ULI EMERGING TRENDS REPORT
Report finds industry leaders upbeat about investment and profitability, writes Alex Catalano
Europe’s real estate industry believes business will be better this year. At least that is the view of 40-45% of those surveyed for this year’s Emerging Trends Europe report.
This annual temperature-taking by PwC and the Urban Land Institute found European industry leaders remarkably optimistic about the prospects for their business in 2013.
They are more confident; they expect their profits – if not staff numbers – to increase and say they intend to spend more capital on real estate this year (see figure 1) They are also willing to take on slightly more risk.
“Having gone through a Darwinian struggle, they are confident that they are well positioned to withstand the tough climate, with all its continued uncertainty,” the report says. But no one thinks it is going to be easy. “In the great scheme of the recovery, we are at the start of the second act,” one interviewee said.
Optimism is the general tone of the report, but there are, of course, gradations. Those with good access to capital – equity investors and institutions, fund managers and publicly listed property companies – are more upbeat than private property companies, lenders or housebuilders.
Overall, equity is expected to flow even more freely this year, while for debt, not surprisingly, the reverse is predicted; 57% think there will be moderately or significantly less available (see figures 2 and 3).
Pessimistic outlook in southern Europe
The country variations are interesting when it comes to expectations for debt and equity availability. Respondents from Portugal, Greece and Benelux are very downbeat, while the availability of debt is also expected to be scaled back in Spain, Italy and Turkey.
In France, Germany and the Nordic countries, opinion is split pretty evenly between those who expect the same or more debt to be available and those who think less will be available. Only in the UK and central and eastern Europe do more than 60% of respondents say there will be the same amount or more debt available this year.
However, there is a caveat: “Capital is as choosy as it has ever been and it is the squeezed middle that is suffering most,” the report says. “Attracting it is hard work for the ordinary medium-sized property company or non-core asset.”
Or as one interviewee put it: “Europe is a great place to deploy capital, but a tough place to find it.”
Most of Europe’s real estate industry is expecting more assets to flow onto the market this year, as bank deleveraging starts to bite in earnest.
Much more action is predicted in Ireland, where the report says a fragile trading market is emerging at the prime and distressed ends of the market: “Everyone is there and everybody is having a look,” (see Special report pp17-24). Dublin’s investment prospects have risen five places to 21st in this year’s survey (see figure 4).
Opportunistic investors set to pounce
Opportunistic investors are also positioning themselves to pounce in Spain, once the deals start to flow. Spain’s bad bank, Sareb, is expected to start selling towards the end of this year.
“We have our focus, but over the course of the year that could turn on its head. We might lose appetite for Ireland quickly if Spain gets priced right,” a respondent told Emerging Trends.
Though their business outlook is pretty optimistic, Europe’s real estate leaders give their local markets a sober assessment.
They are pessimistic about performance in 2013; they scored the prospects for investment and development in Europe’s main cities at an average 2.9 and 2.59 respectively, with 5 representing ‘excellent’ and 1, ‘very poor’. “That is among the lowest scores registered in Emerging Trends since 2004,” the report says.
Munich, Berlin and London are the top-rated cities for investment, with Hamburg, Paris, Zurich and Stockholm also making it into the top 10. Their attractions are clear: they are larger, more liquid western European markets with better economic prospects. In the east, the emerging cities of Moscow and Istanbul also score highly.
Those cities reckoned to have the worst prospects are largely the ones in the eye of the Euro-storm: Athens, Lisbon, Madrid and Barcelona.
Nevertheless, “what is distinct about 2013 is investors’ willingness to take on slightly more risk,” the report says. “Those surveyed by Emerging Trends Europe are still wary of southern Europe, but they are prepared to dig deeper into more stable markets to find opportunities.”
This reflects a much more granular, deal-lead approach to business. “Everyone is adjusting to local realities. With very few exceptions, Europe-wide strategies have lost their sense,” one interviewee told Emerging Trends.
This sharper, narrower investment focus extends to the type of assets sought. Those who cannot or do not want to compete for core property are “finding assets with a story, investigating secondary or tertiary deals with a local sharpshooter by their side, or hunting out cities where the demographics look promising.”
There are big shifts in occupier demand to contend with. Retail is being polarised between the luxury segment and local convenience shopping, while Asian consumers and tourists are a force to be reckoned with. The drift to online shopping is changing consumption and distribution patterns across Europe, so logistics is a sector to watch.
Meanwhile, European take-up of offices by telecommunications, media and technology companies exceeded that of banking and finance in the first half of 2012.
“The office sector is on the precipice of an entirely new era,” the report says. “Media companies don’t like office buildings to be too overspecified. They look for buildings with variety that allows for socialising, quirky meeting spaces and ‘an interesting public realm’.”
Interestingly, sustainability issues have not retreated from the real estate agenda, but are gaining much more traction in Europe. Investors, developers, occupiers and lenders are all increasingly concerned about the green credentials of their buildings.
Green buildings are commanding higher rents and values, while lenders are worried about refinancing risk.
“The most important aspect of lending today is how that asset will look five years down the line,” one banker told Emerging Trends. “In five years’ time, will I get my money back? For that reason sustainability is very, very important.”
Respondents’ views on 2013’s Emerging Trends
“In the great scheme of the recovery, we are at the start of the second act”
“The prime recovery is done. Maybe there will be a bit of income growth, but no yield compression”
“Europe is a great place to deploy capital, but a tough place to find it”
“Large players from overseas now have a risk appetite for Europe, especially the UK”
“Debt is expected to be available primarily to those who don’t need it”
“Most insurers are providing debt and there are debt funds around, but they’re playing in the top 5% of the market”
“We have our focus, but over the course of the year that could turn on its head. We might lose appetite for Ireland quickly if Spain gets priced right”
“Everyone is adjusting to local realities. With very few exceptions, Europe-wide strategies have lost their sense”
“For all the right reasons, we are going back to where we should have been, spending time assessing locations and details”
“The most important aspect of lending today is how that asset will look five years down the line. In five years’ time, will I get my money back? For that reason sustainability is very, very important.”