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Charting a course for European real estate investment.

American investors planning to take advantage of the anticipated boom in European real estate should study more than just a few phrases in French and Italian, according to the experts at the Arthur Andersen Real Estate Group.

Together with the London-based law firm of Nabarro Nathanson, the Arthur Andersen Group is advising would-be investors that, while the European market presents some very real investment opportunities, it also is rife with radically different trade and tax laws that could trip up American buyers.

To help American investors evaluate their opportunities, the Arthur Andersen/Nabarro Nathanson partnership has released a 168-page guidebook, entitled Building a Stake in Europe. The book lists the different tax and legal concerns of real estate investment for ten European markets, including Central Europe.

One of the dominant themes in this discussion is the establishment this year of the European Community and its single, common market, which is expected to create a wealth of opportunities in commercial, leisure, and industrial property investment. In addition, substantial improvements in Europe's infrastructure are expected to provide an added economic boost to the entire continent.

Right now, many European economies are in recession, with the typical accompanying flattening of property and other markets. For this reason, experts are advising American institutions hoping to cash in on the E.C.'s anticipated upswing to think about buying now, while building and land values in many countries remain low.

Timing is right

According to DAvid Sproul, a tax partner in Arthur Andersen's London office, 1992 will be a great year for Americans to invest in European properties. He cites a range of "solid, economic" opportunities for investors both conservative and daring: from property in established markets, like France and the United Kingdom, to markets with enormous growth potential, like Spain and Portugal, to the big question marks of Central and Eastern Europe.

"This enthusiasm is based on real strength," Sproul says. He notes that Europe's economic growth projections for next year and beyond average between 3 and 3.1 percent. This is well above U.S. rate of roughly 2 percent. All of the European countries are at or above 2.5 percent; some countries, like Spain and Germany, have much higher growth projections.

"Prices now are as low as they are likely to be for some time," says David Bramson, director of Nabarro Nathanson's property department. "Any industry that comes in will be welcomed with open arms. Doors will be opened at planning and zoning commissions for the best possible sites and the most competitive building contract prices.

"If you're trying to establish your place in Europe, there couldn't be a better time," he urges.

No single market

However, Sproul and others caution that Americans looking to cash in on the European boom should do some homework first.

The most important for American investors, Sproul says, is a simple one: Despite the establishment of the European Community and its common trade market, "There is no common European real estate market, no common set of real estate laws, no common building regulations, no common rules for planning--and there aren't going to be." Real estate simply is not covered in the E.C.'s single market rules, he explains.

One major exception to this rule is taxes, Sproul says. Experts are predicting that European real estate transactions, like all other international business conducted in Europe, will be affected by forthcoming E.C. Commission directives.

Specifically, the directives are expected to cover a range of direct and indirect tax issues, including the payment of dividends and interest and the handling of profits and losses. If adopted, the directives most likely will allow each E.C. member country to establish its own legislation in order to implement them. As of now, however, taxation varies from country to country.

For example, in a typical scenario, an investor purchasing a building in Germany would pay a transfer tax of 2 percent of the building's purchase price, plus notary and land registration taxes of roughly 1 percent. If the property is rented or otherwise makes money, the German government charges 46 percent corporate income tax from non-resident owners. In addition, annual net assets are taxed at a flat rate of 0.6 percent; this tax is calculated on a net asset value, or "standard tax value," which typically equals less than 20 percent of the property's fair market value.

In contrast, an investor buying a building in Italy will be charged a registration tax; depending on individual circumstances, the tax will equal either 8 percent of the property's purchase price or 100,000 lire (about $87 when JPM went to press). In addition, a separate land registry tax of 100,000 lire and a cadastral tax of 50,000 lire will be levied.

Non-Italian investors will be charged a 19 percent value-added tax unless they employ an Italian VAT representative. And, if their building generates income, the owners will be charged 47.8 percent Italian corporate income tax. (Potential or assumed income generated from real estate also is taxed; the tax is levied on cadastral income and is based on land registry details.) Any increase in the property's value is hit with a progressive tax, assessed every ten years, which ranges from 5 to 30 percent.

Taxes no doubt will be a major concern to U.S. investors, as all European investments are subject to both U.S. taxes and all of the commercial, financial reporting, employment, and tax provisions of the governing country. Thus, Sproul encourages potential investors to consult with tax and legal specialists familiar with the various European tax structures.

Investing vs. developing

Still another important distinction for Americans eyeing European real estate is the one between areas of investment and development.

According to Sproul, institutions seeking investment properties should look to developed markets like Paris, Frankfurt, and London. "This is where most of the capital flows are coming at the moment, in terms of buying leased-up buildings as investments," he says.

In contrast, markets that are ripe for development, like Spain, Italy, and Central Europe, offer a different kind of opportunity.

"This is a very exciting time for people with vision," Bramson says: "not for property investment but for development. If you move outside of the European Community and into the ex-Communist countries, you will see people coming in to develop the sort of facilities that these countries need: hotels, residences for expatriate workers, and short-term office space."

Burgeoning markets

One market that has been gaining more attention from Americans and other foreigners in Belgium and the Netherlands.

The Low Countries are home to three of the world's largest ports and have been major European distribution centers for hundreds of years, says Henk Knuvers, a tax partner in the Amsterdam office of Arthur Andersen's International Property Group. And, despite anticipated competition from newly opened Eastern European ports, they are expected to continue as major economic centers.

In particular, the city of Brussels is expected to expand as an administrative capital, becoming what Knuvers calls "a Washington, D.C., of Europe." Brussels has a very high rental growth rate, which ranged from 10 to 15 percent over the last five years.

Another growing market for foreign investors is Germany. According to Daniel Borger, senior manager in Arthur Andersen's Frankfurt office, Germany's central location makes it ideal for foreign companies seeking to establish a foothold both in the E.C. and in the former Eastern Bloc countries. In addition, the German real estate market now is a hybrid of an established, industrialized market and an under-developed market in sore need of even the most basic facilities and services.

The recent reunification of Germany has produced seriously mismatched supply and demand, Borger says: "Lots of demand and very little supply. We basically need everything." This includes office, residential, hotel, and warehouse space.

To take advantage of opportunities in Germany and throughout Europe, the Andersen/Nabarro experts are advising investors considering Central and Eastern Europe to establish partnerships with local developers, investors, or other real estate professionals.

"The right way to get into these markets is to do so with local partners," Bramson says. "You can take advantage of the local knowledge, deal better with the local institutions, and get things through smoothly. This is the best way to make use of the vision that U.S. developers are known for."

Martha Schindler is associate editor of the Journal of Property Management.
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Title Annotation:Investment Insights
Author:Schindler, Martha
Publication:Journal of Property Management
Date:Jan 1, 1992
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