Real Estate To Remain Attractive In 2020

Real estate set to remain an attractive investment asset in 2020 despite strong political and economic headwinds – PwC/ULI report 

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.

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 Urban Land Institute (ULI) and PwC, is based on the opinions of over 900 real estate professionals across Europe, including investors, developers, lenders, and advisors.

A business environment filled with caution

The positive but cautious approach is in spite of some wider geopolitical concerns and specific industry challenges.

More than two thirds of survey respondents – a higher proportion than last year – say rising construction costs will have the biggest impact on their business in 2020. This is particularly significant for those investors relying on a build-to-core strategy in order to source assets. A lack of affordable housing also remains an area of concern and opportunity, with 61 percent of respondents saying they believe 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 were rated as key concerns by 81 percent and 70 percent of survey respondents respectively. Nearly 60 percent were also concerned about national politics – a sharp rise on last year and impacting on investor sentiment towards the UK and German markets.

Gareth Lewis, Director in 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 (ESG) 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 percent expected that risk to become greater over the next five years.

The blurring of traditional and alternative real estate

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 dominates 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 are operationally more complex but are 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 in 2020- top ten

*a significantly lower number of respondents scored this sector

European cities ranked for investment and development prospects

The city rankings in this year’s report reflect 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, figure in the top 10. The fundamentals of these markets are judged “quite healthy”, overriding concerns over Germany’s economy. Similarly, good supply/demand dynamics are working in favour of other top 10 cities, such as Amsterdam and Madrid.

Despite ongoing Brexit uncertainty, London ranks 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.

European cities overall prospects 2020

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Daniel Peacock