06 Sep, 2017
Emerging Trends in Real Estate in Europe 2017 and beyond
Investors continue to see value in real estate across many parts of Europe. However, return expectations are being scaled down, and the importance of active asset management as a means to access income is being talked up. In this risk-off climate, in which many real estate investors are clearly willing to sacrifice some yield for lower risk
1. Lowering returns
Life is getting tougher for Europe’s real estate industry. It is certainly a hot topic. Can the returns of the last three or four good years, propelled by yield compression, possibly be maintained as Europe moves further through the cycle and in the face of continuing low growth and heightened political risk?
More than two thirds respondents of research believe that outperformance will be more difficult to achieve, and 55 percent are expecting more volatile cycles. And, a third of respondents say they are lowering their expected returns. However, looking at the returns being targeted in 2017, most are hopeful of achieving the same as they cited last year; 45 percent are still aiming for between 5 and 10 percent, and another 24 percent are also still looking for between 10 and 15 percent.
2. Accessing real estate
In the last cycle there was a lot of capital but I’m not sure it was coming in for the best of intentions, and it got caught out when the market moved and the debt markets froze.
Whereas today capital, debt or equity, is coming in because it wants the fundamentals of real estate. The bigger issue is: how and where is all this money going to be spent? London, New York, Paris, Frankfurt: they simply can’t provide enough buildings that will trade frequently enough.
The words of a global research head will resonate with many in European real estate — 63 percent say availability of assets will impact their business in 2017.
3. Operational alternatives
Hotels, student housing, retirement/ assisted living and healthcare are the principal targets — the last three offer the best real estate investment prospects for 2017, according to survey respondents These sectors offer a measure of diversification and stability of income returns when mainstream real estate looks expensive and vulnerable to economic uncertainty.
There is now a sustained shift of capital into these sectors, with as many as 44 percent of survey respondents stating their intention to invest in them, reflecting the idea of real estate becoming a service rather than simply bricks and mortar. Investors have just got to get their minds around real estate becoming a more operational asset rather than just as a lease.
4. Increasing allocations
One area of the capital markets where there is a high level of confidence is the sphere of equity. There is little doubt that European real estate will continue to see large inflows of equity, particularly looking for prime assets.
Of those surveyed by Emerging Trends Europe, 48 percent expect equity available to the sector to increase — less than the 55 percent who expressed this sentiment last year, but still a healthy cohort. Low global interest rates and bond yields are making real estate yields look attractive, even if in most countries they are at record lows.
5. Crossing borders into European real estate
There is a perception that uncertainty is set to have a cooling effect, but not a deep chill, on cross-border capital flows into Europe in 2017.
Where to go?
With pricing for core real estate considered too high in many markets, selective development is not being ruled out; 79 percent think it is a good way to acquire prime assets in gateway cities.
According to Emerging Trends Europe, the five leading cities for overall investment and development prospects in 2017 are Berlin at Number 1, followed by Hamburg, Frankfurt, Dublin and Munich.
Elsewhere, Sweden and Stockholm have also assumed safe haven status, albeit prime assets are even harder to source than in Germany, and the country has added currency risk. Iberian cities are also very much in the frame. Lisbon, now at Number 7, is viewed more favorably than either Madrid or Barcelona.
CEE markets, like Czech Republic, Hungary, Poland, might suffer. They’re seen as a bit riskier in a more risk-off environment. The perception of previous years that Italy would become «the next Spain» has not really materialized because its banking system remains weighed down by non-performing loans. But Milan, Italy’s financial and business centre, is considered the stronger of Italy’s two major markets and is still mid-table at Number 15.
Overall prospects, 2017
Alternatives dominate the list of sectors deemed to have the best prospects for the year ahead. 44 percent of industry leaders now say they would like to invest in these sectors, an increase of 16 percentage points over the previous two years.
Reasons for considering alternatives
Of the respondents considering investing, developing or lending to alternatives in 2017, 61 percent favor student housing and 51 percent hotels. What is more, the interest in student housing is broadening. Where before it was seen as a viable sector mainly in the UK and perhaps Germany. There is new-found interest in social and affordable housing, moving from close to the bottom of the list in past years to near the top for 2017.
Sectors being considered
Demographic trends, meanwhile, have helped lift healthcare to the top spot for investment prospects, perhaps reflecting the higher operational risks here compared with residential. By contrast, one sector that is emphatically at odds with the overall positive outlook for alternatives is self-storage, which respondents believe has the lowest investment prospects of all.
Traditional sectors are being perceived as more and more challenged: business parks, suburban offices and out-of-town shopping centers all rank lowly in terms of investment prospects.
With shopping centers, investors are not shunning them per se but they are highly selective. Shopping centers have moved from shopping centers to mixed-use urban centers