Dollar's rise fuels transatlantic dash for European real estate

[LONDON] US investors are buying European commercial property at a record pace as the dollar's eight-month rally and struggling economies on the continent make offices, shops and warehouses cheap.

US spending on European commercial real estate last year was just short of the 2007 peak, according to Real Capital Analytics. The record may be broken this year after a strong first quarter, said Simon Mallinson, RCA's managing director for Europe, the Middle East and Africa.

"With the US markets becoming increasingly expensive and with the currency advantage we are starting to see, the US institutions are making a big push for Europe," said Richard Divall, head of cross-border capital markets at broker Colliers International. "Europe is the region of the world that still has distress."

The US currency has jumped amid speculation that the Federal Reserve is moving toward raising interest rates this year as the economy surges. Meanwhile, stagnation and the prospect of deflation in Europe is prompting European Central Bank President Mario Draghi to implement a 1.1 trillion-euro quantitative-easing program to stimulate growth. The dollar gained 26 per cent against the euro in the last 12 months.

US investment in European commercial property climbed 90 per cent last year to 41.2 billion euros ($45.3 billion), just shy of the 2007 peak of 41.5 billion euros, RCA said. Another 8.9 billion euros has been spent this year through March 25, with a further 3.3 billion under contract.

"The U.S. dollar-euro exchange rate movements make unhedged European real estate look increasingly cheap and US investors remain convinced that mis-pricing opportunities exist across the continent," RCA's Mallinson said by e-mail. Americans will "likely outpace their previous peak."

Europe's recovery will probably strengthen this year, leading to job growth and higher domestic demand for real estate, according to a report by Deutsche Asset & Wealth Management. Overall investment in European property climbed 12 per cent to 160 billion euros last year, according to the report.

Even with increased competition for assets, European commercial properties will remain attractive to foreign buyers this year, according to investors.

"I don't see the trend stopping," said Pierre Vaquier, chief executive officer of Axa Real Estate. "All of the countries that are dollar dominated should continue to deploy in Europe."

Record-low returns from fixed-income investments have spurred money managers to buy real estate in a search for higher returns. Institutional investors will increase their real estate spending by US$52.5 billion this year, with Europe a key target, Colliers said.

Commercial property values in the US reached a record high in January as investors compete to buy the best quality buildings, according to a value-weighted composite index compiled by research firm CoStar Group Inc.

Returns across offices, shops and warehouses are set to average about 10 per cent annually for two years, Deutsche Asset & Wealth Management said. Europe's main banks hold 236.5 billion euros of soured loans and assets linked to non-residential real estate, the ECB said in October.

"When we placed 12 Dublin bank branches leased to AIB Plc on the market in December, the quoted price was the equivalent of about US$60 million. Now it's closer to US$52.5 million," said James Meagher, a director at Knight Frank.

The European unit of New York-based Northstar Realty Finance Corp. owns or is under contract to buy US$2 billion of commercial real estate in the region, it said in February. The company plans to spin off the business into a publicly-traded real estate investment trust. Blackstone Group LP, the world's largest private-equity investor in real estate, agreed to buy an office building this week in the City of London financial district for 268.4 million pounds.

The euro bounced back slightly against the dollar during the last two weeks, adding to unpredictable movements since the Fed surprised investors by indicating it is in no rush to raise rates.

"Europe is getting very interesting from a currency valuation point of view; nobody wants to catch a falling knife," said Scott Brown, president and CEO of Cornerstone Real Estate Advisers, which plans to expand its European assets by up to US$1 billion in 2015. "Are you better off going in before the bottom than after the bottom?"

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