Euro - good news for best locations
The groundwork has now been laid for a significant increase in cross-border property investment in Europe. First, yardsticks for property investment performance in the different European countries are being put rapidly into place, thanks largely to the efforts of Investment Property Databank (see box). Second, the need for funded pension schemes in the countries of Continental Europe is being increasingly recognised - the Netherlands and Switzerland have them already - and the resultant funds will be looking for investment outlets. Third, 11 of the EU countries are now linked in a common currency with common short-term interest rates. The coming of the euro may not impinge directly on the property sector, but it is likely to lead rapidly to a Europeanisation of financial markets, with investors taking a view of opportunities across the euro zone rather than only in their own back yard. The impact will be felt first on bonds and on equities, but the climate change will inevitably affect property investment in due course.
The home of the biggest property investment market in Europe - Britain - is, of course, still outside the euro zone. But that has not prevented Britain's property industry from looking at the impact of the euro on its own affairs as well as its neighbours'.
Indeed, the British property industry was treated towards the end of 1998 to a very sceptical view of the euro at a meeting organised by the Royal Institution of Chartered Surveyors (RICS), Britain's premier property body. Economist Tim Congdon and financial writer and broadcaster John Plender both took the view - particularly forcibly in Congdon's case - that there was not enough political and economic harmony across Europe for the new currency to be a success.
This did not prevent their looking at some of the new currency's likely effects. They foresaw an increase in mergers and acquisitions activity among industrial and commercial companies in Europe, leading businesses perhaps to concentrate their activities in the most efficient locations and most modern buildings. It could be good news for the value of property investments in these favoured locations. It might sound a note of warning for investors in older or less well-sited properties. There were also implications for hotel property if Emu led to an increase in trade, travel and tourism.
With internal exchange rates and the cost of short-term money no longer an issue in the euro zone, investors could judge cross-border property deals more clearly on their fundamentals. Yield differentials were likely to erode - though would remain to some extent - and there could be pressure to bring local property market structures and practices in line with each other. But there was a note of warning, too.
Property investments are not mobile like bonds and equities, which might make property an attractive tax target for European governments.
Though the issue was not raised at the RICS meeting, an interesting early test of the euro mechanism and its property implications is raised by the unusual circumstances of Ireland, one of the 11 original euro-signatories. Ireland has been undergoing a massive property boom, yet at a time when the country needed to damp down its economy it was required roughly to half its short-term interest rates to adopt the euro zone standard at the start of this year. It remains to be seen whether the Irish government can prevent this cut in the cost of finance from fuelling still greater excesses in the property sector. But since busts and bank losses on property lending tend to follow overblown booms in the real estate sector, this could be the time to take a wary view of Irish property.