Increased demand from investors and improving occupancy levels combine to bring development into play – with Europe’s core cities still holding sway, writes Russell Handy 

With prime office space across Europe in short supply and less fear over leasing risk, investors are now turning their attention to developments and refurbishments.

“The best office buildings and locations are getting secured quickly,” says Richard Holberton, CBRE’s EMEA head of occupier research. “We’re now seeing strong declines in office vacancy levels across EMEA.”

The relative strength of office employment has helped to drive vacancy rates down, Capital Economics says, with vacancy rates down in most euro-zone markets last year.

Levels of empty office space in European cities are at their lowest since 2012, CBRE says. Paris, Frankfurt, Brussels and London’s West End office market all saw vacancy rates decline last year, with stronger falls in Madrid, Budapest and Dublin.

The advisory firm notes the positive impact that a lack of development has so far had on rents.

Conversely, confidence in the market’s need for quality office space is playing its part in investment strategy, with redevelopment – and in some cases ground-up speculative construction – no longer regarded as taboo.

M&G Real Estate is funding what it says is the largest-ever UK speculative office development outside London. The investment manager is backing developer Ballymore’s £200m Three Snowhill project in Birmingham. 

The 420,000sqft development will go towards satisfying demand from UK and foreign firms for office space, says M&G Real Estate chief executive Alex Jeffrey.

He says the scheme will benefit from low vacancy rates, with occupier demand outstripping supply and pushing rents upwards.

Also in Birmingham, developer Argent and Hermes, asset manager for the BT Pension Scheme (BTPS), is building speculatively.

The decision to put a spade in the ground without pre-let commitments was based on a belief that large UK cities such as Birmingham pose little risk of oversupply, Chris Darroch, Hermes fund manager, told IPE Real Estate recently. The scheme will add 1.8m sqft of office space to the second-largest UK city between 2018 and 2025.

Investing speculatively in secondary cities such as Birmingham might seem bold. Phasing developments is a way to avoid future vacancy risk, an approach that Argent and Hermes are taking.


In Paris, sales of developments, or vente en état futur d’achèvement (VEFA), as well as refurbishment and renovation prospects, have increased. While the Paris market may not be ready for fully speculative developments, there is clearly a rise in appetite for leasing risk. “We certainly began to see more VEFA transactions in the Paris region last year,” says Karim Habra, head of France at LaSalle Investment Management. “It’s happening more.”

The firm last year invested in the 58,000sqm Echo Ouest office scheme in Levallois, due for completion next year and pre-let to L’Oréal.

“We are looking at more opportunities like this at the moment,” Habra says.

To the northwest of Paris, the Kosmo office project is currently being viewed by investors, with an off-market deal a likely outcome for the asset, according to a source. The 25,000sqm Avenue Charles de Gaulle site, in Neuilly-sur-Seine, is due for completion in 2018.

Primonial REIM’s recent purchase of Perella Weinberg’s Les Miroirs A and B scheme suggests appetite for leasing risk and confidence in future occupier demand. The asset’s current tenant, global manufacturing firm Saint-Gobain, is due to vacate the property between now and 2019 to move into new headquarters nearby.

Buyers of assets with leasing risk – or preferably with tenants lined up to move in – will be closely watching rental growth prospects in a city where leases, typically of three, six or nine years, are lengthening as tenants seek out better deals in return for commitment. Office occupiers in the French capital have enjoyed significant incentives in recent years, including rent-free periods of up to 18 months.

UBS Asset Management Global Real Estate this year sold a Paris office development, with demolition and a complete rebuild scheduled by 2020.

The investment manager’s Euro Value Added Real Estate Fund sold the building in La Défense to LaSalle Investment Management, which was acting for Abu Dhabi Investment Authority’s Tamweelview European Holdings. Demolition of the building will start later this year.

With just 13% vacancy, France’s tallest office tower, Tour First, changed hands in January this year. Beacon Capital Partners sold the 80,000sqm asset – the French headquarters of accountancy firm EY – to AXA Investment Managers-Real Assets.

Isabelle Scemama, head of funds, said the asset was a typical example of the kind of properties its latest vehicle, the AXA CoRE Europe fund, would target. With €500m raised for the pan-European, open-ended fund and an initial €700m investment capacity, the firm’s focus is on core European real estate assets.

The fund, Scemama says, is focusing on “cities and not countries”.

What all the above examples have is their location – with central Paris effectively out of bounds to the ground-up developer. The nature of the French capital does not allow for wholesale developments, says Joe Valente, head of European Real Estate research and strategy at JP Morgan Asset Management.

“Refurbishment and renovation is a more likely route for those looking to invest in Paris, with facades retained and reshaping taking place within.”

The Paris office sector, he says, is a market where opportunities do exist – providing investors are willing to venture into redevelopment and refurbishment strategies.

Valente says that while JP Morgan Asset Management is not excluding the comparatively less mature office markets of central and eastern European countries, the firm is focused more on Germany, the UK and France, attracted by their macroeconomics.


Similar to AXA Investment Manager’s core city approach, TH Real Estate is focusing its efforts on 42 European cities it feels offer long-term growth prospects for a new, TIAA-backed fund. The firm assessed 200 cities for their quality of life, urbanisation and growth factors.

German cities ranked particularly highly in the firm’s Tomorrow’s World study, with Munich and Berlin leading the way. Both cities are attracting the attention of investors comfortable with the renovation and redevelopment route.

“We are seeing an increasing interest from investors for strategies focused on gateway and, so-called, smart cities, as opposed to countries”
Paul Hastings

Wealthcap recently bought the new Baywa headquarters in Munich for around €280m. The 54,000sqm asset, at Arabellapark, is being revamped and expanded by developer Competo. Completion is scheduled for October next year.

In Berlin, meanwhile, Patron Capital and developer Suprema have relaunched an office scheme in the city’s Franklinstrasse in Charlottenburg, also due for completion next year. Tenants, including the German government-backed Physikalische Technische Bundesanstalt (National Metrology Institute of Germany) and the Media Design Hochschule university for media and design, have agreed to take space in the asset.

Patron Capital said its scheme offers large floorplates – which it says is currently in short supply in the German capital.

Christoph Ignaczak, investment director at Patron Capital, says the redevelopment’s flexible floorplates can accommodate “both smaller lettings and larger requirements, which have traditionally been difficult to meet in the increasingly popular” City West area of Berlin. 

Strong cities in what many regard as “core Europe” still clearly hold sway. 

“We are seeing an increasing interest from investors for strategies focused on gateway and, so-called, smart cities, as opposed to countries,” says Paul Hastings real estate partner, David Ryland. “These strategies are based on long-term trends in the market and their likely impact on real estate including urbanisation, demographics and the potential for long-term growth including population growth and discretionary spending”. 

Level corporate tax field is challenge for Europe

A week is deemed a long time in politics. A year, therefore, may seem like a lifetime. But it is worth casting one’s mind back to 2015’s Scottish independence referendum.

In the weeks running up to the vote, AEW Europe held an evening debate at London’s Caledonian club. With a kilted bagpiper present to welcome delegates and the prospect of Scotland going it alone, the event raised the issue of how to attract large, multinational firms and boost employment.

The idea was mooted that in the event of a yes vote, Scotland could have used corporate taxation levels as a way of enticing firms to relocate north of the border.

History took another course, leaving the undivided UK now playing catch-up with its European peers. Some call it a race to the bottom. The country’s chancellor, George Osborne recently announced a move from 20% to 19% next year, with a further cut to 18% proposed for 2020.

Ireland has gradually cut corporate tax from 50% in the early 1980s, to just 12.5% today. The low level, says CBRE’s head of research for Ireland, Marie Hunt, has helped attract office occupiers and helped cut unemployment levels. Ireland introduced the 12.5% level in 2010.

The Irish economy grew by 7.5% last year and Dublin has clearly benefitted from the low level, with several major multinational firms from the technology sector opening offices in the Irish capital. The presence of the likes of Amazon, Google and Facebook has, in turn, attracted international real estate investors, including Germany’s Allianz, Bayerische Versorgungskammer (BVK) and PATRIZIA Immobilien in recent months.

Google has also moved staff into The Netherlands, where corporate tax is 20%. The internet search engine firm is investing around €600m in a data centre in Eemshaven, Groningen. However, the move is more motivated by logistics than taxation, with Eemshaven in close proximity to a major internet cabling junction, linking the US and Europe.

While there are, of course, countries offering lower levels of corporate tax, other issues such as labour costs and rent levels are also significant factors in the relocation decision.

Nevertheless, there is concern within the euro-zone’s real estate sector that such varying taxation levels within one economic community are creating disparity. One investment manager told IPE Real Estate at MIPIM this year that he hoped to see the day when Europe becomes a “level playing field”.

While France and Germany respectively offer corporate taxation levels of 33.3% and 30.175%, rates vary across Europe from 0% to 35%.

AG Real Estate chief executive, Serge Fautré, says: “It’s becoming ridiculous. If we are in Europe then we should have a coherent, one-level tax base.

“That’s a major challenge for Europe in years to come.”

Ireland, says Fautré, who chaired the European Public Real Estate Association from 2005 to 2009, has “been very smart”.

“We need working people, so we need corporations.”

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