Risk of obsolescence growing fast, EPRA event hears

The obsolescence of buildings is one of the biggest risks facing the European real estate industry, according to Jean-Edouard Carbonnelle, CEO of Cofinimmo.

The rising costs of meeting new office requirements and green criteria form some of the biggest risks facing the industry in the next five years, he told an EPRA Insight event in Amsterdam this week. ‘We've seen an acceleration in requirements for office buildings that is absolutely staggering.'

Brussels-listed Cofinimmo is one of the few European companies active in the healthcare sector after launching a strategic reorientation in 2005. Since then, it has slashed the share of its office portfolio to 47% from 100% and is aiming to reduce it further in the next few years. At the same time, the share of the healthcare portfolio is set to rise as a percentage of the total from 35% now to 40% by 2015, Carbonelle said.

'We're seeing negative net office take-up in Brussels,' he pointed out, 'and we believe there will be a further reduction in office space. We are looking at ways of changing part of our office portfolio by selling or converting to residential in the next two to three years..’

Cofinimmo's strong focus on healthcare is also aimed at boosting its share performance. In the US, healthcare REITs trade at a premium to NAV (net asset value), while Cofinimmo currently trades at a discount.

Overall, Europe's listed real estate sector turned in a good performance in 2012, with dividend yields averaging 5% over the 12-month period. But while valuations improved over the year and pending flotations in the UK and Germany are good news for the sector, concerns remain about long-term trends such as obsolescence, also in the retail sector.

In the US, the non-food retail sector is expected to need over 20% less retail space by 2020 and other reports point to obsolescence rising as high as 40% in five years, noted Andrew Vaughan, CEO of Redevco. 'I don’t believe it will be 40% but it will be closer to 40% than to nihil. The trend is structural and here to stay.'

Rachel Lavine, CEO of Atrium European Real Estate, also believes that e-tailing is having a 'crucial' effect on the retail sector, but added that the situation is different for the emerging markets where the CEE specialist she heads is active. 'In Warsaw, MediaMarkt is downsizing its shops, but in the suburbs, they still need big stores. And in Russia, people still queue up when a new 4,000 m2 store opens as most Russians don't have credit cards...The pace (of obsolescence ed.) is slower in the emerging markets.'