The hunt for secure long-term income is driving European real estate investment as the industry hedges against potential interest rate rises and an uncertain geopolitical backdrop, according to Emerging Trends in Real Estate Europe 2019.
The annual report, published jointly by the Urban Land Institute (ULI) and PwC, is based on the opinions of over 800 real estate professionals in Europe, including investors, developers, lenders, and advisors.
“Investors are becoming more cautious, and investment and development preferences are more and more driven by real estate fundamentals such as the economic growth prospects and health of the local occupier markets. On the Romanian real-estate market we have seen a constant increase in asset prices in recent years, although we are still 30 to 40 percent below price levels registered in 2008. Although the fundamental analysis shows that there is still space to see an asset increase in Romania, at least in large cities, investors tend to be cautious in terms of kick-starting new major projects and look also at the wider European context when making investments decisions,” said Francesca Postolache, Assurance Partner, real-estate industry group Leader, PwC Romania.
This caution is also reflected in the expectations related to the availability of equity and debt, with around 28 percent of survey respondents believing that the amount of equity available for refinancing or new investment will increase, compared with 50 percent last year. However, last year’s confidence was particularly high, and there are few current concerns about liquidity, other than for challenging sectors such as retail, as demonstrated by the majority (54 percent) who believe the availability of equity will be about the same.
One of the main barriers to investment continues to be the availability of suitable assets as capital continues to flow into Europe, with strong increases expected from Asia. This is putting pressure on the core end of the market with 70 percent of survey respondents either agreeing or strongly agreeing that prime assets are over-priced.
Interest in alternative asset classes continues to rise in face of tough capital markets environment
One response to this more challenging capital markets environment is that investors are turning to asset classes that are experiencing structural tailwinds and which are less likely to be affected by the current cycle. But Emerging Trends in Real Estate Europe suggests that this is only part of the story.
“The last five or so years has seen a remarkable shift by investors towards alternative real estate, or ‘niche’ sectors. In part this is clearly driven by where we are in the cycle and the search for income. But it is also a response to the innovation that is disrupting the more traditional sectors and a number of long term trends such as demographics and urbanisation”, added Francesca Postolache.
Residential stands out in this respect, with seven out of the top ten sectors preferred for investment and development, including some form of residential, ranging from co-living, student housing, retirement living to social housing and regular residential housing.
In addition to residential, logistics and niche sectors such as data centres and flexible offices are making up the top ten. Logistics clearly continues to benefit from the growth of e-commerce. Traditional formats such as city central or suburban offices and retail formats continue to languish at the bottom of the rankings.