Belgium towers over Europe
Brussels’ status as the de-facto capital of the European Union is making it one of the most sought-after real estate investment markets in Europe. During the economic downturn, which began in 2001, the Brussels central business district (CBD) office market has benefited from office demand resulting from EU enlargement. During this period the Brussels CBD was the only market in Europe which witnessed a rental increase. In fact, 25% of office demand in Brussels is driven by the European institutions, other international administrations, lobbying firms and federations. During the last five and a half years, approximately €13bn has been invested in commercial real estate in Belgium, predominately in the Brussels office market, accounting for around 3% of total European investment volumes.
Foreign investors drive the Belgian investment market and accounted for 56% of total investment volumes during the last five years. The leading investor groups are the German open-ended funds with 22% of total investments, followed by Dutch open-ended funds (15%), boosted by one transaction of almost €900m – involving the acquisition of GIB Immo by Redevco in 2001. UK investors have a constant presence and account for 6%.
During the last five years Australian investors, who have 3% of investment volumes, acquired two large portfolios; the Banimmo portfolio and the majority of shares in BIAC, which owned Brussels International airport and the real estate associated with it. Investors from Ireland and the Middle East have held an average of 2% and 1% respectively over the past five years, but increased their share to 5% and 4% in 2004.
Domestic investors continue to be very active and represent the remaining 44% of investment transactions. Primarily they are institutional investors and SICAFIs (Sociétés d’investissements immobiliers à capital fixe). Cofinimmo was the first SICAFI to be introduced in 1995, followed by Befimmo. Today these are the two largest SICAFIs, with portfolio values of €2.1bn and €1.1bn respectively.
There is a total of 11 SICAFIs, with a portfolio value of €5.3bn predominately invested in offices (74%) followed by retail (8%), semi-industrial (7%), residential (5%) and mixed assets (6%).
During the last couple of years the SICAFIs
have largely acquired assets with medium and long-term leases from Federal state sale and leaseback transactions.
The acquisition procedure requires that the first offer is binding, something which many German funds did not like. Consequently this gave the SICAFIs a competitive advantage in a market with high liquidity and a shortage of well-let products. The largest domestic institutional investors active on the market include AXA, Fortis and Dexia.
Since 2000, the Belgian investment market has seen major portfolio deals through merger and acquisition and sale-leaseback operations and trading volumes have grown to over €2bn a year. Before 2000, the Belgian investment market reached approximately €1bn on average per annum. In 2004, total investment volumes in
Belgium peaked with €3bn. However, during the first half of 2005 only €0.5bn has been invested, an amount that should increase in the second half as there are a lot of deals in the pipeline.
Although the Brussels real estate market is dominated by international investors, until recently the development market was principally in the hands of local developers. Recently, however, international developers like Nexity, Cargill, Bouwfonds Property Finance, Hugenholtz Project Groep and JM Construction have entered the Brussels market, underlining their confidence in the potential of the city.
Investor interest in the office market has been focused primarily on the Brussels market
(11.6m m2 of office stock), followed by Antwerp, which is Belgium’s second-largest city and Europe’s second-largest seaport, with 1.8m sqm of office stock. Antwerp has undergone major infrastructure works including a new ring road, the enlargement of the subway network and the connection with the high speed train route which runs from Amsterdam to Paris.
Regional cities like Gent (0.48m m2), Mechelen (0.40m m2), Liège (0.43m m2), Leuven (0.35m m2), Charleroi (0.28m m2) and Namur (0.22m m2) have become increasingly attractive to Belgian investors, particularly for long-lease government deals, but are in the large provincial markets with no established letting market.
While offices are the main focus for investor interest (65% of total investment in 2004), the retail sector continues to be very attractive and is perceived as less risky. The volume of retail
investment transactions in 2004 was unusually high at around 21% of total investment volumes, including the sale of Grand Prés (36,000m2) in Mons to Difa, 50% of the shares of Waasland SC (45,000m2) to an external fund managed by ING, and the sale of the retail park Hydrion (34,000m2) in Arlon to Pillar.
Shopping centres are particularly in demand,
perhaps because Belgium has one of the lowest rates of shopping centre provision per capita in Europe because of strict regulatory controls,
creating scarcity in this sector. Prime yields for high street retail units are reported to have fallen below 5%, with one transaction as low as 4.5%. This is unheard of in Belgium, but not considered unusual elsewhere in Europe. There is no doubt that if a good shopping centre were offered for
sale today there would be investor appetite well below 6%, again breaking the mould by local
standards, but in-line with other principal
The other sector showing rapid growth is logistics. Antwerp is the second largest port in Europe (and Rotterdam, the largest, is very close geographically). Belgium is therefore a natural springboard for the distribution of goods into Northern Europe and the export of European products to the rest of the world. From a real estate perspective this has translated into demand for modern warehouses on the Antwerp-Brussels axis, and in the Limbourg and Liège areas towards the German border. Investors are attracted by this market which is not only dynamic, but historically offers more generous yields than the office or retail sectors. There is therefore high investor demand but due to a lack of product, the logistic investment market accounted for only 3% of the total transacted in 2004.
Some large recent investment transactions include the Dutch fund Celogix acquiring the “Canal Logistic Centre” (44,000m2 in Willebroek, let to Blitz) and the sale by Eurinpro of “Tri Access Logistics” (54,000m2, let to Schenker and ODTH) to Queristics Investments, a joint venture between Dutch and Middle East investors. Kenmore Capital acquired a logistic scheme occupied by Hays Logistics in Olen (18,000m2) as part of a pan-European investment deal. Two other logistics schemes were sold by Eurinpro, one located in Willebroek (55,000m2 , let to Schenker) and one located in Genk (13,000m2, let to NYK logistics), to Standard Life EPGF. Prime yields for logistic schemes hardened to below the historic threshold of 8% during 2004, reaching 7.85% for prime schemes located on the Antwerp-Brussels axis.
Low interest rates and the opportunity to leverage investments through secured debt make real estate very attractive compared with other asset classes. Some institutions are increasing the amount of real estate held in their investment portfolio, moving from 5-10% to 15% of total assets. More funds are being created and they are chasing income-producing assets throughout the different market
segments (offices, retail and warehousing). Yields have hardened in all sectors due to competition between investors, and the lack of well-let product in the traditional investment grade locations is driving money into other markets. The Brussels decentralised and periphery markets, which are driven by the corporate sector, are particularly benefiting from a renaissance after four very lean years. Indeed, the current high vacancy rates and downward pressure on rents outside the CBD offer corporates the opportunity to move into more adequate buildings under attractive conditions.
The yield differential between the CBD and
outside CBD locations is narrowing. For six- to nine-year leases, prime yields outside the CBD have come in from 6.8% to 6.5% in the decentralised area and from 7.1% to 6.7% in the periphery, compared with the CBD where prime yields have been pushed down to around 6%. Yields for buildings occupied by the Belgian Government under an 18-year indexed lease contract are between 5.4 and 6.2%.
With yields at current levels Belgium is very attractive compared with some other mainstream markets; only some Eastern European countries offer more generous returns. The positive yield gap (the gap between the long-term interest rates and the prime office yields) makes real estate investment very attractive, and there is no shortage of willing lenders.
Only time will tell whether the relatively generous yields traditional in the Belgian market are truly a thing of the past. To some extent this is a self-fulfilling prophecy. Provided that Belgium remains on the “buy” list of international investors, yields will remain sharp, and may indeed have further to fall.
Belgian real estate is clearly one of the winners in the convergence that is undoubtedly under way in the European investment markets.
Patricia Lannoije is associate director and head of research Belux for Jones Lang LaSalle