Investors See Opportunity In Hot European Markets

By Sara Seddon Kilbinger
Special to The Wall Street Journal Online

The globalization of real estate has prompted more investors to chase opportunities in Europe. Here's a look at some of the hot spots where investors are channeling their money:

London offices

Strong demand for London office space and rising prices create one of the best investments in Europe, says Simon Marx, head of international property forecasting at Experian in London. While offices in the U.K. last year gained 11% in price, prices in London rose 13%. The biggest rise was 14% in the West End, home of the U.K. Parliament, foreign embassies and Soho media groups.

"It's the Lancer effect," says Catherine Jones, who researches West End offices for advisory firm King Sturge, referring to the investment vehicle for the oil-rich Abu Dhabi royal family. Lancer acquired almost £1 billion ($1.88 billion) of West End property last year, or 20% of the total invested. "Middle Eastern investors have more money to spend because of rising oil prices, so they are putting it into assets such as trophy buildings in the West End."

Growth is driven by a strong economic market and a turnaround in merger-and-acquisition activity, especially in the banking sector, says Paul Kennedy, head of European research at Invesco Real Estate in London. Many tenants, conscious of rising rents, are leasing additional space before prices go higher, he says.

Cross-border investment in London offices last year accounted for €9.6 billion ($12.27 billion) -- or 48% -- of the total investment made in London offices, according to advisory firm CB Richard Ellis in London.

In February, American Express Co. leased four floors of Belgrave House, or 13,140 square meters, on London's Buckingham Palace Road.

However, prime office yields are only around 3.75% to 4% in the West End and 4.5% to 4.75% in the City of London financial district, according to King Sturge. Investors are counting on stable rental income and the promise of strong rental value growth over the next three to five years, Ms. Jones says. (The yield is the annual percentage return, expressed as the ratio of annual net income to the capital value of a property.)

Stockholm offices

Sweden's economic strength -- an estimated 3.6% growth in gross domestic product this year and 3% seen for in 2007 -- should cause office vacancy rates to fall to 12% by the end of this year from around 15% over the last two years, says Magnus Lange, head of the capital markets group at advisory firm Cushman & Wakefield in Stockholm. "We've been waiting for this for a long time," says Mr. Lange. "The market is improving as more office tenants look to move into new premises...sometimes with the aim of consolidating several offices into one location."

One example: Last month law firm Mannheimer & Swartling signed a lease in the central business district of Stockholm for 12,260 square meters, to accommodate a staff of up to 400 people.

About 75% of €3.5 billion in office deals in Stockholm last year involved international investors from countries including Germany and the U.K., Mr. Lange says. One limitation: a shortage of high-quality office buildings in Stockholm.

Istanbul retail

With homogenization of shopping districts world-wide, international retailers such as Spanish Inditex Group's Zara fashion chain are expanding into Turkey, which has opened talks for eventual membership in the European Union.

Foreign investors typically prefer to acquire properties leased to international retailers that are familiar names and more likely to attract bank financing, says Ali Pamir, managing director of advisory firm DTZ Pamir & Soyuer in Istanbul. "As yields in Turkey fall, as the market matures, getting good rates of finance is critical for investors if they are to get good returns," Mr. Pamir says.

German and Dutch investors, in particular, have been quick to appreciate that Turkey's retail sector is ripe for development: Turkey has just 30.4 square meters of retail space per 1,000 people, a fraction of the European Union average of 171.1 square meters, according to advisory firm Cushman & Wakefield Healey & Baker.

In addition, EU accession talks have boosted the country's credibility. Still, Turkey has its risks, such as a less transparent market than in Western Europe, which is reflected in higher yields. Prime shopping centers offer yields of around 8% to 9%. Investors buying shopping centers before they are completed hope for yields of 10% to 11%, Mr. Pamir says.

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