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Europe's property sales rise as values retrench

Commercial-property sales in Europe still are rising, but the volume of investment is just a fraction of what was seen before the financial crisis. The growth of property value is still slow and investors remain concerned about the global economy.

European commercial-property sales are up 80% in the second quarter from a year ago, but are less than a third of the levels seen at the peak of the market, according to the latest data on commercial-property investment from Jones Lang LaSalle, cited by the Wall Street Journal.

The total amount of investment in commercial property in Europe, the Middle East and Africa rose to €23 billion ($29.77 billion) in the second quarter, “a modest 15% increase” from the first quarter of the year, according to Jones Lang LaSalle.

“We're in a period of steady, but not spectacular recovery,” said Arthur de Haast, head of the international capital group at Jones Lang LaSalle.

By the end of the year, commercial-property sales in Europe, the Middle East and Africa should reach $130 billion, up 35% from 2009, predicts de Haast, compared with nearly $350 billion at the peak of the market in 2007.

Some of the biggest deals in Europe this year have been in the London area. In the latest deal, the Metro Shopping Fund announced Tuesday that it had sold the N1 shopping center in London's Islington area for £112 million ($170.6 million). The price represents an initial yield of 5.3% for the buyer, Henderson Global Investors, for its German business Warbug-Henderson KAG, according to J.P. Morgan analyst Harm Meijer, who described it as “a good deal for the sellers.”

Also, in May, Mohamed al Fayed, the Egyptian tycoon, sold London's legendary Harrods department store to Qatar Holding, the investment arm of the emirate's sovereign wealth fund, Qatar Investment Authority, for €1.5 billion. And this month, private-equity firm Carlyle Group LLC agreed to pay £671 million for six landmark London buildings. The properties previously were part of the portfolio that secured the White Tower commercial mortgage-backed security, or CMBS. The CMBS was in default, and the properties were sold by special servicer CB Richard Ellis.

The United Kingdom accounted for 40% of commercial-property sales in the Europe-Mideast-Africa region in the second quarter, according to Jones Lang LaSalle. But the rise in valuations in London is slowing as investors remain cautious.

Commercial-property values in the UK fell 44% over a 25-month period to July 2009. Property values have rebounded 15% since then, but the pace of recovery is uneven. From August to the end of December, UK property values rose 8.6%, but growth has slowed to 5.8% this year, according to the latest data from Investment Property Databank, a property-research group.

“We've seen a noticeable change over the past few months, partly because property values stopped racing ahead,” said Charles Walker, a senior fund manager at Legal & General Group PLC, a British insurer and asset manager.

As the year progresses, Jones Lang LaSalle expects investors to focus on France, Germany, the Nordic countries and Poland.

“Investors see that the French and German economies are recovering,” said de Haast. “The euro has fallen against sterling, and this adjustment of European economies is making the Continent more affordable for outside investors.”

Other major European deals in the second quarter include the €564 million sale of the Sony Center at Berlin's Potsdamer Platz to South Korea's National Pension Service and the €450 million joint acquisition of the Cap 3000 shopping center in France by a group led by Altarea SA, the French retail specialist.

Amid uncertainty about the global economy, investors appear more cautious about investing in property. A report issued this week by Preqin, which tracks private-equity investment, shows that private-equity funds are finding it harder to raise money. In the second quarter of 2010, private-equity real-estate funds raised just $7.3 billion, the lowest amount raised in a quarter since the third quarter of 2004. The report also said many funds have failed to reach their targets, and it is taking longer for managers to close funds.

“Investors are more careful and do a lot more diligence,” said Mike Sales, head of property investment at Henderson Global Investors.

At the peak of the boom, investors who took too long to study a fund risked missing the market entirely, said Marcus Meijer, chief executive officer of private-equity fund Meyer Bergman, which is trying to raise €600 million for its European retail fund by November. “Now, it's not unheard of to take 12 to 18 months just to get to the point where an investor is willing to start doing diligence,” he said.

Private-equity real-estate funds have raised a large amount of money over the past three years as they geared up for what was expected to be a bonanza of distressed-property sales as banks worked out nonperforming property loans. Preqin estimates that private-equity real-estate funds are sitting on a cash pile of about $178 billion.

But the bonanza has failed to materialize. In many cases, banks continue to extend property loans rather than book the losses, and special servicers are reluctant to sell assets, hoping to sell property later at a higher price.

“There is a huge amount of product still being held by the banks,” said Meyer Bergman's Meijer. “There is a lot of frustration with the special servicers because they are either unable or unwilling to put properties up for sale.” (Wall Street Journal)