“The key thing to remember is to look forward and not back,” an interviewee says in the eighth edition of Emerging Trends in Real Estate® Europe, jointly produced by PwC US and the Urban Land Institute. This suggestion is encouraging given the fact that last year European real estate was forced to face the debt problems in Greece, Ireland’s sovereign debt crisis, the proposed Basel III revisions of financial regulations, and continued efforts by Europe’s politicians to overhaul the financial system with regulations.
However, looking forward does not ease any real estate investor’s mind because 2011 will produce additional Basel III efforts and possibly their impact on financial lending; worries about the next European country whose economy may need support; and the impact of spending cuts on consumers, businesses, and the real estate industry. With all these hurdles, many interviewees seemed concerned. “In January 2010, the sunny uplands did not seem too far away, but they do now,” one commented. Said another, “Optimism dissipated as every month came and went. It was battered by events.”
Statistically, the European recovery looks to be underway as real growth of gross domestic product is displaying signs of improvement for this year. However, many interviewees admit that it is “hard to feel confident” about the future of the economy. The majority of Emerging Trends respondents expect European economic growth to be flat over the next months, possibly due to a lack of consumer demand and growth, increases in taxes, and continued unemployment concerns. “We’re in a period of two years, maybe longer, where every six months sentiment will swing,” stated a concerned interviewee. In addition, respondents have found it difficult to trust any positive economic indicator; many just seem to remain pessimistic under the current conditions. As one interviewee supporting this feeling said, “Even when there is good news, there is caution.”
With this cloud hanging over the economy, many believe that unlike the situation in Asia and the United States, European real estate will find it difficult to attract capital this year. “The problem for Europe is we are in a distant third, bronze-medal position. If you are a big pension fund, then you are probably allocating half of your money to Asia, 30 percent to America, and the rest to Europe—and most of that will go to Germany.”
Even so, equity capital is expected to take the lead this year as the majority of respondents believe that there is plenty to flow back into European markets. Unfortunately, debt capital returning to the real estate markets is expected to be much more limited and difficult to obtain, possibly even more difficult than in previous years. “Banks will hold on new loans waiting for their current ones to get out of any potential trouble first,” said one interviewee. Emerging Trends survey respondents agree: over 83 percent believe that debt capital in 2011 will be substantially or moderately undersupplied. Overall, “2011 is not anticipated to be a promising year for new debt issues in the market.”
With continued economic concerns and challenging capital opportunities, the trends for existing and new investments, as well as development, have changed as investors become aware that any further compression of property yields is over and that the sluggish financial system may continue to stall real estate fundamentals and any chances for rental growth in the near future.
Investors with portfolio properties are expected to focus on management to preserve their current real estate value. This strategy may be sufficient for most markets, but many interviewees speak of a concern about “peripheral Europe.” Said one, “Peripheral Europe has issues: Portugal, Spain, Ireland, Greece, and Italy need employment growth in order to further sustain recovery.” In addition to fundamental concerns, there is a growing anxiety for portfolios that have debt due for refinancing in 2011 and 2012. “Refinancing will be the main issue: both the increase in interest cost, but also pressure by banks for a lower LTV [loan-to-value] ratio, will make refinancing discussions particularly difficult.”
Even with an abundance of economic concerns and a lack of debt capital, some cities remain on the radar for acquisition of an existing property, a new property opportunity, or possible development. According to the 2011 Emerging Trends survey results, Munich, London, and Istanbul ranked in the top three in all three categories.
The concerns of Munich respondents in 2010 over Germany’s economy have subsided as 2011 forecasts predict strong growth for the country focusing on manufacturing exports to emerging markets. “Germany will be a boring market as ever, but boring is not meant in a negative way. It will simply be stable,” said an interviewee. “Economic troubles haven’t had the same impact on Istanbul’s commercial real estate as they have had on other European locations,” another interviewee said, and this helps explain the city’s high rating this year. Istanbul remains one of the few higher-risk cities that investors continue to target as many become more risk averse during these more difficult financial times. Sentiment regarding London continues to improve in 2011 as investors still focus on prime properties in this area. Concerns about overpriced deals are still heard, but, as one interviewee said, “This has generally gone for prime assets in London. These do not present much attraction for an opportunistic investor.”
According to respondents, property sector deals will focus mainly on the core and core-plus segment. “Demand for core is as hot as ever,” “core and core-plus are hot,” and “core with the focus on quality” were just a few interviewee statements on this topic. Even with the concern over a lack of consumer spending, retail is the number-one core property sector for both existing and new property investments, according to 2011 survey respondents. “Retail is very, very popular at the moment because it stood up well during the crisis,” one investor said. Office and apartments ranked high under both existing and new property investments categories, whereas less investment interest was found in the mixed-use and industrial/distribution sectors.
According to survey respondents, 2011 looks to be a challenging year for real estate investments in Europe as the region deals with regulation issues and faces economic hurdles. However, the survey indicates that investors continue to look at real estate investments focusing on very specific real estate properties as they tighten their property management to get through the year.
Emerging Trends in Real Estate® Europe 2011 represents a consensus outlook for the future and reflects the views of more than 600 individuals who completed surveys and/or were interviewed as part of the research process for the report. Interviewees and survey participants represent a wide range of industry experts—investors, developers, property companies, lenders, brokers, and consultants.
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