Property in S. Europe

LONDON (Reuters) – Southern Europe will deliver the strongest investment returns from retail property in the next few years, but Britain’s commercial property boom is set to fizzle out, Arlington Securities told Reuters in an interview. Meanwhile, the biggest returns from industrial property will come from major distribution hubs in Northern Europe – in Belgium and the Netherlands – and around ports on the Mediterranean and Adriatic coasts like Trieste and Marseille, Arlington’s head of research Andrew Smith said. Arlington is a property services and fund management firm and is owned by Australia’s Macquarie Goodman. It has 12 billion pounds ($22.33 billion) in assets under management and helps to manage the retirement savings of staff at Britain’s Barclays Bank, as well as some UK, Swiss, and Dutch local authority and private sector pension funds. Smith said an improved economic outlook, coupled with the spread of international retail networks, augured well for retail and industrial property investments on the European mainland. «Although retail sector performance has started to falter in the UK, European markets are benefiting from improving consumer confidence and from increasing cross-border demand from big international retailers such as Spain’s Inditex, Sweden’s Hennes & Mauritz, and Britain’s Tesco,» he said. His top tips were in the south, including Spain and Italy. The Spanish retail sector was likely to benefit from an immigrant-fueled and increasingly prosperous population, while deregulation in Italy’s fragmented market would give bigger international retailers greater market access, he said. Industrial property The growth in international retailing, together with a boom in Asian imports and an eastward shift in European manufacturing, also threw up investment opportunities in industrial property because the continent’s warehousing and distribution network was expanding, he said. Smith said investors could exploit those opportunities by putting some of their money to work in Arlington’s European Logistics fund, which he hoped would grow to about 1 billion euros, from around 270 million euros currently. ProLogis, the biggest US owner of industrial property, last month raised 650 million euros for its European division in an initial public offering of shares. Less appealing and closer to peaking was Britain’s pricey commercial property market, where Smith forecast a second-successive annual total return – which combines capital and rental income growth – of almost 20 percent in 2006. Despite the introduction of tax-efficient real estate investment trusts (REITs) in the UK next year, the seeds of slower growth were being sown as office construction picked up, retail competition intensified, and UK pension funds met their asset allocation targets for property, Smith said. «REITs will reinforce demand for property and help to extend the run of strong returns – nowhere more so than in the UK. But that isn’t going to go on forever,» he said. Arlington expects UK total returns to slow to 9 percent in 2007 and 5 percent in 2008 as a London office boom tails off. As a result of this expected slowdown, British institutional investors were increasingly looking to diversify their property holdings abroad – initially into Europe, but also beyond. «Whereas European investors, and the British in particular, have been cautious in their approach to cross-border investment, they are becoming bolder,» Smith said. «Some are prepared to make the jump to a global strategy.»