CH: Europe property hunters ignore far-flung bargains
LONDON--European real estate investors are so spooked by the region's sovereign debt crisis that a blinkered focus on the best neighborhoods of London, Paris and Berlin means they are missing dramatically better deals in far-flung locations.While the most popular districts of Europe's financially strongest cities are the safest bet given the markets' resilience, elsewhere there is much more money to be made on high-yielding assets with stable tenants on long leases.
“You can't assume all property outside the best areas is junk,” said Matthew Richardson, director of European real estate research at Fidelity Worldwide Investments, which has US$400 million of European property under management.
Fidelity owns an office block in the British coastal town of Bournemouth, 100 miles from London, which is rented by a government tax office and produces a yield of 8.25 percent.
That compares with about 5.5 percent for the best office blocks in London's main financial district and sub-4 percent yields for the luxury shops on highly sought-after Bond Street.
Property yields — the annual rent as a percentage of its overall value — are higher on so-called secondary assets because they are deemed riskier due to factors like location, lease length, the tenant's financial strength and the building's state of repair.
The same government that rents the building would only pay 1.7 percent on a 10-year bond. Granted, it could cut staff and offices but the tax office is one of the least likely to be cut and the lease contract ties them in for another eight years.
According to Richardson's calculations, the property could lose 52 percent of its underlying value and he would still make more money over eight years than if he put his money in government bonds.
The value of prime commercial property in the top European cities is about 9 percent below its last peak in September 2007, property consultant CBRE said, while falls of more than 40 percent are common in many countries' regional areas.
Nicholas Judd, a partner at property advisor 90 North, is one of a few consultants pitching regional property to overseas investors.
