Elsewhere: Commercial Capitals of the World

Most Successful

International real estate consulting agencies carry out at least a dozen of surveys per year with a view to finding out which location will be the best venue for doing business. Regardless of methods used, Paris and London have topped the ranking for years.

According to the European Cities Monitor 2005 by Cushman & Wakefield Healey & Baker, in the overall rating of the best cities for business the French and British capitals continue to lead by some margin, followed by Frankfurt and Brussels. Those four cities have led the rankings for the past 15 years, CWHB reports.

Comparing the results of the latest survey to a similar study 15 years ago shows that Barcelona has made the biggest leap forward, having moved from 11th spot in 1990 to 5th. Madrid ranks only 7th in the latest study.

Analysts at the Researchworldwide.com commercial real estate information portal assume that the fact the two leading Spanish cities have broken into the top ten reflects the general situation on the Spanish property market, evidence of the considerable demand both for residential and commercial real estate in the largest cities.

Other cities, however, have lost their positions. D?sseldorf dropped from 6th place to 16th; Geneva – from 8th to 18th ; Hamburg fell five spots to 19th place; Glasgow fell 12 places from 10th to 22nd. Lyon, Athens and Moscow failed to make it into the ranking at all.

The key factors in deciding where to locate a business remain the availability of office and retail space, qualified staff, transport and communication networks and the cost of labor, according to analysts. Quality of life factors are the least significant.

Strong Points

London is the top rated city for access to markets, for the availability of qualified staff, for international transport links, telecommunications factors, and for languages spoken. Warsaw is again top for the cost of staff, Lisbon for the value for money of offices, Dublin again comes top for the climate created by government, Berlin for the availability of offices, Paris for internal transport, Barcelona again for quality of life, and Stockholm for freedom from pollution.

Warsaw remains the city that can expect the biggest influx of companies over the next five years, with 41 of our sampled companies expecting to locate there. If this happens, Warsaw would move up to 6th position in terms of international company representation. Prague, Moscow and Budapest can also expect a healthy inflow of companies; and Bucharest is attracting interest. Paris, London, Madrid and Milan are the most popular nominations among the more established business cities.

But on the whole, commercial activity is on the rise throughout Europe. Analysts at CB Richard Ellis Research report that by early 2006 the demand for class A offices grew simultaneously on 10 leading world markets.

Global investment activity has been on the rise over the past years, notes Steven Dunn of CBRE. But such signs as tenants’ readiness to pay more, lower vacancy rates and poor building activity along with the consistent inflow of investment capital proves that a new peak of office investment is not far off.

In Europe, demand for office space grew sharply in London, Paris and Madrid. In London, bid prices grew by 6.7% over the past year while the vacancy rate fell to 7%. In Paris and Madrid, bid prices rose 2.1 and 8% respectively while vacancy rates dropped to 5 and 9% respectively.

Paris leads the ranking presented by the Urban Land Institute and PricewaterhouseCoopers in their joint report “Emerging Trends in Real Estate Europe 2006”

The report provides an outlook on European real estate investment and development trends, real estate finance and capital markets, property sectors, metropolitan areas, and other real estate issues. Emerging Trends in Real Estate Europe represents a consensus outlook for the future and reflects the views of more than 300 individuals. Survey participants represent a wide range of industry experts — investors, developers, property companies, lenders, brokers, and consultants.

Although emerging markets in Ukraine, Slovenia, the Baltic countries and Romania are increasingly attracting interest, London and Paris still top the rankings. Paris continues as the number-one city based on the average of total return and city risk ratings, followed by London, Helsinki, Madrid, Barcelona, Stockholm, Dublin, Lyon, Copenhagen, and Edinburgh. Frankfurt is the lowest-ranked city in the survey by a wide margin, with modestly poor prospects for total returns and a below-average risk rating.

Somewhat different is the ranking of cities with the best development prospects. From this perspective, the fast-growing but riskier markets of Istanbul and Moscow rise to the top of the chart. Paris, Barcelona, and London round out the top five for development prospects.

Secrets of Paris

Paris reigns supreme again, taking the top spot in the risk adjusted total return rankings for the second year running. Does it really have everything? Many survey respondents think so and are quick to praise its ability to offer “long-term investments in a consolidated city.” In this capital-rich, product-poor property environment, the city also gets top marks for its size and liquidity. Total return prospects for Paris are among the best in Europe (third in our survey), and this, together with its attractive risk rating (also third), pushes it into first place overall. 53% of respondents recommended buying offices in Paris in 2008, and only 8% decided to sell. Last year rental rates grew 5.9% (5th place).

The entire office market of Paris falls into three areas – the central part, La Defense (where vacancy still exceeds 10%) and other parts of the city. La Defense, Paris’ commercial district built in the 1950s-1960s, has over 3 million square meters of office space occupied by over 1,500 of the world’s leading firms. Initially, La Defense was designed as a large-scale exhibit for the World Expo 1958. Three prominent French designers – Robert Edouard Camelot, Jean de Mille and Bernard Zehrfuss – contributed to the creation of the modern Defense – a cluster of multifunctional skyscrapers linked by pedestrian paths. Paris lost its bid to host World Expo but won in a more important race. International investors showed an interest in the city. The first to secure tenancy at La Defense was the Esso oil company that needed space for 1,500 employees of 12 departments.

Office supply is expected to grow in other parts of the city as well. Slough Estates International (SEI) has announced plans to develop the major office facility Portes de France in St. Denis, measuring 26,500sqm, opposite the Stade de France where the Rugby World Cup will be held in late 2007.

Recently, Jones Lang LaSalle announced the final closing of the LaSalle French Fund II. Having set out to raise ?300 million, the final amount raised was ?338 million which, using 75% leverage, will enable LaSalle to assemble a diversified portfolio of approximately ?1.3 billion across France. The European and North American investors in the LaSalle French Fund II include some of the world’s largest pensions funds as well as strong local players.

The Fund offers the opportunity to invest in the largest and healthiest market in Continental Europe and capitalize on the current and growing demand for core real estate assets and improving market fundamentals.

Simon Marrison, Managing Director of Continental Europe and President of the LaSalle French Fund II said, “We are extremely pleased with the response from both previous and new investors who were attracted by the depth and quality of our experience in France. Since beginning operations in 1995, we have invested over ?2.3 billion throughout the country and have a demonstrable strong track record of realized returns in France.”

On behalf of the LaSalle French Fund II we have acquired a 48,000sqm office development in Gennevilliers, to the immediate northwest of Paris in the Hauts de Seine (92) department. The project will be 300 meters from the Gabriel P?ri line 13 metro station and will be developed by Nexity Entreprises. It will form part of a wider redevelopment zone coordinated by the city of Gennevilliers and known as ZAC du Coeur de Ville. Delivery is anticipated to be in April 2008. Finance was arranged by HRE.

Island of Changes

Survey respondents continue to be positive about the London market, hence its second-place ranking. As one respondent observed, the depth and size of the market, just like Paris, continue to give it merit for both buy and sell opportunities. The survey results indicate investors in all property sectors wanting to continue to buy or hold in 2006, with little emphasis on selling. The property product crunch is likely to continue in 2006. For many, it is a recovery market gathering pace in 2006—”the cyclical upturn is underway,” says one interviewee.

The West End still outranks the City, where recovery is slower. At a vacancy rate of 5%, the West End has its lowest vacancy rate in four years and CBRE’s rental index for the area is up 3.6% year over year. In addition, new supply is 40% lower than its peak in 2003 and many interviewees see the West End as a healthy development option. Respondents generally believe the office sector has two to three good years of performance ahead of it. The City lags in its recovery, but it is starting to see positive demand figures that have reduced ready-to-occupy space to 10%. Tenant incentives need to be worked out of the market before anything more than marginal rental growth is seen.

Like Paris, London, too, falls into three commercial zones – the City, the West End and Canary Wharf. Banks and financial institutions prefer the City, though some have offices in Canary Wharf (Docklands). Government institutions including the Houses of Parliament and many industry-oriented companies have offices in the West End.

The supply of office space has grown considerably, according to DTZ Research. In the West End alone, the stock of offices reached 371,000sqm – 30% higher than in 2004. In the largest deal reported in 2005 in that part of the city BDO Stoy Hayward rented a 14,800sqm office center at 55 Baker Street.

High office demand generated by financial institutions has also been registered in the City, where the stock grew to 540,000sqm. Standard Chartered Bank (Hong Kong) rented a 21,000sqm office at 35 Basinghall Street; Deloitte & Touche rented an office measuring 20,800sqm on New Street Square. John Forrester, chief of the central realty agency, expects the situation will remain just as favorable this year.

Canary Wharf is a relatively young business district developed in 1990, within the industrial Docklands area. One Canada Square was designed by architect Caesar Pelli. The area houses office of banks, law firms and media companies.

Capitals With Prospects

Helsinki jumped from sixth place last year to third in the rankings for 2006. The city ranks in the top ten in risk-adjusted total returns (third), total returns (seventh), and city risk (fourth). Rent increases and capital growth should be modestly good in 2006, and a high percentage of survey respondents recommend buying office (65%) and retail (62%) in Helsinki, while less than 5% believe that 2006 is a good time to sell in either property sector.

Industrial properties are seeing far less interest. Yields are relatively high for Europe at 6.5% for both office and high-street retail properties, and very high for industrial at 10.3%. Office vacancy rates increased in 2005 and there are structural differences between older and newer office stock, with oversupply a potential risk in 2006. Helsinki has “passed the worst,” states one experienced investor in the market. There is strong demand from foreign investors for Helsinki office properties; according to a year-end market report, 20-plus foreign property investment firms have been active in the market over the last several years.

There’s a national victory for Madrid this year as it beats Barcelona in the rankings for the first time. This reflects investors’ sentiment that the Spanish capital is reaching a turning point. Last year, there was caution over the huge supply of offices on the outskirts—which was still mentioned in several 2006 interviews. While it remains a heavily supplied market, there has been little change in the vacancy in 2005, and speculative supply in 2006 and 2007 will be no more than 550,000 square meters. Demand has been steady in 2005, giving respondents more confidence for including Madrid on their prospects list. A solid majority (61%) rate Madrid a “buy” market for office properties. Enthusiasm among some is tempered by the perception that Madrid is a “medium-term” prospect, while others note the possibility of undersupply in key areas and think central Madrid provides opportunities for grade A office development.

On many levels, Barcelona should reign supreme over Paris. Without the adjustment for city risk, Barcelona actually takes the top spot as it beats Paris this year in outlook for both rent increases and capital growth, and it ranks second behind Istanbul for total return prospects. Barcelona is also on a par with Paris for its supply/demand balance and development outlook. The city just doesn’t have the size and the liquidity, which holds back this continually attractive city at fifth place overall, though it rose from its eighth-place position last year. The majority of respondents are attracted by what they think will be a continuation of strong rental growth in 2006. Yet, it is scaring off some investors for 2006; they refer to Barcelona as a “difficult” market.

Top “buy” markets for the office sector are Helsinki, Moscow, Lyon, Madrid, and Istanbul, with over 60% of respondents suggesting that these were good markets for buying offices in 2006. Helsinki, Lyon, and Madrid are each considered low-risk markets with reasonable rent growth prospects, and Moscow and Istanbul both rate highly for growth prospects. With the exception of Madrid, office yields are relatively high in these markets, ranging from 6.5% in Helsinki to 12.5% in Moscow.

At the same time, analysts warn against buying in Germany and the Netherlands. Both countries get the consistent thumbs down for 2006. For Germany, the caution is patchy; few will touch Frankfurt and Berlin, but the other cities may have some merit in 2006. Berlin and Frankfurt are near the bottom of our office “buy” list, while Hamburg and Munich fall more towards the middle. Office yields in the German markets as of the third quarter were generally in the range of 5.2 to 5.6%, but yields actually rose 20 to 50 basis points from third-quarter 2004 to third-quarter 2005, according to CBRE. The Netherlands’ poor rating is more a concern over supply. Amsterdam, Rotterdam, and the Hague are highlighted by many as particularly poor prospects. At a stretch, good markets in the Netherlands are named as Zwolle, Breda, and Maastricht.

Moscow’s risk-adjusted total return rating puts it in 26th place. On the other hand, Moscow ranks highly (second place) on prospects for both capital growth and development. A limited amount of high-quality space is available in the office sector, with economic demand increasing. Class A office vacancy rates have steadily declined over the last two years, with rental rates increasing in the mid-$800s per square meter per annum, while vacancy rates remain in the 6% range and rents are relatively flat. Foreign investors are increasing, with some interest growing from German mortgage lenders.

Heart of Europe

The home of the European Union – Brussels – slipped in the overall rankings from 2005 to 2006, primarily due to less favorable city risk ratings. Investors appear mixed on office investment and development, although residential appears acceptable. Several investors ranked residential development in Brussels on par with London and Paris. Office supply in 2006 is a potential risk affecting rent growth expectations, and Brussels is one of a few markets where office vacancies have been on the increase, rising 100 basis points over the past year to 11.7% as of the third quarter of 2005. The private sector is showing modest gains in office occupancy share and respondents indicate a major fight for tenants over the next year with significant relocation opportunities. One investor stated, “…E.U. institutions are prepared to look outside the traditional Leopold area” in Brussels, with non-CBD locations growing increasingly attractive.

Brussels, a very pan-European investment market, shows improved prospects as a distribution market, as respondents increased the “buy” recommendation for industrial in 2006 versus 2005. On the other hand, investors’ enthusiasm for buying retail and office properties has waned considerably from last year.

Office Deficiency

There is one more group of business capitals – the cities that report the highest demand for office space, even despite the ever-growing IT and outsourcing sectors. The www.researchworldwide.com portal, citing data presented by Colliers International in its report “Global Office Real Estate Highlights”, has published a list of 15 cities experiencing an acute shortage of office space.

The list includes five European commercial centers: Stuttgart, Rome, Geneva, Dublin and Paris (the central part). In most of them, offices under construction account for a relatively low share of the market, 0.3 to 4.3%. Paris, with 7.5%, is an exception. The reason for that is the increased interest in centrally-located offices on the part of REITs. Thus, Paris has the best chances to overcome its office deficiency.

Stuttgart, with only 0.3%, is not viewed as a favorable business location. The demand for offices is lower than in other parts of Germany, for example, 80% lower than in Munich. Office rentals in Stuttgart are 28% below Munich rates. As a result, new offices are being developed in other cities, with Stuttgart remaining an outsider. Rome, the Eternal City, is waiting for its time to come. In the past 12 months alone office rental rates dropped 8% and are expected to drop even lower.