John Forbes 

Istanbul has been identified as the top European market for both investment and development, according to the ranking system employed in the Urban Land Institute’s and PricewaterhouseCoopers’ Emerging Trends in Real Estate Europe 2012 survey of more than 600 European property professionals. Istanbul’s popularity is largely attributable to its strong economic growth prospects and favorable demographics (i.e., a young and growing population). Retail development in Turkey has particularly high potential, with consumer spending on the rise and an influx of major international companies. But its appeal is more a reflection of its long-term economic future than a sign that investors are about to plow their capital into the market.

“It depends on your risk appetite,” explains ULI member and PwC real estate partner John Forbes. “Istanbul doesn’t necessarily attract the bulk of core investors, particularly in a market where people are going for lower risk. You may think it offers the best possible returns, but if you’re avoiding risk, you’re not going there. On the other hand, for those who do have an appetite for risk and who are looking for higher returns, Istanbul scores consistently strongly in the survey.”

Equally, the languishing of cities in Spain, Italy, Portugal, and Greece at the bottom of the rankings, in light of concerns over their financial health, does not mean that capital will totally avoid these markets. Interviewees said opportunistic investments in Spain and Italy, for example, could not be entirely ruled out given the expectation that desperate banks there will begin to release assets this year.

The report also depicts the decline of London in terms of both new and existing investment as well as development, owing to concerns about the difficulty of obtaining assets, strong competition, and pricing being on the brink of a bubble.

In general, the top-ranked cities tend to be either in western or northern Europe, or in growing regions to the east. Moscow, for instance, was highlighted as a rising investment magnet, with 82 percent of the Russian-based respondents anticipating deployment of more capital into real estate this year, and 75 percent expecting profits to rise.

Munich ranked second in the survey, with one of the lowest unemployment rates in Germany. Its economy is perceived to have fared well during the recent economic turmoil and its appeal is based on the notion of the city as a safe haven offering a deep and liquid market that is more stable than Frankfurt’s.

Warsaw follows, thanks to its increasing prominence as the financial center for the eastern European region. This will boost the city’s office sector while its retail sector is also in a strong position, having attracted international retailers. Extremely low retail vacancy rates and limited supply are expected to keep this sector robust.

Berlin, which, like Munich, offers stability, ranked next as Europe’s most alluring market for residential investment. Stockholm came in fifth place owing to strong public sector finances and a solid export-driven economy.

Nonetheless, investors said they were eschewing a strategic focus on whole countries, cities, or sectors in favor of asset-led, deal-by-deal approaches; nowhere can be considered a “must-buy” today given the ongoing uncertainty surrounding how regulations such as Basel III, Solvency II, and the Alternative Investment Fund Managers Directive will eventually affect the market.

“The overriding commentary within the report is in terms of investment decisions becoming a much more granular process, with the notion of ‘safe haven’ becoming a less reliable one than in previous years. No market today is considered a sure bet,” says Joe Montgomery, chief executive of ULI Europe.