The FINANCIAL — The hunt for secure long-term income is driving European real estate investment as the industry hedges against potential interest rate rises and an uncertain geopolitical backdrop, according to Emerging Trends in Real Estate Europe 2019.
The annual report, published jointly by the Urban Land Institute (ULI) and PwC, is based on the opinions of over 800 real estate professionals in Europe, including investors, developers, lenders, and advisors.
This caution is also reflected in the expectations related to the availability of equity and debt, with around 28% of survey respondents believing that the amount of equity available for refinancing or new investment will increase, compared with 50% last year. However, last year’s confidence was particularly high, and there are few current concerns about liquidity, other than for challenging sectors such as retail, as demonstrated by the majority (54%) who believe the availability of equity will be about the same.
One of the main barriers to investment continues to be the availability of suitable assets as capital continues to flow into Europe, with strong increases expected from Asia. This is putting pressure on the core end of the market with 70% of survey respondents either agreeing or strongly agreeing that prime assets are over-priced.
Interest in alternative asset classes continues to rise in face of tough capital markets environment
One response to this more challenging capital markets environment is that investors are turning to asset classes that are experiencing structural tailwinds and which are less likely to be affected by the current cycle. But Emerging Trends in Real Estate Europe suggests that this is only part of the story.
Residential stands out in this respect, with seven out of the top ten sectors preferred for investment and development, including some form of residential, ranging from co-living, student housing, retirement living to social housing and regular residential housing.
In addition to residential, logistics and niche sectors such as data centres and flexible offices are making up the top ten. Logistics clearly continues to benefit the growth of e-commerce. Traditional formats such as city central or suburban offices and retail formats continue to languish at the bottom of the rankings.
European cities ranked for investment and development prospects
The annual city rankings included in Emerging Trends in Real Estate Europe reflect the industry’s appetite for smaller, “late-cycle play” newcomers combined with some of the larger, established markets, while at the same time considering geopolitical risks. Lisbon jumped ten places to take the number one spot in a late-cycle play, with interviewees also praising the city’s quality of life and political leadership.
The more established German cities still dominate the top ten with Berlin taking second place followed by Frankfurt, Hamburg and Munich ranked five, seven and ten respectively. However, for some, the year-on-year popularity of these cities is beginning to take its toll with many respondents citing overpriced investments in these locations.
The rest of the top ten is largely made up of cities, such as Madrid, Amsterdam, Vienna and Dublin that score positively on real estate fundamentals and rental growth prospects, but in many cases also on quality of life, connectivity, innovation potential and attractiveness to talent.
Despite investment volumes and occupier demand for offices in London holding up well, Brexit continued to overshadow London’s short-term prospects, with 70% of Europe’s senior professionals believing that the UK’s ability to attract international talent will fall following the March 2019 deadline whatever the final deal.
Social value of real estate continues to grow in importance
The report also examined the growing influence of social value alongside the financial returns from investments. Nearly 60% of survey respondents believe the industry is moving towards using a wider range of non-financial measures to assess the value of real estate and real estate businesses. Similarly, 59% agree that non-financial metrics are increasingly important in measuring returns.
The current outcome of this trend is a greater focus on combining uses such as co-working facilities, retail and last-mile logistics, with non-commercial uses and placemaking elements, such as affordable housing, community centres, public spaces and childcare facilities.