London tops in Europe property investment

£ weakness, big price falls let UK capital beat Munich, Hamburg and Paris

Central London, the world’s most expensive office rental market, is the best place in Europe for new property investments after prices fell the most in two decades, a survey compiled by PricewaterhouseCoopers (PwC) LLP shows.

The pound’s weakness and the scale of the price declines allowed London to beat Munich, last year’s top-placed city, Hamburg and Paris.

Another 23 urban centres were judged by real estate professionals surveyed by the accounting firm and the Urban Land Institute.

Prices of offices in central London fell 50 per cent in the two years through last July – more than most other European cities.

The UK capital has also become more attractive to overseas investors because of the pound’s 25 per cent depreciation against a trade-weighted basket of currencies during that time.

Office property values rose 4.4 per cent in the last four months of 2009, according to Investment Property Databank Ltd (IPD).

‘The worst may be over and the bottom has been reached for London,’ said John Forbes, PwC’s head of real estate, at a presentation in London. ‘There’s a concern that for prime assets with good tenants, there’s a bubble developing.’

Sales of offices in central London amounted to £6 billion (S$13.5 billion) in the second half of last year, IPD estimates. That was more than double the figure for the previous six months, according to the research company.

Last November, South Korea’s National Pension Service spent £1.04 billion acquiring HSBC Holdings Plc’s headquarters in Canary Wharf and two other buildings.

Rents stopped falling in the final quarter in the West End, enabling the central London district to regain its status as the world’s most expensive location for leasing office space, according to DTZ Holdings Plc.

Last year, it cost US$21,420 in rent, charges and taxes to provide space for one worker in the West End, the real estate adviser estimates.

Land Securities Group Plc and Great Portland Estates Plc announced last month that they would start construction work on six new developments in the West End. Both anticipate that a looming shortage of large vacant offices will lift rents.

Scarce debt finance has concentrated investment in the hands of cash-rich investors like insurers and mutual and sovereign wealth funds, which favour ‘prime income-producing property’ in the larger and most active real estate markets, PwC’s report said.

For the second straight year, Dublin offered the worst prospects for new investments, the survey showed. Moscow and Spain’s Barcelona and Madrid were also shunned as risky markets.

Munich and Hamburg were judged to offer the best return from buildings that are already owned because of the range of industries nearby and the emergence of Germany’s export-driven economy from recession as world trade recovers. Both followed Istanbul as the best place to start development projects.

The German cities ‘fared better in the difficult times because they boomed less when things got frothy’, Mr Forbes said.

Paris ranked third on the outlook for existing investments, one place higher than London, because landlords rely less on financial services companies for tenants.

The British and French capitals vied for first or second place in surveys until 2007, mainly because the size of the two office property markets appeals to international investors, PwC said.

The slide in European property values may be reaching a bottom and capitalisation rates (the annual rental income as a proportion of a building’s price or value) will probably fall in 2010, the survey showed.

Across Europe, concern about waning tenant demand affected views on development prospects, which were broadly deemed to be ‘modestly poor’, the report showed. That’s because of the perceived fragility of Europe’s economic recovery and the scale of real estate lending.

Banks have 1.06 trillion euros (S$2.07 trillion) of real estate loans on their books, PwC said. There is also 95 billion euros of securitised debt outstanding. A ‘big bulge’ of both matures in the next four years and will need refinancing, according to the firm.

‘It is unlikely that European banks will opt for large discounted disposals of distressed loans and assets,’ PwC said. ‘They are more likely to work them out over time.’

The survey drew on responses from more than 600 real estate professionals. PwC compiled the study with the Urban Land Institute by surveying brokers and analysts from the continent’s largest property investors.

Source : Business Times – 2 Feb 2010