Market Data

A Stabilizing Euro Creates Real Estate Opportunities

As of last January, the euro is legal currency in 12 of the 15 countries that make up the European Union. Denmark , Sweden , and the United Kingdom have opted out for the time being.

EU bank transfers, including the purchase or sale of real estate properties and accounting, have been performed in euros since January 1999, and the currency has experienced few problems. Since the euro facilitates commerce by allowing properties and products to be compared equally among participating EU countries, without concern about possible currency fluctuations, its growing acceptance will have a tremendous effect on global commercial real estate transactions and investment.

The Euro and Commercial Real EstateWhen first introduced, the euro was valued below the U.S. dollar and participating EU countries' real estate investments in the United States were down considerably. Many deals in the pipeline in late 1998 and 1999 fell through because the price of the properties increased by as much as 30 percent, which no longer made them viable investments. As the currencies get closer in value, U.S. investors' interest and activity have increased. Because of the perception that the euro still is undervalued, well-informed investors are pouring money into the 12 states with the expectation of higher returns in three to five years when they plan to reinvest.

Investment in the United States by Europeans from the 12 euro currency countries will come back strong, most likely in the next two years. There is pent-up demand among investors in these countries who want to put their money into U.S. properties to diversify their portfolios and because they see the United States as a safe haven.

Euro FactsThe graphic symbol for the euro looks like an E bisected by two parallel horizontal lines that represent the currency's stability. It was inspired by the Greek letter epsilon, in reference to the cradle of European civilization and to the first letter of the word Europe . The coins and notes have one common side; on the reverse side is a local design representing the country that issued the note.

The euro has increased financial stability in Europe. Participating EU states are bound legally to continue the fiscal discipline detailed in the Maastricht Treaty, including sound management in public finance, price stability, exchange rates, and interest rates. Under the Stability and Growth Pact enacted in July 1997, EU member states not complying with strict guidelines for managing public finances can be sanctioned.

The euro also consolidates and extends Europe 's single market. Trade and investment are enhanced greatly, since there are no transaction costs or currency exchanges in the euro zone.

The euro creates new opportunities in the financial sector as well. It facilitates the introduction of secondary money markets to increase the availability of capital for real estate development and purchases.

The European System of Central Banks, which comprises each country's central banks and the independent European Central Bank, defines and implements the euro's monetary policy. The ESCB also conducts foreign exchange operations, holds and manages participating states' foreign reserves, and promotes smooth payment system operations.

Euro vs. the DollarWhen the euro first was traded as a currency in the 12 member states, several factors led to its decreased demand:

  • investors hesitated to buy the currency, since no one knew how the notes and coins would be accepted;
  • speculation was that strong currencies such as the German mark would be pulled down by weaker currencies such as the Italian lire or Spanish peso; and
  • there was a lack of supply of the currency.
Yet the euro's value has risen steadily since that time. The following factors influence the increasing demand.
  • nvestors now have a currency in place and can measure its performance.
  • The smooth transition by the participating countries is increasing the public's acceptance of the currency.
  • Tourists and investors traveling and investing in Europe now buy one currency instead of 12 or 15.
  • Since the euro has a €500 note and the United States only has a $100 note, it most likely will become the currency of business conducted in cash.

In the future the euro could account for nearly one-third of the global foreign exchange reserves. The ECB has cooperated with the U.S. Federal Reserve and other central banks to ensure sufficient liquidity for market and other economic transactions.

Today's real estate investors are looking to buy low and sell high worldwide. To stay ahead of the curve and the competition, commercial real estate professionals should be informed about global markets and currencies to anticipate their clients' questions and to offer sound foreign real estate investment guidance.

Manfred Chemek, CCIM, CIPS, GRI

Manfred Chemek, CCIM, CIPS, GRI, is chief executive officer of Manheim International, a real estate investment and consulting firm in Houston. Contact him at (281) 556-9421 or mchemek@ccim.net.

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