Technology alters real estate values in new unified Europe

By Kenneth V. Smith

Lifestyles, commerce and government regulation are changing quickly in Europe. Some signs include cross-border banking and residential mortgage loans, significant new investments in European real estate by a U.S. pension fund, and even cigarette smugglers who advertise on the Internet to avoid high tobacco taxes.

How and where Europeans live and work is changing not only because of the unification of the economies of 11 countries, but also because of rapid adoption and expansion of telecommunications and Internet technologies. The coming euro currency will cause change not only for the countries participating in the European Monetary Union, but other European countries as well. Many analysts are predicting the strength of the euro on the world economy will surprise Americans and Asians.

Many of the changes are being greeted with enthusiasm, but there are also some localized signs of birthing pains for the new Europe. For example, Frankfurt, Germany, is losing some of its luster as the banking center of Germany and all of Europe. Like the U.S. banks, German banks are automating, consolidating, down-sizing, and moving operations to other cities as telecommunications technology reduces the importance not only of geography but also large work forces.

Consequently, some experts predict Frankfurt will lose an additional 4,000 banking positions within the next several years. There is a surplus of office space in central Frankfurt, and upscale homes in the city have lost value as bankers and other professionals have moved to the suburbs to become American-style commuters.

Location, infrastructure and employment rates are the key factors throughout the world in determining the value of real estate, as Frankfurt is seeing today. The price of a home or the lease rate for an office are directly related to the quality of government services supported by taxes. With the change in banking, local government officials are seeing a loss in tax revenue and they face growing problems in maintaining essential services.

There are reports that some British banking executives are refusing transfers to Frankfurt. According to The European weekly newspaper, Frankfurt lost 14,000 jobs in the private sector in the past three years. Throughout Germany, as many as 200,000 jobs in banking are expected to be cut within the next eight years.

New technology, online commerce and the Internet are also presenting a new set of problems for European governments. For example, Sweden last year attempted to control cigarette smoking by imposing an additional 25 percent value added tax. But, cyber entrepreneurs developed Web pages to advertise much lower prices for cigarettes in neighboring countries, and the Swedish government has rescinded the tobacco tax.

As noted by WebPromote Weekly, "This is the first sign of the direct correlation between Internet trade and Swedish political decisions, and should be alarming news to Swedish policy makers, who must now readapt their legal measures to coincide with the Internet's social and commerce-related powers." It is easy to anticipate similar problems in real estate as governments try to regulate brokers in one country selling property to a national of another country, and a mortgage transacted online with a lender in still another country.

But such dark storm clouds are seen by most financial and government leaders as spotty and temporary. In an upbeat speech on the rapid growth of telecommunications and the booming economy in Europe, B/ritish Telecommunications (BT) Chief Executive Sir Peter Bonfield says profits, growth and expansion will be unprecedented in the next few years. Speaking in New York two weeks ago at a conference organized by Morgan Stanley, Bonfield told investment analysts and executives that "a market almost twice as big as the U.S. local market has just opened for business. It's called Europe."

Bonfield was addressing issues surrounding the expansion of telecommunications services in Europe. But, like nearly all other aspects of the economy, this will certainly have some impact on local real estate values and the ways in which real estate is marketed, sold and financed.

"What we see today is the beginning of a revolution in society as a whole," Bonfield said, "and it's a revolution being driven by the telecommunications industry. The current trend is clear: monopoly, bureaucracy, and stagnation are out; competition, choice and innovation are in."

Bonfield's purpose in the New York speech was to promote the value of BT stock as his company expands services in Britain, Europe and Asia. But, clearly some of the details in his presentation offer signs of how life and commerce are changing in Europe. For example, BT is providing every person in Britain with a free e-mail address. Then, to increase opportunities for British citizens to tele-shop and tele-bank, BT has recently signed a partnership agreement with Microsoft for WebTV.

All this activity in Europe is catching the attention of new real estate investors. For example, last month the California Public Employee's Retirement System (CalPERS) announced a $100 million investment in European real estate. The investment is with Security Capital Global Realty, a Luxembourg-based private real estate investment firm. This is a relatively small investment for CalPERS, the world's largest public pension fund with more than $129 billion in assets.

"A global real estate portfolio offers CalPERS greater diversification and the ability to capture higher investment returns abroad," said Charles P. Valdes, Chair of CalPERS Investment Committee. "International real estate markets are experiencing dramatic growth and recovery. Global Realty offers us the ability to participate in another basket of investable opportunities that exist in foreign real estate markets."

Before making the investment in Europe,CalPERSasked its real estate advisor, Pension Consulting Alliance, about the potential of European real estate. In a report to the fund managers, the consultants concluded that the pension fund should consider international real estate investments for three reasons: the sheer size of the international real estate markets, potential diversification benefits, and the potential for high returns.

The study forCalPERSalso found that the size of foreign real estate markets is hard for a global investor to ignore. Currently, real estate is the world's largest asset class, comprising 54 percent of global financial wealth. The U.S. market is less than one-half the size of the real estate markets elsewhere in the world.

Furthermore, the consultants said that with U.S. real estate markets stabilizing, and many international real estate markets entering a recovery phase, research shows investors are looking abroad to achieve higher returns. According to the study, international real estate can diversify a U.S. based investor's real estate portfolio by reducing volatility and offering investors access to greater returns than found in the U.S. real estate market.