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Financial Turmoil Adds to Allure of Europe’s Best Properties

Financial Turmoil Adds to Allure of Europe’s Best Properties
A pedestrian passes an advertisement for a new store on Old Bond Street in London on Aug. 15, 2011. Photographer: Simon Dawson/Bloomberg

Irish investor Aidan Brooks’s Tribeca Holdings Ltd. paid 13 percent more than the asking price for a shop on London’s Bond Street that generates slightly more income than a U.K. government bond. It beat three other offers.

Buyers like Tribeca made the British capital the world’s top destination for property investment for the past two years as they sought safe bets amid economic, financial and political uncertainty. The latest declines in stock prices and bond yields are likely to spark even greater competition for the best real estate in London and continental Europe, said Dan Fasulo, managing director of research firm Real Capital Analytics Inc.

“The real investment momentum is in those countries viewed as a place of stability,” Fasulo said. “There’s a huge pool of capital out there just focused on core real-estate markets.”

The euro region’s sovereign debt crisis and prospects for slower economic growth triggered this month’s slump in global stock markets and depressed yields for bonds with the best credit ratings. Economic concerns will hurt confidence and drive investment toward the least-risky assets and boosting demand for prime properties in the best markets, CB Richard Ellis Group Inc. said in an Aug. 16 research report.

Accelerating inflation is eroding the value of record-low bond yields in the most-favored countries, making real estate more attractive. Unlike gold, buildings generate a regular income and offer the prospect of rising values, said Hans Vrensen, global head of research at property adviser DTZ Holdings Plc.

‘More Compelling’

Falling yields “make property more compelling” and investors have committed $343 billion in capital targeting commercial real estate in Europe, more than in the Americas or the Asia-Pacific region.

“There’s a lot of money chasing few available opportunities, which is why pricing has adjusted so aggressively for prime properties,” he said.

About $12.3 billion was spent on prime offices, shops and homes in London in the first half, the most of any city, and real-estate investors have been flocking to Paris, Germany’s largest cities, Switzerland, Stockholm and Oslo, Real Capital Analytics’s research shows.

Tribeca bought Cartier Ltd.’s store on Bond Street for 18.7 million pounds ($31 million). Annual rent equals 2.74 percent of the purchase price, or 0.2 of a percentage point more than an eight-year British government bond. Cartier has eight years left on its lease.

Shortage of Space

“The story for London gets stronger amidst the turmoil elsewhere,” Ashley Marrison, property director of London-based Tribeca, said by telephone. He called the Bond Street purchase a “long-term wealth preservation play” supported by a shortage of space on the street that’s likely to lift rents and values.

Last week’s disorder and looting in London, for which police have so far charged 1,010 people, hasn’t diminished the appeal of investing in the city, according to Jeremy Helsby, chief executive officer of Savills Plc.

“There’s no evidence of an unwillingness to invest in London,” Helsby said on a conference call today after the property broker reported a 52 percent increase in first-half profit. “I can’t think of any set of circumstances of London not retaining its status as a destination for international capital.”

Big Malls

Popular shopping locations such as London’s Bond Street and dominant regional malls are attracting the second-most investment in Europe after prime offices in the biggest cities. That’s because they continue to attract shoppers with their big-name brand tenants even as European economic growth slows.

Gross domestic product in the 17-nation euro area rose 0.2 percent from the first quarter, the worst performance since the region emerged from a recession in late 2009, the European Union’s statistics office in Luxembourg said on Aug 16. An index of executive and consumer sentiment in the single-currency region fell to 103.2 from a revised 105.4 in June, the European Commission in Brussels said July 28.

The continent’s largest retail landlords including Unibail-Rodamco SE and Klepierre SA said their tenants reported retail sales superior to national averages, helping lift their rents and the values of their centers.

Largest Deals

Europe’s two largest single property deals in the first half were Capital Shopping Centres Group Plc’s 748 million-pound acquisition of the Trafford Centre in Manchester and Canadian Pension Plan Investment Board’s 650 million-euro ($938 million) purchase of 50 percent of CentrO in Oberhausen, Germany, Europe’s biggest retail complex.

Retail properties accounted for 37 percent of European transactions in the first half, according to CB Richard Ellis, exceeding the average of 28 percent since 2003.

London was one of the first property markets to start recovering from the financial crisis, rising in the second half of 2009 after two years of declines erased 50 percent from city-center office values. The pound’s 22 percent drop since September 2007 has helped make property more attractive to foreign buyers.

Malaysian Employees Pension Fund this month paid 147.5 million pounds for an office building on St. James’s Square, where one of the tenants has one of London’s highest rents.

Higher Risk

While spending in London shows no sign of slowing, some investors are turning to more affordable markets or riskier properties because of the shortage of prime real estate for sale and the high prices it commands.

The 2.74 percent capitalization rate for Tribeca’s Bond Street purchase contrasts with the 8.75 percent average for shops in non-prime locations elsewhere in the U.K., according to data compiled by CB Richard Ellis.

“So much money has been chasing the very prime properties with good tenants that there’s a sense that they’re overpriced,” said John Forbes, who oversees the real estate funds advisory arm of PricewaterhouseCoopers LLP.

Paris, Europe’s largest office market by space, had a 38 percent increase in total property sales in the first half, according to RCA. Deka Immobilien Investment GmbH acquired an office development project in the city center last month for 330 million euros.

Germany, Scandinavia

Germany had the second-highest real-estate investment in Europe after the U.K. in the first half, with a 45 percent increase in sales. The Nordic region had a 61 percent jump in transactions to 8.5 billion euros, RCA data show.

Investors are starting to look at riskier properties or alternative ways of putting money into real estate, such as lending or buying stakes in closed-end property funds in the secondary market, PwC’s Forbes said.

“What do you compromise on if you cannot get a prime asset in a prime location with a prime tenant?” he said. Managers are seeking “to launch funds that are higher up the risk profile,” though investors will be wary about risk and the managers’ track records, he said.

Sixty-three percent of European investors surveyed by Preqin, which monitors alternative investments including property, said they are “below target” in real estate.

For more patient investors, there’s still money to be made in prime real estate even if it means paying a top price, according to RREEF Real Estate, the New York-based unit of Deutsche Bank AG that oversees 42.6 billion euros of assets.

The Long View

“For investors with a 10 to 15-year horizon, deals still make sense” because of attractive cash flows and some scope for higher rents and values, said Pierre Cherki, the global head of RREEF.

The income from Cartier’s Bond Street store will probably rise when rents reset in three years, according to Tribeca’s Marrison. Cartier’s Zone A rent, a measure of the most valuable storefront space, is about 535 pounds a square foot compared with current Zone A rents of 750 pounds on Bond Street, he said.

At least the investment is generating an income for its owner, Savills broker Jonathan O’Regan said. He sold the store for more than three times what previous owner British Airways’ pension fund paid 12 years ago.

“If you had put 20 million pounds in the stock market when Tribeca bought it, what would it be worth today?” O’Reagan said.

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