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Nicolas who?

Most French business people are practically giddy over the election of Nicolas Sarkozy as their new president. A fiscal conservative, Sarkozy wants to reform the economy in part by cutting income taxes and lifting the current limit on working beyond 35 hours a week. Yet talk to someone in Paris commercial real estate about the impact of his election and you get a very different response. Election? Quelle election?

The reason for their lack of excitement about the Sarkozy revolution is that at the moment the Paris real estate market doesn't need to be saved. “The market is still booming,” says Tanguy Quero, a research analyst for Jones Lang LaSalle in Paris. Real estate investment sales volume in Paris climbed 57% between 2005 and 2006, from €11.8 billion to €18.5 billion. This year, investment seems to be continuing to grow. Investment came in at €7.1 billion in the first quarter of 2007, compared with €4.6 billion in the first quarter of 2006.

“Today the real estate market is more dependent on how the whole Eurozone is going,” says Quero. “It's more and more international, it's more and more integrated. We don't look at the election as a real factor.”

Nearly 65% of all real estate investments were by non-French investors in the first quarter, and 90% for Paris's office market, the largest in Europe. Not surprisingly, yields have fallen 25 to 50 basis points over the last 12 months and now range from 4% to 4.25%.

Nor will they need Sarkozy's help anytime soon. “We believe that the French market, and specifically the greater Paris market, will be going on like this for at least two or three years,” says Quero.

Where the cielo isn't falling

Recent reports out of Spain make it sound as if the whole Spanish real estate market has been flattened. An April market crash took some home residential construction company stocks down as much as 65%, and some brokers are reportedly slashing new home prices by as much as 25%.

In spite of the dour news, the year looks good for institutional investors outside residential. In Madrid, office vacancy rates in the CBD hover around 3% to 4%, according to Dolores Martinez, a research analyst at Cushman & Wakefield's Madrid office. CBD rents range from about €2.32 to €3.06 per sq. ft. per month, about 16% above where they stood in 2006.

Although Cushman & Wakefield estimates more than 9 million sq. ft. of new office space will come on line within the next two years, Martinez isn't concerned. Absorption in the past two years has been strong — over 7 million sq. ft. annually. “The prospects, at least for this year, are good for the office sector,” she says.

Next year? Martinez concedes that Madrid prices can be volatile. Many analysts forecast bad news for an economy that has long relied on home building for much of its growth.

A Hamburg flat gets a shot in the arm

After hundreds of years of periodic destruction, plenty of buildings in Europe carry bullet holes and other scars. But not many apartment buildings display those kinds of souvenirs on the inside.

Recently, however, the new American owners of a building in downtown Hamburg found that one of their units still had cracks in the plaster walls from bomb damage in World War II.

This might sound like neglect on the part of the former landlord, but Michael Cohen, international vice president for Behringer-Harvard, a Dallas-based property investment firm, says the former owner had actually worked hard to upgrade the wiring and plumbing of all 144 units of the property.

Behringer-Harvard, which bought the building two years ago, has continued to renovate as well. Most tenants agreed to the free upgrade, says Cohen. Only 12 turned it down. In fact, the company never even got access to the bomb-damaged apartment until the tenant finally left — after 45 years in the building.

The damage had been protected by what some would argue is another relic: Germany's strong tenant laws. Perpetually renewable leases and rent control keep homeownership in Germany down around 35% — and also keep the landlord out.

According to Cohen, “If a tenant doesn't want you to come in, they don't have to let you.”

Bennett Voyles is a veteran commercial real estate reporter and National Real Estate Investor's Paris correspondent. For questions or comments, e-mail [email protected].

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