ULI PwC 2020 Report

PwC ULI: Headwinds not deterring investors

The threat of rising construction costs, demand for affordable housing and the shadow of political uncertainty are all playing on developers’ minds as they plan for 2020.

Europe’s property leaders continue to have faith in real estate as an attractive and in-demand investment class, despite strong political and economic headwinds, according to the latest Emerging Trends in Real Estate Europe 2020 report by PwC and the Urban Land Institute.

Cutting carbon emissions and meeting institutional investors’ calls for greater social responsibility are rising up the agenda

With interest rates set to stay lower for longer and bond yields in many European countries in negative territory, real estate income retains its broad appeal to investors, especially in comparison to other asset classes. Equity and debt are expected to remain plentiful for most real estate sectors.

With ongoing political tensions as a result of which economic growth is stagnating, there is little evidence of complacency given the inherent risks in a late-cycle market where values are above historic levels, with market participants careful how they deploy capital with a focus on cities that offer liquidity and stability.

Lisette Van Doorn, CEO of ULI Europe, said: “The search for secure, stable income explains the continued strong interest from investors who are continuing to allocate vast amounts of capital to real estate, especially in comparison to other asset classes. At the same time, the entry to the new decade is marked by many more market participants thinking strategically about the bigger investment picture in which mixed-use, smart mobility, density and greater use of technology are all integral to the success of locations in which they invest.”

The report, published annually by the ULI and PwC, is based on the opinions of over 900 real estate professionals across Europe, including investors, developers, lenders, and advisors.

Filled with caution

The positive but cautious approach was notable in the face of geopolitical concerns and industry challenges.

More than two thirds of respondents said rising construction costs will have the biggest impact on their business in 2020. This was particularly significant for those investors relying on a build-to-core strategy in order to source assets. A lack of affordable housing also remained an area of concern and opportunity; 61% of respondents said they believed the problem will worsen over the next five years, a sharp increase on last year.

At a macro level, international and European political instability is overshadowing the industry and was rated as a concern by the majority of respondents. Nearly 60% were concerned about national politics – a sharp rise on last year and impacting on investor sentiment towards the UK and German markets.

Gareth Lewis, director of PwC Real Estate, said: “Despite a backdrop of uncertainty, the Brexit effect and rising construction costs, we still foresee an active market in 2020. Investors are clearly drawing comfort from the central banks’ decision to maintain or cut interest rates – a notable change in sentiment from last year’s report and probably the biggest factor supporting the relative levels of optimism that emerged from this year’s interviews.”

In addition, over two thirds of survey respondents expressed concern about the impact of environmental issues on their business. Investment managers were responding to pressure from institutional investors to increase environmental, social and governance initiatives, while others were contending with emission reduction targets stemming from increasing regulation to future-proof their developments and investments against the requirements of the Paris Agreement.

There was also a greater awareness of climate risks in particular. Almost half of survey respondents said the risk of climate change has increased in their portfolio, and 73% expected that risk to become greater over the next five years.

Alternative becomes traditional

In terms of sectors, logistics once again tops the rankings in this year’s Emerging Trends for investment and development prospects, driven by a continued increase in online retail sales. The sector is still seeing supply struggling to keep up with the changing patterns of consumer demand with plenty of room for growth in e-commerce in continental Europe.

As for other sectors where capital is flowing, residential once again dominated investment rankings, taking six of the top 10 slots. Many residential related sub-sectors, such as retirement or assisted living, co-living, student housing, affordable housing and rented residential properties were operationally more complex but were seen as being securely underpinned by strong demographic demand.

Lewis said: “With a number of real estate sectors undergoing significant structural change it is hardly surprising that many interviewees regard investing in ‘anything with a bed’ as a sound, defensive strategy at this point in the cycle, given the counter-cyclical nature of residential, supported by long-term urbanisation and demographic trends.

“But there also seems to be a growing recognition amongst industry participants, that the enhanced complexity and operational risk that comes from embracing the ultimate end-user and their evolving demands, is one worth taking to achieve target returns.”

Sector prospects

Overall rank Sector Investment ranking Development ranking
1 Logistics facilities 2 1
2 Retirement / assisted living 1 2
3 Co-living 3 3
4 Private rented residential 7 5
5 Student housing 4 9
6 Affordable housing 9 4
7 Healthcare 5 7
8 Data centres* 8 6
9 Serviced apartments 11 8
10 Flexible / services offices and co-working 10 10

*a significantly lower number of respondents scored this sector

The city rankings in this year’s report reflected both the caution and opportunities driving the market, with a focus on cities believed to offer liquidity and stability. Paris tops the list as the overall favourite for prospects in 2020, with investors anticipating knock-on benefits from Brexit, the 2024 Olympic Games and especially the Grand Paris project.

All German cities surveyed – Berlin, Frankfurt, Munich and Hamburg – figured in the top 10. The fundamentals of these markets are judged “quite healthy”, overriding concerns over Germany’s economy. Similarly, good supply and demand dynamics are working in favour of other top 10 cities, such as Amsterdam and Madrid.

Despite ongoing Brexit uncertainty, London ranked fourth on the list this year, with a third of respondents rating the UK capital’s prospects as ‘good’ or ‘very good’ and a further third rating them as fair. However, in other UK cities despite well performing central business districts, Manchester, Birmingham and Edinburgh are taking the impact of Brexit uncertainty and rank in the lower half of the overall prospects league at positions 23, 24 and 25.

Overall prospects

Rank City
1 Paris
2 Berlin
3 Frankfurt
4 London
5 Madrid
6 Amsterdam
7 Munich
8 Hamburg
9 Barcelona
10 Lisbon

Urban mobility

The report also examined how the greater use of smart mobility solutions are seen as integral to the success and growth potential of Europe’s cities. Around 80% of survey respondents said changes in emerging mobility and infrastructure solutions were playing a part in their investment decision-making.

Transport connectivity was seen as the most important factor driving city selection. New solutions from scooters and car-sharing to automated vehicles have the potential to change which buildings and districts were seen as most valuable by real estate investors and developers. Industry leaders canvassed for Emerging Trends Europe believed it was also likely to reinforce the attraction of mixed-use development, while challenging established principles around density, fixed or single-use buildings and the traditional “hub and spoke” model for urban planning.

Van Doorn said: “New mobility solutions give cities the opportunity to distinguish themselves through increased and more sustainable connectivity. At the same time, the wider range of public and private transport solutions democratises mobility and provides real estate investors with more influence in how well-connected their projects are, and the consequent impact on value.”

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