.
Meanwhile, property-performance benchmarking is also crossing boundaries. Investment Property Databank is rapidly expanding in Europe, recently acquiring French research group BD2i. IPD research director Tony Key says: “We’re rolling out the IPD service into other euroland countries where we find a group of investors willing to support it.”
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Joe Kaempfer BAA McArthur Glen “As we are an Anglo-American property company specialising in designer outlet centres, with property in the UK, France and Austria, the euro is good for us because it will rationalise the investment market. Two years ago our shopping centre in Troyes, France was unsaleable. With the advent of the Euro and the fixing of exchange rates, property interest in France has risen and the value of Troyes has dramatically increased. “In the past we were concerned about operating in Italy, for obvious reasons. Now it’s a much rosier picture. We’re building a shopping centre in Seravalle and looking at three other sites. I’m not sure we would have gone to Italy with quite the same vim and vigour if it wasn’t for the euro.” |
Benchmarks cross borders
IPD has already produced benchmarks for direct property investment in Germany, Sweden, the Netherlands and Ireland and is currently in negotiations to produce indexes in Belgium and Denmark.
So what is the attitude of smaller property companies towards the euro? Frogmore Estates finance director David Willmott says emphatically that the company has no intention of going into Europe. “We are 100% UK-based and feel that ultimately property is a local business. We plan to stay in the UK, where we are finding plenty of demand.”
As to the possibility of pan-European interest pushing Frogmore off investors’ shopping lists, Willmott feels that this has little to do with the single currency. “The issue of consolidation and whether institutional investors will show a preference for pan-European companies is a remote one from EMU. The impact for us will be the ramifications the euro has on the general economy, on whether exchange rates hit our exports and whether occupiers take space,” he says.
However, despite Willmott’s and others’ caution about the euro, attitudes in the UK are far from gloomy. A number of other property companies, consultants and fund managers are entering into a host of European alliances.
At the end of January, quoted UK developer Development Securities and Dutch developer MAB Groep announced a strategic alliance to undertake joint projects in Europe. Both companies cited the advent of EMU as the catalyst behind the alliance.
Retail property, in particular, is emerging as the asset class tipped to benefit most from EMU. Hammerson chief executive Ron Spinney has shopping centres on the Continent and thinks the euro provides an “extra fillip”.
Although the euro has its champions and detractors among UKproperty professionals, a wait-and-see mood prevails. Cautious, targeted European investment by sector is in the air but the most oft-heard comments among directors of UK property companies are in tune with those of Ian Henderson, chief executive of Land Securities. He says: “We are 100% UK-based and we have no immediate plans to change that.” But he emphasises: “The jury is still out.”
UK funds are also cautious, preferring indirect property investments as the way into Europe. Tax-exempt quoted vehicles, similar to the US real estate investment trust model, would be ideal and analysts predict that a standardised REITs model may emerge, with both sector and country specialist funds developing.
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Mark Dixon Regus “We started in Brussels 10 years ago. The single market kicked off our business plan. We planned to do business in all 12 capitals. Every year we’ve seen more and more cross-border business. “Ninety per cent of our business is in greater Europe, including Russia and Eastern Europe. This year we’re rebalancing as we open more centres in Africa, Asia and Latin America. “The euro will bring price stabilisation and price transparency as companies start to site their operations according to personnel, location, and price. The cheapest space with the best people in the most convenient place will win out. “I can be an occupier in Dublin or go to Berlin where I can get more space at a cheaper price. It’s going to be a flatter, more open, much more understandable market – and much more competitive. “The UK regions will have to be more competitive – which means shorter leases and better prices. Lack of flexibility is the main inhibitor in the UK market. The UK has good airports and connections and good people, but it’s not the best located market, and its infrastructure needs to be better.” |
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Ian Henderson Land Securities “We are 100% UK based and have no immediate plans to change that, though we keep an open mind. “With the advent of European monetary union, the elimination of conversion risks removes one of the risks but there are still other issues which have to be addressed. “The jury is still out to such an extent. Are we going to see a greater drive towards political union or a concentration on trading? In the latter case, we won’t have a situation that leads to the harmonisation of lease lengths, law, accounting standards and so on. “We will see greater transparency in costs and prices at home. Our stronger lease structure is attractive to investors. Many German investors come in and buy leases for that reason.” |
Into Europe via a third-party vehicle
A recent Standard Life survey of 27 fund managers indicated that 56% would consider investing in Europe, and of those a clear majority, 60%, said that they would prefer to do so via a specialist third-party vehicle such as a limited partnership.
“The survey shows a clear appetite for investing in Europe,” explains Neil Cable, Standard Life’s fund manager for Europe.
The main deterrents to direct property ownership, said the survey, are high transaction costs, lack of familiarity with the markets, illiquidity, lack of suitable benchmarks and lack of transparency in transactions. The shorter leases of euroland came right at the bottom of the list, despite anecdotal evidence that some investors are not yet comfortable with them.
Overall, fund managers’ attitudes towards EMU were overwhelmingly in favour, with 81% of respondents saying that the economic impact would be positive. When asked whether the UK joining EMU would encourage them to invest in continental real estate, 63% said that it would, while 62% believed that the real estate markets in continental Europe would outperform the UK markets over the next three years.
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Ton Meijer MAB Ton Meijer is an enthusiastic europhile, writes Erica Billingham. “I must say I don’t see the downsides. On the Continent, our life has become much easier since the introduction of the euro,” says the chairman of MAB, a private Dutch developer which operates in five European countries including the UK. At a stroke, the currency risk which MAB and other international businesses were forced to live with, has gone. “We’ve worked in France since 1978 and we have seen horrendous currency differences in short periods between the guilder and the French franc, which were a major concern for our business,” he says. But not any more. For MAB, which specialises in large-scale mixed inner-city development, such as de Resident, in The Hague, the single currency rate brings two major benefits. “Now that the currency risk is over, it gives us the possibility to go much further in the risks we take,” Meijer says. This means that MAB will have the freedom to tackle much more ambitious projects, where conceptual planning and site assembly can take several years, without being shackled to short-term currency fluctuations. He thinks that raising money for projects will also be easier in the new financial climates. “Financial partners are more willing to join you because they don’t have the currency risk either,” he says. The second benefit is transparency across all the markets MAB works in: the Netherlands, France, Germany and Belgium. “It gives us extra insight as we can compare costs much faster. For example, we can benchmark prices and yields in the German market against the French market,” he says. Meijer believes that national property companies will eventually have to operate in countries across Europe but that they will probably stick to a specific sector. “I think the right solution is specialised companies. Investors are not so fond of mixed companies. So, for example, you will have a shopping centre company that owns centres in France, Germany, the UK and Holland,” he says. This evolution of the property business will be driven by increasingly mobile tenants and by UK companies that want to expand into continental Europe and continental companies with an eye on the UK. Retailers, says Meijer, are particularly keen to deal with one developer that can provide them with shops in all the countries they need to trade in, rather than build up a network of local contacts. “What puts off a retail chain from expanding abroad is that they do not know the markets. There are many examples of English companies that went to the Continent and paid too-high prices,” he says. The ability to provide a UK foothold for its Dutch clients was one of the factors behind MAB’s tie-up with Development Securities in January. The two companies have a co-operation agreement that lets them share information about each other’s markets. |
