The 2020 Emerging Trends in Real Estate Europe report, published on 6 November by consultancy PwC and industry body the Urban Land Institute, polled 905 players across European commercial property on their expectations for next year. The results highlight key trends that property debt professionals should think about. Here is a flavour:
1. Defensive positions despite healthy liquidity. With interest rates set to stay lower for longer, equity and debt for real estate are expected to remain plentiful for most of 2020. Current monetary policy, however, is not yet seen as a meaningful stimulus to economic growth. The threat of a global recession, escalating trade tensions between the US and China, and continuing uncertainty over Brexit are all clouding sentiment. Investors and lenders are also concerned about the prolonged real estate cycle and record high property values, which will keep them selective when it comes to deploying capital.
2. Environmental tipping point. Environmental, social and governance issues have gained traction in recent years, but the survey suggests a significant change of tone among market participants. While real estate investors engage with the long-term trend to make their portfolios more sustainable, recent green financing initiatives suggest times are changing for lenders too. The obvious driver for change is to reduce CO2 emissions. In addition, the extra level of scrutiny of underlying assets, which is required for sustainable lending, can help debt providers to better manage risk across their portfolios while rewarding sponsors committed to ESG through favourable financing rates.
3. Development push despite rising construction costs. Increased investor interest in develop-to-core strategies, in a bid to generate greater returns than those provided by highly priced existing assets, could boost development lending opportunities. However, the debt market remains cautious and relatively selective in this space and developers still rely on sponsors providing substantial equity. Meanwhile, survey respondents see the cost of construction as a major concern for 2020. As rising labour and material costs add to the risks associated with development, there is little sign of a new oversupply emerging.
4. Residential regulatory risk. Property lenders are keen to finance investors’ growing interest in residential. The sector is seen to be supported by long-term demographic trends, which makes it less sensitive to market cycles than some traditional types of commercial real estate, such as offices. With the supply/demand imbalance in housing acknowledged as a long-term issue, the industry has responded by deploying increasing amounts of capital into rental housing. However, several governments across Europe – mainly at a city rather than a national level – are also responding to the affordability issue with proposals to set rent controls, which has had a negative impact on sentiment among investors and lenders.
5. Digital transformation gaining momentum. A greater use of technology in real estate is one of the trends noted among market participants. The survey reveals two main ways of harnessing technology: a third of respondents are buying products from third-party suppliers, while a quarter are investing or partnering with start-up proptech firms. In the lending space, banks – and particularly the large German lenders, such as Aareal and Berlin Hyp – have gained access to technological innovation by investing in start-ups. Some banks have launched their own initiatives, like Berlin Hyp’s crowd-based real estate inspection service. Yet despite the progress, the use of technology in the world of real estate finance remains in its infancy.
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