What is Going On in Europe?

The Euro-crisis is affecting every region differently. But experts say savvy buyers can take advantage of once-in-a-lifetime opportunities.

By Camilla McLaughlin

Volatile” and “markets in turmoil” might be used to characterize the current status of real estate in Europe. Yet, recent data shows prices overall beginning to recover, even creeping up by 1.3 percent overall in the last 12 months, and in a few prime locations, sales are brisk with few indications of an appreciable slowdown.

Sometimes headlines don’t tell the whole story. As tempting as it is to sum up real estate on an entire continent with a catchy phrase, viewing Europe solely through the lens of the fiscal crisis distorts the picture, especially for upscale properties. “Nuanced” is the word Joachim Wrang-Widen, director of affiliate services for Europe, the Middle East and Africa for Christie’s International Real Estate, uses to describe the state of real estate in Europe. “It’s not possible to generalize, not even within individual countries, because markets are quite diverse and run in different cycles time-wise.”

Like the U.S., Europe is a patchwork of markets that differ within a single country and increasingly by asset class, which means the highest price points — the top 5 or even 10 percent of the market — have a dynamic uniquely their own. “When I look at the market that we work in, I think there is a general concern across the board about Europe. Is it specific enough to watch and pinpoint one country? I don’t see that yet,” says Shari Chase, CEO and founder of Chase International.

Still, these are markets in transition. “The desirable places are desirable, no question about it,” says Chase. “But when you say London, people tend to think it’s the whole market of England and it’s not. There are some country homes that are selling, but most people want to be in the central part of London, and it’s the same with Paris. The central cores of areas are the key heart pulse of what’s going on.”

In many countries, tax structures are in flux as purchases by foreign nationals come under greater scrutiny, making tax implications more of a concern for buyers and owners. Buyers are also more discreet, more directed and thoughtful. Chase elaborates: “They are very intellectually optimistic about what they are doing and where they are placing their money.”

All of which explains why the ongoing crisis has done little to cool the enthusiasm of high-net-worth individuals for Europe’s platinum locations and the most desired have, according to The Wealth Report 2012, published by the international real estate consultancy Knight Frank, remained “relatively hot.” Eight out of the top 10 locations in their global Prime International Residential Index are in the U.K., France or Switzerland. Monaco continues to be the most expensive residential location in the world, followed by Cap Ferrat and London.

“I am not seeing a high level of interest from U.S. buyers, although there are always some inquiries from wealthy Americans who are looking for vacation homes in Tuscany or Umbria. We are receiving a significant amount of serious interest from Canadian buyers and have for some time. A great deal of my marketing focus is directed toward Middle Eastern, Russian, Chinese and Latin American high-net-worth individuals who are presently in the market in significant numbers,” says Bob Hurwitz with Hurwitz James Company.

The desire to shelter wealth and assure personal security are prime priorities for wealthy buyers worldwide. “Real estate is the single largest investment people will make in their lifetime, and it doesn’t matter where they are on the wealth pyramid. That means people will want to buy in locations in markets where they know money is safe and where they know they can get out. And that means that well-established markets like London, like Paris, like Monaco, like New York for that matter, are focal points for people with money,” explains Wrang-Widen. Adding to the allure of real property is volatility in equities and bonds as well as in the money market. “Real estate is coming back as an investment medium. It’s going to be there 20 years from now, and you have some control over it,” he explains.

Still, it’s impossible to ignore the Euro-crises rippling through the continent. “This is affecting all the markets,” says Chris Dietz, European director, Leading Real Estate Companies of the World. Although markets in Euro countries are feeling the fallout, many in non-Euro countries, particularly London and Swiss cities, are benefitting.

London has clearly emerged as the preferred safe haven for many high-net-worth individuals, followed by Geneva and Zurich. According to Knight Frank, prices in London overall have increased by 10.5 percent in the 12 months ending in June, while Geneva posted a 6-percent gain and Zurich 5.9 percent. However, these London stats are for the city overall and do not solely focus on high-end areas in central London, such as

Mayfair, Kensington, Knightsbridge and Belgravia, where demand is higher. “London is unique, with extremely high prices and stable market conditions. The challenge for high-end brokers today is having enough properties to keep up with demand,” observes Dietz.

The London market also reflects patterns occurring in other prime locations. Sales volume and property prices might be down in many countries, including Spain, Portugal, and Italy, but even here the data doesn’t tell the whole story. “When you look at the aggregate numbers of these countries, sales and prices have gone down significantly, but once you delve into the stats, you find that some markets are still depreciating while others may have gone down significantly but have plateaued and are now showing minute signs of a potential recovery,” observes Wrang-Widen.

Additionally, some locations, such as Majorca, Spain, have been more sheltered than others. “Prices went down a little there, but in the luxury segment there has never been a problem,” observes Dietz.

Although vacation and resort markets are showing greater declines than cities such as London or Paris, prime second-home locations have an appeal that is difficult to tarnish, no matter where they are located. “The romance, history and grandeur of castles and major estates in the hills of Tuscany and Umbria are always a strong magnet for many affluent buyers. In addition, anything on the coast, particularly the Italian and French Rivieras, are going to attract significant interest,” says Hurwitz.

Clearly, the most under-reported story in the European market is that this is the time to buy. John Brian Losh, publisher of LuxuryRealEstate.com, says buying opportunities have never been better. “If you are even thinking about buying in Europe, now is the time. Prices are down, inventories are up, the dollar is stronger — it’s the perfect storm for buyers.”

“I think the interest will increase as the nature and duration of the Euro crisis evolves and becomes clearer. If there is a complete meltdown, or the conditions in Greece devolve even further and create havoc, prices will drop even further. Astute investors, who are on the sidelines right now watching the ebb and flow, will step up and snatch up some great properties at amazingly depreciated prices. There is the potential for huge upside for anyone with the financial capacity to consummate certain estate purchases now and sell when the market turns around for huge profits,” shares Hurwitz.

Hurwitz consults for several major overseas family and investment funds. He says: “I am very bullish on buying quality properties now and over the next year in the absolute best locations for these portfolios. The greatest amount of profit I have made for my clients has been in the timely and savvy purchase of trophy properties, and the conditions on today’s market are ripe for such investment.”

Paris

Few other European cities capture hearts more than Paris, and few other places speak to the varied motives of buyers today. “Paris provides heritage, culture and a vibrant cosmopolitan lifestyle, but its added advantage is that the price of prime property is often 20-percent to 30-percent less than in central London. Its history, architecture, boulevards, large squares, boutiques and cuisine act as a major pull factor for buyers seeking to combine culture with a fun lifestyle. Buyers are not simply looking for a bricks-and-mortar investment, in my experience they genuinely want to spend short, regular breaks throughout the year soaking up the Parisian culture, one that many see as synonymous with fun, passion and a sense of joie de vivre,” says Mark Harvey, who heads Knight Frank’s French desk.

Upcoming Destinations

The newest luxury star gaining momentum may be Montenegro, which is one of the last unspoiled destinations in the Mediterranean. Most importantly, the government, having learned from other popular European destinations, is limiting development. Germany may not be a rising star, but it is still considered a strong location with a safe political and economic environment, and Berlin is gaining new interest from upscale buyers.

Taxes

Officials in France have proposed a 75-percent tax rate on earnings over $1.3 million, and a 45-percent rate on those earning $191,000 or more. This has prompted a surge of inquiries regarding property in London, Switzerland and Belgium, according to reports in British media and numerous other sources. Additionally, the French government plans to increase taxes on foreign-owned second homes, raising the capital gains on property sales from 19 percent to 34.5 percent. Other countries are also changing tax policies regarding purchases. Monaco recently reduced the tax for individuals purchasing in their own name from 7.5 percent to 4.5 percent. In the U.K., all real estate purchases above $3.1 million qualify for a 7-percent stamp duty, while those purchased through a corporate entity pay 15 percent.

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