Americans are buying in Europe, just less so --- Despite
tighter times, if financing is on offer deals are to be had
By William Boston Special to the WSJ
29 October 2008
As the U.S. economy braces for the possibility of a deep recession, there is a perception in Europe that
American investors are dumping properties across the Continent to raise cash.
But data prepared for The Wall Street Journal by property consultants CB Richard Ellis suggest that isn't
the case -- at least not yet. In fact, American investors continue to acquire more European properties than
they sell, although sales are off sharply.
In the first half of 2008, Americans purchased 6.1 billion euros ($7.65 billion) of commercial property, down
from purchases that totaled 14.2 billion euros in the second half of 2007 and a peak of 20.7 billion euros in
the first half of 2007. But purchases during the first half of this year were ahead of dispositions, which
totaled 3.6 billion euros.
"There is no evidence of Americans being forced sellers in Europe," said Michael Haddock, director of
research and consulting for Europe, the Middle East and Africa for CB Richard Ellis. "This is surprising when
you consider that the business of many American investors is based on a short-term turnaround."
One of the most surprising deals to emerge this year was Lone Star Funds' decision in April to pay 1 billion
euros to acquire 1,300 mainly logistics properties from Deutsche Post WorldNet AG. The deal was a surprise
both because of its size and that Lone Star was able to raise 700 million euros in debt financing at a time
when banks were reluctant to do such deals. The deal was financed by a consortium of banks that included
Eurohypo AG, Natixis SA, DekaBank and Societe Generale SA.
Lone Star declined to comment about the deal. But its adviser on the deal, Helmut Schuchl, director of
property consultants Knight Frank's Munich operation, said arranging financing with a club of banks was
clearly a trend at the moment. "No bank will do this alone," he said.
The surge in U.S. investment in Europe during the past few years was driven partly by the availability of
credit to finance large projects and often for reasons specific to local markets. London's commercial-property
boom was a result of the rise of the city's importance in global financial markets. In Germany and
throughout Central and Eastern Europe, the end of communism sparked a building boom as Berlin and
Eastern European capitals were rebuilt.
As long as such opportunities exist in Europe and real-estate funds are able to raise money, U.S. investors
will likely remain a part of the European investment landscape. But highly leveraged deals that were done
last year and this year could be up for refinancing in the next couple of years, pressuring investors who paid
high prices for prime real estate as the market was rising. Now, with credit tight and valuations falling, some
investors may find it difficult to refinance those loans.
"We know that a lot of big transactions in 2007 were done on a two- to three-year financing and that
suggests that there could be refinancing issues in 2009 or 2010," Mr. Haddock said.
Metrovacesa SA, the Spanish property group, for example, is still negotiating with British bank HSBC
Holdings PLC about refinancing more than 800 million euros in short-term financing that it took to buy
HSBC's European headquarters building in Canary Wharf. Other acquisitions now under scrutiny are Lehman
Brothers Holdings Inc.'s purchase of the Coeur Defense office complex in Paris and a 1.5 billion euro
acquisition of 73 hotels in the U.K. from InterContinental Hotels Group PLC.
The Coeur Defense deal is a perfect example of how U.S. investors often came to Europe with a specific
investment time frame that is now in danger because of the effect of the financial crisis. The owners of
Coeur Defense had hoped to sell the complex at a profit by 2012. While they still maintain that time frame,
a sale could happen earlier at the right price. "If someone offers me 2 billion euros, sure we would sell. But
we are not selling at 1 billion euros. Our sale horizon remains the same," said Gautier Beurnier at Atemi SAS,
which joined with Lehman to buy the building in 2007.
The situation at Coeur Defense epitomizes the uncertainty about commercial-property investments
spreading in Europe. While there may not be a stampede out of Europe, it is becoming clear that investors'
appetite for European property is on the wane.
"We're covered in Europe," said Walter Krug, managing director of Morgan Stanley Real Estate Investment
GmbH, an open-ended fund in Germany. "We are now looking mainly at opportunities in the U.S. We think
the U.S. property market is beginning to hit bottom."