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Real estate developers may shun London as labor costs increase

London real estate development may slow as construction for the 2012 Olympics and a new terminal at Heathrow Airport drive up labor costs, according to a report published today.

Investors are now more interested in holding on to the properties they own in London than buying more because of concerns that the strong price gains between 2004 and 2006 will start to slow, said the report by the Urban Land Institute and PricewaterhouseCoopers LLC. „Understanding local property market fundamentals is the key to successful investing in 2007,” Bill Kistler, president of ULI Europe said in a statement accompanying the report.
That includes „appreciating labor force issues in London in the run-up to the Olympics in 2012. Total returns on UK commercial real estate, which have been at least 18% in each of the last three years, are set to slow this year. Central London offices are expected to be the best performing UK real estate assets over the next two years because of a shortage of supply.
The decision of investors not to buy in 2007 would cost London a significant share of the €105 billion ($136 billion) invested in French, German and British property annually, said the report. Those concerns, raised in the fourth annual survey of almost 400 senior real estate executives, left London ranked second behind Paris as the most attractive city in Europe for real estate investment.

Munich, home to Bayerische Motoren Werke AG, the world’s largest luxury-carmaker, jumped 13 places to fourth behind Stockholm as investors look to benefit from increasing demand for offices. It’s the first time a German city has featured among the 10 most-favored cities in Europe for investment since the annual survey was first published in 2004. „Germany will be the hottest market in 2007,” said Kistler.
Investors say the sector is near its peak with European markets „awash” with money. More than half of those surveyed expect an oversupply of capital this year, the report said. „Despite predictions of a calmer investment environment in 2007 and single-digit returns, equity capital is continuing to pour into the European real estate sector,” said Henrik Steinbrecher, an adviser on European real estate PricewaterhouseCoopers.
Investment in European commercial real estate may top €200 billion ($264 billion) next year with several times more money available to spend than properties to buy, according to real estate brokerage Jones Lang LaSalle Inc. said last month. Spending this year will be around €200 billion, 28% more than in 2005, when it totaled €156 billion, Tony Horrell, CEO of European capital markets, said in an interview in London. (Bloomberg)