Arbitrage Real Estate participated at the launch of the Emerging Trends in Real Estate Europe 2016 report, which was presented by ULI Europe’s CEO, Lisette Van Doorn in PwC's More London riverside offices in London.
Based on the opinions of more than 500 internationally renowned real estate professionals, the report provided an outlook on European real estate investment and development trends, real estate finance and capital markets, as well as trends by property sector and geographical area. This year’s responses highlighted that the clear challenge to the industry is less about bricks & mortar and more about services. As one interviewee concluded: “20 years ago we had tenants, now we have customers, in 20 years’ time we’ll have guests”.
Herein below we make reference to the key findings, as summarized by Gareth Lewis, Director at PwC.
Key Trends in 2016
Optimistically cautious
Generally respondents to the survey were optimistic about 2016 however with a stronger undercurrent of concern than previous years. With abundant equity in most markets, and debt flowing relatively freely there is still an incredibly positive view on capital flows for 2016. Equally the majority felt interest rates would remain low meaning many pension funds, sovereign wealth funds and private equity investors will still find the difference between European real estate and bond yields compelling. Cross-border capital flows are expected to increase, but at a more measured rate than 2015.
Changing landscapes
The real estate landscape however is changing with the effects of urbanisation driving investors to think more and more about cities or even specific districts. The 5 leading cities for investment prospects in 2016 are Berlin in Number 1, followed by Hamburg, Dublin, Madrid and Copenhagen. Many interviewees back the German capital to continue its positive momentum and thrive well beyond 2016 based on its young population and its growing reputation as a technology centre. Yet London and Paris attracted by far the most capital in 2015 (these two gateway cites saw €57 billion of deals in the year to Q3 2015) and it’s likely to be the same story in 2016. So their relatively low rankings at no.15 and 22 essentially reflect the strengthening recovery and improving prospects of Europe’s other real estate markets that are perceived to be not so far through the cycle.
Shifts to regional centres
There is a continued shift to smaller capital cities or regional cities like Birmingham and Manchester in the UK. Their ranking reflects the positive view expressed during the interviews on UK regional cities in particular. This is very much a theme reflected in ULI's Emerging Trends report in the US, which identified a strong trend towards investing in smaller, regional cities referred to as “18hr cities”.
Alternatives become mainstream
The increased liquidity of European markets goes hand in hand with a continuing shortage of assets to buy. The availability of prime assets is expected to get worse, with 63% of respondents thinking prime assets are overpriced. That’s why nearly 80% of respondents see development as an attractive route to acquiring prime assets.
Healthcare, hotels, student accommodation and data centres are all expected to outperform as sectors benefitting from urbanisation and long-term demographic trends - with 66% of those who are considering going into alternatives citing this the main attraction. Whilst it is the alternative sectors that take top spots in the ranking of investment prospects for 2016, it is high street retail that comes out top - further highlighting the industry’s view that urbanisation is a megatrend to follow.
There was a stampede of capital into the Logistics sector during 2015 – a sector clearly benefitting from the impact of e-commerce - and the signs are that there will be more of the same in 2016.
Industry in transition
It was clear from the many interviews that participants in the industry are acutely aware of the changing world of real estate, beyond simply the influence of global capital flows. A combination of the disruptive forces in the occupier market, and a long-term, low yield, low growth environment look set to create a much more global competitive market - in which particular skill sets will be needed to access value. And some predict, that the more intense, sophisticated property management used by residential operators and serviced offices will trickle across to other real estate classes.
But those canvassed by Emerging Trends Europe held polarised views on many areas related to these market disruptions. Optimal lease lengths, the credibility of the flexible, shared/serviced office model, changing operational skill requirements for property managers, and how they should alter traditional property valuation methodologies. The survey also highlighted concerns over a lack of alignment between how owners, managers and occupiers see a well-performing building and the need for new language around this.
You may access the full report here
