European Union: European Real Estate Update

SUMMARY AND IMPLICATIONS

In the first of a series of articles from associates across our European Alliance network, we look at current market trends and legal developments in a number of the Alliance jurisdictions, with a particular focus on the cities in which each associate works, respectively Paris, Berlin and Barcelona.

FRANCE

a) Market overview

Last year the French real estate market witnessed a small (0.1 per cent) increase, despite historically low interest rates. However, it still demonstrated its capacity to withstand the current adverse economic conditions with more than €15bn invested and, in particular, €5.4bn during Q4 of 2012. Large transactions have sustained the market, with more than 40 deals exceeding €100m and representing more than 50 per cent of the total transaction volume for the year.

Investments mainly focused on prime location Parisian offices and city centre retail locations, which together made up 51 per cent of transaction volumes. The real estate market is likely to remain tight and still mainly focused on prime assets, mostly consisting of offices in Paris and its surroundings and city centre retail assets.

As to who is investing, there are a high number of foreign institutional investors, such as sovereign funds, which generated 87 per cent of transactions above €200m. Other investors such as insurers and French REITS have also been quite active. However, investments by private individuals have fallen significantly because of tax uncertainties.

b) Legal developments

The government's tax measures, which principally relate to social housing, will not be enough to re-boost real estate investments in 2013; investment volume is expected to decrease slightly this year.

GERMANY

a) Market overview

A mixture of low interest rates, rising inflation fears and global lack of safe investment opportunities have led to a considerable increase in investments in office, residential and retail properties in Germany, which is seen as a safe haven in the troubled seas of the European real estate market. Even though purchase prices have been rising constantly, observers consider the German real estate market to be stable; risks of a property bubble in Germany are generally seen as low.

Last year investments in commercial buildings amounted to more than €25bn, the highest amount since the beginning of the financial crisis, with high demand for both retail and office buildings. In particular, office buildings experienced a renaissance, resulting in investments of approximately €10.7bn. At the same time general consumer behaviour was considered positive by the retail market players, which had a favourable impact on the retail lease sector (notwithstanding continued pressure from online retailing). Interestingly, in Germany the demand for retail space is in favour of inner city shopping malls, rather than out-of-town centres on greenfield sites, partly attributed to rising demand for accessibility from an elderly population; so called the "silver shoppers".

Berlin and Munich are the predominant cities for investments. In Berlin demand for commercial building rentals is high with low vacancy rates. As a result, landlords are offering fewer tenant incentives. As with France, foreign investment in Berlin is high and accounts for around 33 per cent of all transactions.

In relation to investors, as in the UK, entities with strong equity, such as state funds, social insurance funds, insurance companies and pension funds are more and more dominant in the German real estate market. Although it is worth noting that in the residential sector, foreign investors account for about 40 per cent of investments (three per cent being British investors).

b) Legal developments

Green leases

"Green" real estate is progressing further. Green building certificates for new buildings are becoming standard in various asset classes. In addition, green leases have been developed and standardised in order to round out the concept of sustainability. The ZIA (Zentraler Immobilien Ausschuss – Central Real Estate Committee), an influential committee representing the German real estate economy, recently published a set of green lease standard terms and conditions which may be used to complement conventional lease terms.

Transfer tax

Political discussions about the prohibition of RETT (Real Estate Transfer Tax, which is triggered by the acquisition of at least 95 per cent of the shares of a property-holding entity) blocker structures were alarming many investors. Historically to avoid RETT, investors would buy 94.9 per cent of the shares directly, using an intermediate company to acquire the remaining 5.1 per cent. However, the tax regulations which are now on the statute books are less radical than originally announced; certain RETT blocker structures are still permitted and will therefore survive. Overall economic involvement, rather than legal participation will now be taken into account when calculating the 95 per cent threshold.

SPAIN

a) Market overview

As is the case in much of Europe, outside of one or two core cities per country, it is fair to say that the real estate market in Spain, outside of Madrid and Barcelona, is in fairly dire straits. Even in those two cities activity remains comparatively sluggish; in Q1 of 2013 for example, a total of more than €96m worth of office buildings were sold, 81 per cent down on the €505m in the same period in 2012, although this may be due to readjustment of prices and does not take into account that, in Barcelona at least (conversely to Berlin), there are favourable office rental conditions with competitive rents and lease terms.

As in Greece and other European countries, the authorities are selling off parts of their real estate portfolio to generate liquidity. In Barcelona's case, the regional Catalan government has become one of the new protagonists in the office, hotel and residential real estate markets. An option particularly favoured by the Catalan government is the sale and leaseback, which allows it to extract value from government buildings in prime locations, whilst continuing to use them to provide administrative and public services; this is piquing an interest from international investors looking for constant and secure rental income streams in the medium to long term.

One of the most important developments in Spain over the past 12 months has been in banking, with the creation of SAREB or Spain's "bad bank" (which is currently in the majority private owned; 54.33 per cent compared with 45.68 per cent public funds), and continuing consolidation of the sector generally. Bankia-BFA and Catalunya Banc, amongst others, have come under state control, whilst other banks have strengthened their position by acquisitions as with BBVA, Caixabank and Sabadell.

b) Legal developments

REITS

Revised legislation passed on 27 December 2012 governing the creation of Spanish REITS (SOCIMIs), has been welcomed by investors given that, unsurprisingly, since the financially unfavourable original legislation was introduced in 2009, no SOCIMIs were created for three years! The principle changes are:

  • zero taxation of the SOCIMI on profits obtained;
  • obligatory distribution of the annual profits by a dividend of at least 80 per cent of the earnings from leases and at least 50 per cent of the earnings from trading assets; and
  • a reduced minimum share capital, down from €15m to €5m.

Littoral law

A further legislative change likely to affect the real estate market, at least in coastal areas, is the reform to the law governing the Spanish coastline, which was passed by the national parliament on 29 May 2013 (although this is subject to challenge by some of the autonomous regional governments). A series of measures have been introduced partly to protect coastal against the excesses of urban expansion and the effects of rising sea levels. Some of the key changes are as follows:

  • the ability to repair and refurbish buildings within maritime zones of "special protection" (new buildings and extensions are still forbidden). Upgrading had previously been prohibited with only minor repairs being permitted; and
  • an increase in the term of "coastal leases" (when the original law was passed in 1988, owners of houses that were legally constructed prior to 1988 and compulsorily acquired were given a 30 year "lease", which would have expired in 2018), to 75 years and making assignment to third parties for valuable consideration possible (previously such leases could only be assigned through inheritance, and then only in specific circumstances).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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