With the advent of the Euro, the problem of converting values into the new currency arose for the real estate market. In a certain sense the conversion was and is simple. Prices expressed in national currency have been or will be converted with the fixed exchange rate (for example €1 = 1,936.27 Lire). However, since 12 different national currencies are involved in the conversion process and the fixed exchange rate of the Euro contains several decimal points, according to Jones Lange La Salle the conversion will undoubtedly cause price rounding (both up and down) – even for property values, for example for asking rents.
A potential price increase is a topic of conversation not only for real estate but also for other goods and services. ABN-AMRO's current estimate anticipates a 0.7% increase in consumer prices in the Eurozone due to price rounding alone.
According to La Salle, the "rounding" effect will accelerate the slowdown of European real estate markets as a consequence of the probable rounding of rents downwards (reaching the first useful Euro) without taking into account the correct mathematical calculation. Furthermore, the “Euro effect” will cause an average (unweighted) drop in maximum rental rates of 0.9% in Europe. The highest effect will be recorded in Berlin and Dusseldorf, the most moderate in Paris.
Another problem that arises is that of the conversion of historical real estate values. It is important to underline that there is no “correct” method of converting historical values. Different organizations and companies use different methods. Jones Lang LaSalle decided to use the method used by the European Central Bank to convert the historical data contained in its databases. With this method all historical data are converted from national currencies at the fixed exchange rate since 31 December 1999 (31 December 200 for Greece). This method, based on a fixed rate, has the advantage of not changing the historical values of rents, profits and capital values. The method is also based on the methodology used by those European institutions closest to the EMU. In practice, this means that we can quote the % change in rents in a given city for the period prior to 1999 without running the risk of it being altered due to conversion into Euros with a variable rate.
source: Real Estate Observatory
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