Investors around the world retain their dour outlook on the European economy, but are adapting to the idea that the region’s weakest economies will be transforming after a long slog. Real estate companies are retooling business plans and looking far and wide—in many cases toward Asia—for potential profits. As a result, a hint of optimism colors the outlook for global real estate in 2013, according to about 900 real estate professionals interviewed across Europe and the Asia Pacific region for the Emerging Trends in Real Estate© reports released by ULI and PwC.


Top Investment Markets for 2013

1. Munich: Residents of Munich and the surrounding region have a purchasing power unrivaled in Germany, and record tourist numbers were expected in 2012. Munich’s retail market is poised to benefit, with the city being the first stop for international retailers expanding in Germany.

2. Berlin: Dubbed “Silicon Allee,” Berlin now hosts 15,000 tech companies generating turnover of E19 billion ($25.4 billion) per year. The clean technologies sector employs more people in Berlin than anywhere else in Germany.

3. London: The widespread search for safety has boosted London’s popularity. In particular, investors are homing in on top neighborhoods such as Mayfair, where capital from Asia, Greece, and Spain seeking a safe haven helps prices soar.

4. Istanbul: Demographic trends are exciting in Istanbul. International luxury brands, global companies such as Nestlé and Microsoft, and banking and insurance companies are establishing bases in the city, drawn by Istanbul’s proximity to cities in Russia and the Middle East. Strong demand for prime retail space keeps the city center thriving.

5. Hamburg: Population growth makes apartments a popular choice for investors. Media businesses are the city’s largest employer, while the Port of Hamburg is an important trade hub for goods from the Far East. Hundreds of Chinese companies are based in the city.

In Europe, rather than seeing the continent as one problem-prone region, real estate investors are looking at a series of separate markets, each containing its own risks and opportunities. Investors are drilling down to details—to areas where demographic trends are promising, or even to specific deals in which an asset is surrounded by a thriving economy.

Real estate companies have restructured their businesses over the past five years and are beginning to deploy new strategies to profit in challenging economic and property market conditions. Adapting to the “new normal,” businesses are mitigating risks wherever possible and focusing capital on specific assets and opportunities rather than adopting panregional or sector-specific investment positions.

About 80 percent of respondents surveyed in the European report said they believe that the Eurozone crisis has presented their businesses with new opportunities. However, this relative optimism is tempered by a pervasive belief that there will be little improvement in the overall European economy or the region’s real estate market this year. Respondents were more pessimistic on the outlook for cities’ real estate markets than they have been since 2004, and 45 percent of real estate professionals said they expect capital values to remain stagnant until 2017.

“Almost five years since the start of the financial crisis, real estate investors remain cautious about capital deployment and the availability of debt,” said Joe Montgomery, chief executive officer of ULI Europe. “As a result, investors are focusing on the harder-to-find opportunities in blue-chip cities such as Munich, Berlin, London, and Paris rather than turning to secondary locations in search of higher returns.”

Simon Hardwick, real estate partner at PwC Legal, said, “Real estate investors are approaching opportunities with a new mindset, conscious that the environment in which they are operating is the new normal and is set to stay the same for some time yet. Investors face ongoing challenges but are cautiously optimistic about their prospects for the first time in many years.”

With three of the top five markets, Germany dominates the investment prospects for Europe’s commercial real estate sector as investors continue to favor safe-haven locations. The Emerging Trends ranking of 27 cities across Europe sees Munich placing first, closely followed by Berlin in second place and Hamburg in fifth, with investors taking comfort from each of the cities’ strong local microeconomic climate and resilient property market conditions.

Munich, with its growing population and the lowest unemployment rate in Germany, has a mix of global and medium-sized businesses and a strong service-based economy. Office vacancy rates are low by German standards, and investors are confident that this will combine with supply constraints to result in rental growth this year. Consumer purchasing power is unrivaled in Germany, and tourist numbers are near record levels, according to the report.

Berlin, home to 15,000 tech companies (soon to include local headquarters for Google and Twitter), was aided in the rankings by its hip, young scene. Hamburg, Germany’s second-largest city, placed fifth largely because it is perceived as a safe haven. Investors are showing particular interest in apartments and office space.

London, which is seen by many as Europe’s ultimate safe-haven market, is the biggest gainer in this year’s report, climbing to third place from tenth last year. Investors continue to be attracted by the size and liquidity of London’s real estate market, the stability of the British pound, and the city’s ability to stand apart from economic issues affecting the rest of the U.K. and Europe.

Istanbul lost the top spot it had claimed for the past two years. Ranked fourth in Europe for investment prospects, Istanbul remains popular because of its exciting economic and demographic potential. With an average age of 29, the report notes, Turkey has demographics that are hard to ignore, and its economic growth rivals that of China. Seeking to attract international capital and transform Istanbul into a regional financial center, the government recently eased restrictions on foreign ownership of Turkish real estate. This is expected to boost investment by $5 billion per year, according to Turkey’s Association of Real Estate Investment Companies. But the report notes that a fragmented market and lack of institutional-quality assets make deals difficult to secure.

The worst-performing cities were those in countries at the heart of the Eurozone crisis or struggling to cope with the consequences of the 2008 financial meltdown, such as Athens, Lisbon, Dublin, Madrid, and Barcelona. Ranked last in the survey, Athens’s real estate market is “moribund,” according to the report. “Greece’s privatization program is a key hope, but it is off to a slow start.”

Through much of Europe, tourists from Asia are big business. Chinese tourists, in particular, are using social media to make travel decisions, flocking to Paris’s luxury shops (which are staffed with Mandarin speakers), then to Brussels for chocolate and on to Frankfurt’s factory outlets.

Download the “Emerging Trends: Europe” Report

Asia Pacific

Asia Pacific:
Top Investment Markets for 2013

1. Jakarta: Indonesia’s capital and largest city leads the rankings for both investment and development for the first time. Jakarta was described as a surprising choice because of its lack of investment-grade stock and its economy, which, though growing, lacks the enterprise, scale, and infrastructure of the economies of its more developed neighbors. However, Jakarta is seen by many real estate professionals as the most favorable emerging market in the region, with business transactions generally easier to execute and more transparent than those in other frontier markets such as Vietnam. The country’s interest rates and inflation are stable, the gross domestic product is growing steadily, and foreign direct investment grew by 39 percent in the first half of 2012. Demand for property is strong, resulting in year-to-year office rents leaping 29 percent. Despite some challenges, such as difficulties securing bank debt and locating reliable local partners, Jakarta holds significant promise.

2. Shanghai: Shanghai’s office and retail markets have proved to be mainstays for foreign funds looking to invest in Chinese real estate. Both sectors remain popular because of the city’s relatively user-friendly business environment, growing volume of institutional-grade properties, and historic market performance. However, in spite of Shanghai’s strong ranking, the city is not as appealing to foreign investors as it was a few years ago. Prices are considered relatively high, the market has become saturated, and Chinese regulators have become less open to foreign investment because they have increasing confidence in the ability of local real estate practitioners to finance and develop properties. Though Shanghai will remain firmly on the radar of foreign funds with a mandate to invest in China, activity in the city will remain muted for the short term.

3. Singapore: Singapore retains its popularity among real estate investors, who see the market as a safe haven offering solid but not spectacular returns that are underpinned by the city’s position as a global financial hub. The city’s office market has recently run out of steam, with significant amounts of new Grade A office space drawing tenants away from existing buildings—a problem compounded by shrinking employment in the local financial sector. Rising vacancies and falling rents are causing problems for some international funds looking to exit the market.

4. Sydney: Sydney has seen a limited amount of new supply of commercial space in recent years, although a significant amount of office and retail space is in the pipeline for 2015. A shortage of institutional-grade property continues to suppress sales volumes and keep prices buoyant, driving up total returns for office assets. Australia has absorbed more international real estate investment over the past year than any other country in the Asia Pacific region. Office assets remain a popular target for these funds, and some analysts believe that foreign investors account for 30 percent of the transactions in the sector.

5. Kuala Lumpur: Kuala Lumpur is beginning to enter the real estate limelight, offering a stable market with good opportunities for opportunistic returns. Though property sales slowed noticeably in most Asian markets during the third quarter of 2012, Kuala Lumpur was the exception. The long-term prospects for the commercial property market are deemed by many to be strong due to the success of the government’s Economic Transformation Program in drawing foreign investment.

Asian real estate markets continue to benefit as an alternative to investment in Europe. However, across the Asia Pacific region an overall sense of optimism is tempered by concern that prime assets in key real estate markets are becoming overpriced. As a result, Emerging Trends finds that markets outside core cities are increasingly attractive for investment and development. This is reflected in Jakarta, Indonesia, being named the top choice in the region for both investment and development prospects for 2013.

“With high rents, high capital values, low yields, and an abundance of local capital, many international investors are struggling to see attractive investment opportunities in Asia Pacific’s prime real estate markets,” said Richard Price, chief executive, Asia Pacific, for CBRE Global Investors and vice chair of ULI North Asia. “As a result, investors are expanding their horizons as they seek compelling investment opportunities. Some are looking at frontier markets such as Indonesia, while others are revisiting often-overlooked capitals such as Kuala Lumpur and Bangkok, which explains the strong showing for these locations in this year’s report.”

However, while the report notes the great potential in such “frontier markets” as Indonesia, Vietnam, and the Philippines, some investors are also venturing into Cambodia, Mongolia, and even Myanmar, where international sanctions were removed only in the past two years. “In many, if not most, cases, these destinations are for neither the faint of heart nor the inexperienced,” the report says.

K.K. So, Asia Pacific real estate tax leader at PwC Hong Kong, said, “Investors’ interest in alternative asset classes is also shown in our report. The overall dearth of investible options across Asian markets has led some opportunity players to migrate towards more focused strategies in niche sectors, especially where these require an element of expertise that domestic players lack. These alternative asset classes provide not only a measure of protection against cheaper local money, but they also are relatively sheltered from economic volatility.”

The logistics sector was mentioned favorably by several interviewees, especially in Japan, where distribution infrastructure has been reorganized in the wake of the 2011 earthquake, and in China, where the requirements of domestic consumers, especially in the e-commerce arena, continue to outpace the capacity of local logistics networks that have traditionally been oriented toward meeting exporter demand.

Shanghai, as well as several other cities in China—including Beijing and second-tier cities such as Chongqing, Tianjin, and Shenyang—ranked in the top ten for both investment and development prospects. The report points out that, despite concerns related to rapid growth and surging prices, it is not unusual for emerging markets to witness unexpected price movements and that such shifts must be viewed within the context of local market conditions.

“Secondary markets such as Kowloon in Hong Kong and second-tier Chinese cities are also experiencing increased interest from international buyers,” Price said. “At the same time, core investment markets in many mature, western cities are seeing a surge in demand from newly formed Asian institutional investors seeking to capitalize on the post–global financial crisis corrections there.”

In Japan, though Tokyo is ranked 13th for investment prospects and 18th for development prospects, many investors think the city’s outlook is improving. It is seen as a magnet for foreign investment, with core funds looking at the office sector and more opportunistic investors heading for the residential sector.

In Australia, opportunities are similar to those in Japan insofar as they involve buying into pockets of distress that have lingered since the global financial crisis, the report says. The main source of deals in 2012 involved loan portfolios of European financial groups that had entered the Australian market at its pre-2007 peak and are now looking to exit, usually at a substantial loss.

Investor views about India were very polarized. Although the nation is perceived to be a market with a lot of low-hanging fruit, many private equity investors that entered deals between 2005 and 2008 and are now looking to exit are having problems finding buyers for their projects due to lack of liquidity in the market. In particular, the report notes, concern has focused on instances in which retroactive changes have been made to existing regulations to the disadvantage of foreign investors.

ULI and PwC unveiled the results of the Asia Pacific version of Emerging Trends through a series of forums across the region in November and December. The report for Europe will be a focus of the ULI Europe Annual Conference in Paris in early February.