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2020 predictions: property to remain an attractive investment asset

Real estate is set to remain an attractive investment asset in 2020 despite strong political and economic headwinds, the latest research from PwC and ULI (Urban Land Institute) has revealed.

According to the latest Emerging Trends in Real Estate Europe 2020 report, Europe’s property leaders continue to have faith in real estate as an attractive and in-demand investment class, despite political and economic instability across the continent.

The report found that, with interest rates set to stay lower for longer and bond yields in many European countries in negative territory, real estate income has retained its broad appeal to investors, especially in comparison to other asset classes. It also says that equity and debt are expected to remain plentiful for most real estate sectors.

Although there are ongoing political tensions across Europe – from Brexit to the Catalonian protests – which is causing economic growth to stagnate, there is at the same time little evidence of complacency ‘given the inherent risks in a late-cycle market where values are above historic levels’.

Market participants are, with political and economic factors in mind, being careful about ‘how they deploy capital with a focus on cities that offer liquidity and stability’.

“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,” Lisette Van Doorn, chief executive of ULI Europe, said.

“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 ULI and PwC, is based on the opinions of more than 900 real estate professionals across Europe, including investors, developers, lenders and advisers.

Caution dominates in the business environment

The positive but cautious approach outlined above is despite some wider geopolitical concerns and specific industry challenges.

Over two thirds of those surveyed, a higher number than last year, believe increasing construction costs will have the biggest impact on their business in 2020.

This is most significant for those investors relying on a build-to-core strategy in order to source assets.

Meanwhile, a lack of affordable housing also remains an area of concern and opportunity, with 61% saying they believe the problem will worsen over the next five years, a sharp rise on last year.

International and European political instability is, at a macro level, overshadowing the industry and, as such, were rated as key concerns by 81% and 70% of survey respondents respectively.

Close to 60% were also concerned about national politics, a noticeable increase on last year and impacting on investor sentiment towards the UK and German markets in particular.

“Despite a backdrop of uncertainty, the Brexit effect and rising construction costs, we still foresee an active market in 2020,” Gareth Lewis, real estate director at PwC, commented.

“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.”

The report also reflected the increasing awareness of eco issues, with more than two thirds of survey respondents expressing 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 battling with emission reduction targets arising from growing regulation to future-proof their developments and investments against the requirements of the Paris Agreement.

What’s more, the report highlighted a greater awareness of climate risks. Nearly half of those surveyed said the risk of climate change has increased in their portfolio, while 73% expected that risk to become greater over the next five years.

Residential investment dominates

The report found that residential once again dominates the investment rankings, taking six of the top 10 slots.

While many residential related sub-sectors - including retirement or assisted living, co-living, student housing, affordable housing and rented residential properties - are operationally more complex, they are seen as being securely underpinned by strong demographic demand.

“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,” Lewis added.

“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

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


Where did European cities rank for investment and development prospects?

The research said that 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 topped the list as the overall favourite for prospects in 2020, with investors predicting knock-on benefits from Brexit, the 2024 Olympic Games and, more than anything, the Grand Paris project.

All of the German cities surveyed (Berlin, Frankfurt, Munich and Hamburg) also appear in the top 10, with the fundamentals of these markets judged as ‘quite healthy’, superseding concerns over Germany’s economy.

Likewise, good supply/demand dynamics are working in favour of other top 10 cities, such as Amsterdam and Madrid.

London, despite ongoing and seemingly chronic Brexit uncertainty, 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.

In other UK cities, though, despite strong-performing central business districts, the impact of Brexit uncertainty is hitting harder, with Manchester, Birmingham and Edinburgh all ranking in the lower half of the overall prospects league at positions 23, 24 and 25 respectively.

European cities overall prospects 2020

Overall ranking

City

1

Paris

2

Berlin

3

Frankfurt

4

London

5

Madrid

6

Amsterdam

7

Munich

8

Hamburg

9

Barcelona

10

Lisbon


Urban mobility key to the future

The Emerging Trends report also analyses how the greater use of smart mobility solutions are viewed as being essential to the success and growth potential of Europe’s cities.

Approximately 80% of survey respondents say changes in emerging mobility/infrastructure solutions are playing a part in their investment decision-making.

The most important factor driving city selection is transport connectivity, with new solutions from scooters and car-sharing to automated vehicles having the potential to change which buildings and districts are seen as most valuable by real estate investors and developers.

Industry leaders canvassed for the Emerging Trends Europe report believe it is also likely to reinforce the attraction of mixed-use development – increasingly popular for schemes in the UK - while challenging established principles around density, fixed or single-use buildings and the traditional ‘hub and spoke’ model for urban planning.

“New mobility solutions give cities the opportunity to distinguish themselves through increased and more sustainable connectivity,” Van Doorn concluded. “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.”

You can read the full report here

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