EMERGING TRENDS IN REAL ESTATE CLIMATE OF CHANGE - EUROPE 2020 - PWC
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Emerging Trends in Real Estate® Climate of change Europe 2020
Emerging Trends in Real Estate®
Europe 2020
Climate of change
A publication from PwC and
the Urban Land Institute
Front cover image:
La Défense, Paris, France
Image: Milan, Italy
Contents
4 Business environment
22 Real estate capital markets
34 Markets to watch
74 Getting smart about mobility
We are doing more of what we think of as low
risk – more on the core-plus and value-add side
rather than opportunistic. But markets are active,
liquid and functioning quite well.
Director, global investment bank
Emerging Trends in Real Estate® Europe 2020 1
Executive summary
“You have still got equity markets signalling a Europe’s property leaders remain resolute
reasonable level of investment returns. But bond in their belief in real estate as an attractive
markets are signalling a collapse into recession. The investment asset class despite strong
political and economic headwinds.
two just don’t reconcile. So, I think Europe represents
significant challenges.” The threat of a global recession,
escalating trade tensions between the US
Director, global investor and China, and continuing uncertainty
over Brexit have all clouded sentiment
among Emerging Trends in Real
Estate® Europe’s survey respondents
and interviewees.
There are consequently question marks
against the European economic outlook
for 2020 although the industry draws
comfort from central banks’ decision
to maintain or cut interest rates – a
significant change in direction from last
year’s report and already a big boost
to investment.
The shift in monetary policy has led to
cap-rate compression in some office and
logistics markets during 2019 and raised
the possibility of further value increases
to come in 2020. But secure, stable
income remains the guiding light for the
majority of the industry, especially this
late in the cycle.
With interest rates set to stay lower
for longer and bond yields in many
European countries in negative territory,
real estate income retains its broad
appeal to investors. Equity and debt are
expected to remain plentiful for most real
estate sectors. The notable exception
is retail, still struggling in the face of
online competition.
Yet there is little evidence of complacency
given the inherent risks in a late-cycle
market where values are above historic
levels. Market participants are therefore
being more careful than ever about how
and where they deploy capital, which for
many means focusing on cities that offer
liquidity and connectivity.
Image Apple Store, Piazza Liberty, Milan,
Italy (Nigel Young / Foster + Partners)
2 Emerging Trends in Real Estate® Europe 2020
At the same time, rising labour and In terms of sectors, logistics once In traditional real estate speak, this
material costs have added to the risk again tops the rankings for investment means that increasingly the industry
associated with development – the and development prospects. Though believes operational risk is one worth
primary industry concern for 2020 is some industry players are put off by taking to achieve target returns. The
the cost of construction. high values here, the majority favour latest survey and interviews suggest a
this sector where supply cannot blurring of sector boundaries as part
Political risk is a constant concern keep up with the changing patterns of a bigger investment picture in which
for interviewees, but environmental, of consumer demand. There is still mixed-use assets, improved transport
social and governance (ESG) issues seen to be lots of room for growth in connectivity, greater use of technology
have perhaps shown the biggest e-commerce in continental Europe. and smart mobility solutions are all
move up the industry agenda over seen as integral to the economic
the past 12 months. While ESG has The same bullish sentiment holds true growth of Europe’s cities and the
been an important reference for years, of residential despite a new regulatory investment potential of real estate.
this survey and interviews suggest threat to rental housing – rent controls
a meaningful change of tone. Most – in several cities across Europe. Acute
obviously, this change has come from supply shortages are still proving a
the pressure exerted by institutional compelling reason to deploy capital
investors through their ESG investment into residential, which in its various
criteria. But it has also come via forms dominates the investment
developments at the product end of rankings for 2020.
the business – as we see opportunities Uncontrollable events
emerge in response to changing With a number of real estate sectors like Brexit or escalating
undergoing significant structural
customer demand for real estate that
change it is hardly surprising that trade tensions can
provides a better overall impact.
many interviewees regard investing make meeting target
Against all of those criteria, Paris in “anything related to a bed” as a
is ranked Number 1 for its overall sound, defensive strategy at this
returns difficult, but
real estate prospects in 2020. The point in the cycle, supported as they in these scenarios all
Grand Paris project, Europe’s largest are by long-term urbanisation and investors are in the
transport scheme, is widely lauded as demographic trends.
a game-changer for the French capital,
same boat. We expect
setting it apart from the competition. As Emerging Trends Europe has to be net buyers: in
highlighted over the past few years,
Berlin, Frankfurt, Munich and these sectors are at the forefront of
the continuing low-
Hamburg all figure in the top 10. The the industry’s transformation into bond-yield world real
fundamentals of these markets are becoming a service industry. There is estate allocations
judged “quite healthy”, overriding a recognition that, for all the inherent
concerns over Germany’s economy. self-protectionism that the traditional are increasing.
Similarly good supply/demand view of real estate supports, the
dynamics are working in the favour of industry sector that funds, builds and Real estate head, global
investment manager
other top 10 cities, such as Amsterdam operates the space in which we live,
and Madrid. work and play, is starting to embrace
complexity and respond to its true role
At Number 4, London’s prospects as part of society’s infrastructure.
are highly rated, too. The interviews
indicate a large volume of capital
waiting for a Brexit resolution before
moving in, although there are lower
expectations for the UK’s smaller,
regional cities.
Emerging Trends in Real Estate® Europe 2020 3
Chapter 1
Business environment
“The market is something of a paradox. The world is not a
happy place at the moment, but it might not be such a bad
place for investors and real estate.”
Director, global investment manager
Image: Pedestrian walkway to Granary
4 Emerging Trends in Real Estate® Europe 2020 Square, King’s Cross, London, UK
Political and economic Central banks have responded by
uncertainty clouds the outlook reversing the rising interest rate policy
for Europe in 2020, and yet of a year ago – for many interviewees
investors remain drawn to the the most significant intervention since
last year’s report. This lower-for-even-
income-generating attributes
longer monetary phase has been,
of real estate. as one private equity player says, “a
shot in the arm” for real estate capital
Values are high, but the
For many of Europe’s real estate markets, with the notable exception underlying European
leaders, the sector’s continuing of retail. A global fund manager adds: economy is still doing
attraction over other investment “Last year, investors hesitated; this year
asset classes is the determining they come with more conviction.”
very poorly. As a result,
force for good. However, there is an you have to have high
undeniable mood of caution across On the other hand, counters another capital values to access
the industry given the darkening global player: “Values are high, but the
macroeconomic picture. underlying European economy is still pretty poor cash flows.
doing very poorly. As a result, you have
The survey and interviews for Emerging to have high capital values to access
Trends in Real Estate Europe have been pretty poor cash flows. The interesting
conducted amid an escalating trade war thing is what’s going to trigger a
between the US and China, continuing realignment of the market?”
uncertainty over Brexit and the major
European economies struggling for
growth. Expectations of a global
economic slowdown are widespread.
Figure 1-1 Business prospects in 2020
Business confidence
2020 21 63 15 %
2019 25 62 13 %
Business profitability
2020 31 49 20 %
2019 37 48 15 %
Business headcount
2020 41 50 9 %
2019 45 46 9 %
0 10 20 30 40 50 60 70 80 90 100
Increase Stay the same Decrease
Source: Emerging Trends Europe survey 2020
Emerging Trends in Real Estate® Europe 2020 5
Chapter 1: Business environment
The possibility of a recession or
Figure 1-2 Social issues in 2020
downturn is never far from the thoughts
of interviewees and respondents to International political instability
Emerging Trends Europe’s survey,
23 58 11 7 1%
underlining the sober, late-cycle mood
across the industry. Their cautious Environmental issues
outlook for business confidence and 23 44 22 9 2 %
headcounts is little changed from last
year, but they are expecting a marked National political instability
slide in profits in 2020. 21 38 14 19 8 %
Housing affordability
With the European Central Bank
returning to quantitative easing from 17 44 22 14 3 %
November 2019, capital is expected
European political instability
to continue targeting European real
15 55 17 12 2 %
estate in 2020 but without removing
the industry’s doubts over the Mass migration
underlying economy. 8 29 34 24 5 %
“There are plenty of huge question Social equity/inequality
marks on the macroeconomic side,” 9 41 25 19 6 %
says one pan-European adviser.
“But in terms of real estate, we have 0 10
Very concerned
20 30 Somewhat
40 concerned
50 60 70
Neither/nor
80 90 100
never seen so much liquidity in the Not very concerned Not at all concerned
market in Europe. It’s very strange and
Source: Emerging Trends Europe survey 2020
slightly dangerous because it seems
there is little correlation between
economic fundamentals and the level
of uncertainty on one hand, and the
volume of activity.”
Nor has the monetary policy shift
alleviated the industry’s prevailing
preoccupations for several years – the
increasingly challenging search for
income amid fierce competition for
core assets and correspondingly high
pricing. All of this is playing out uneasily
over a prolonged late property cycle.
6 Emerging Trends in Real Estate® Europe 2020
Political risk rises “One of the things that has me most
worried is politics,” says a pan-
European fund manager. “Populism
Politics also looms large across the leads to a lot of unpredictable and
market. “From our conversations ultimately potentially self-harming
with investors we know that political
We don’t believe we’re at uncertainty in the form of growing
actions. But many of them are short-
term beneficial, as we’ve seen in the
the end of this investment populism is weighing on their minds, United States. You don’t need to
cycle, but we do think it even if it hasn’t affected long-term have a long-term perspective if you’re
values,” says a global investment
makes sense for most manager. “We don’t believe we’re at the
a populist.”
investors to look for more end of this investment cycle, but we do This is true of public policy on housing
defensive positions. think it makes sense for most investors shortages across Europe. Industry
to look for more defensive positions.” concerns over housing affordability are
rising, but the interviews also reveal
When it comes to social/political issues widespread frustration with state and
in 2020, international and European local authorities imposing rent controls
political instability are rated key as a way of dealing with the problem.
concerns by 81 percent and 70 percent In the eyes of many interviewees this
of survey respondents respectively. is counter-productive, adding political
Nearly 60 percent are concerned risk to the sector while discouraging
about national politics – a sharp rise on new investment.
last year.
As one global investor warns:
It is impossible to dissociate politics “Regulation is always a risk even
from another critically important subject though it has been shown to suppress
– the environment – which has, as one the supply of housing and make the
investment manager puts it, “moved shortages worse, not better. It’s popular
to a different level of risk” since last with politicians because it’s this freebie
year’s report. Over two thirds of survey handout that they can give to their
respondents are concerned about the current constituents, who are renting
impact of environmental issues on apartments. But it will impact the
their business in 2020. “We have talked growth of their cities.”
about climate change for some time,
but the risk has become more severe,” As expected, Brexit and trade wars
says a German CEO. “It affects how you remain major issues, widely seen to
build, how sustainably you build. What have far-reaching consequences for
is your energy cost?” European real estate. “Scrappy politics
is creating uncertain, deteriorating
The political backdrop to investment economics,” says a pan-European
has been on the minds of Europe’s player, perfectly summing up the
property leaders for years. The industry view of the UK and the lack of
difference now is that political issues resolution over Brexit. “It would be quite
are acting as a drag on economic and gutsy to invest in London over the
real estate performance as well as coming year,” says a German institution.
business confidence.
Emerging Trends in Real Estate® Europe 2020 7
Chapter 1: Business environment
Facing up to Brexit
Some 70 percent of Europe’s Figure 1-3 Business impact of Brexit in 2020
senior property professionals
believe that the UK’s ability %
to attract international talent Business
relocations
will fall following Brexit, to the rest
1 3 24 65 7
while the same proportion of Europe
expect business relocations
to continental Europe will
increase in 2020. The UK’s
ability to
attract 18 52 25 41
Though marginally better than last international
year’s, these numbers nonetheless talent
reflect the depth of concern over the UK
economy that the industry shares with
the wider business community. Decrease substantially Decrease somewhat No significant impact
Increase somewhat Increase substantially
The survey was conducted in mid-2019
when the industry was bracing itself Source: Emerging Trends Europe survey 2020
not just for the UK’s departure from the
European Union but the prospect that The interviews suggest that Boris However, not everyone is convinced
a hard Brexit might turn into a no-deal Johnson taking over from Theresa May that the European Union as a whole
Brexit. Though the possible departure as UK Prime Minister in the summer will emerge unscathed from Brexit.
has been put back until January has done nothing to alleviate the largely “Even though the political uncertainty
2020, the majority of respondents “risk off” attitude to UK real estate. is certainly focused on London and
from both the UK and the rest of “Earlier this year there was an attitude the UK at the moment, to think that
Europe nonetheless believe Brexit of, ‘let’s just get on with it’, because continental Europe is without its
will have a negative impact on the UK we’ve been facing that uncertainty now challenges is just simply being naïve,”
property industry. for a couple of years,” says a London- says one global investor. “Europe
based financier. “But it just seems has economic challenges, political
as if there’s increased concern with challenges. It certainly has long-term
more political upheaval and a change issues to do with the euro, long-term
in administration. People are pausing issues to do with competitiveness, and
a bit longer in terms of committing to values are high.”
doing transactions.”
Indeed, Brexit is a “lose-lose situation”,
For some continental cities, there have according to one German-based
been no such doubts. After the 2016 banker: “No other European financial
Brexit referendum, Amsterdam, Dublin, centre would actually take over
Frankfurt, Luxembourg and Paris all London’s position in general. With
seemed set to win business in one form London outside the largest single
or another from London and the UK. market in the world, not only is the UK
The latest interviews indicate the same losing its title as the world’s leading
cities are already Brexit beneficiaries to financial centre, but also the European
some extent – with more business likely Union won’t have the world’s leading
to come their way in 2020. financial centre anymore.”
8 Emerging Trends in Real Estate® Europe 2020In fact, the industry is concerned for
Figure 1-4 Issues impacting business in 2020
Germany, too. Already on the brink of
recession, Europe’s biggest economy Construction costs
is heavily dependent on exports and as
25 42 20 10 3 %
such is considered most vulnerable to
the potential fall-out from the trade war Availability of suitable assets/land for acquisition and development
between US and China extending to %
21 41 22 13 3
Europe. “You don’t feel the impact yet,
but if you speak to bankers, investors, European economic growth
even in this real estate industry, 11 55 19 14 1%
that’s the biggest concern,” says a
German CEO. Currency volatility
9 29 31 22 9 %
One global investment manager
Cybersecurity
believes that as “the narrative in Europe
8 42 30 16 4 %
of German strength, fiscal prudence
and exporting prowess is being rapidly Asset obsolescence
undermined by events”, then the more
7 25 37 25 6 %
domestically focused, consumer-
based economies of France, Spain and Global economic growth
the Nordics stand to gain – “like mini 7 54 21 16 2 %
versions of the US”.
Interest rate movements
According to another global player, 6 25 20 41 8 %
however, the wider impact of trade
Inflation
tensions is “something that we’re
just beginning to accept as part of 4 16 31 38 12 %
the landscape. And I don’t think the Availability of finance
markets are pricing it into most of the
4 15 17 43 12 %
assets that we’re dealing with, which
is probably also a commentary on just
how much capital remains out there to 0 10 20
Very concerned
Not very concerned
30 Somewhat
40 concerned
50 60
Not at all concerned
70
Neither/nor 80 90 100
invest in real estate”.
Source: Emerging Trends Europe survey 2020
Emerging Trends in Real Estate® Europe 2020 9Chapter 1: Business environment
Either way, fears over European and But this is also because of the scarcity
global economic growth are up sharply of suitable assets – a perennial issue
on last year, signalling a testing period for survey respondents. “For a large
for all occupier markets, not just in part, lower investment volumes are Occupier decisions are
2020 but over the next five years. One due to the fact that the product that is
taking a little longer
Nordic interviewee says: “Typically, the available is often not what the investors
occupier market lags behind the overall want. I wouldn’t say only prime but than they were last year.
economy, but we are already starting good-quality product is increasingly There is more uncertainty
to hear that occupier decisions are challenging to find,” says a pan-
taking a little longer than they were last European investment manager.
about where economies
year or earlier this year. There is more are going.
uncertainty about where economies However, the primary concern for
are going.” 2020 is the cost of construction. It is
another long-standing issue, especially
Though the monetary policy shift has for developers directly bearing the
boosted investment, the downbeat rising costs of labour and materials.
economic forecasts have helped keep This year’s survey suggests that the
a lid on the volume of commercial cost problem is coming into view
property transactions – just 1 percent for the wider property industry, as
up across Europe in the year to 30 many more investors adopt develop-
September 2019, according to Real to-core strategies as a means of
Capital Analytics. delivering returns.
Figure 1-5 European business environment in next 3–5 years
7 8 12 17 18 10 9 11 7 8
36 38 39 34 39 52 55 57 61 70
57 54 49 49 43 38 35 32 32 22
Global European Availability Construction Cyber- Cost of Currency Interest rate Asset Inflation
economic economic of suitable costs security finance volatility movements obsolescence
growth growth assets/land for
acquisition and
development
Improve Stay the same Get worse
Source: Emerging Trends Europe survey 2020
10 Emerging Trends in Real Estate® Europe 2020Interest rate boost Figure 1-6 Interest rates and inflation in 2020
For all the political and economic
uncertainty clouding European real 1% 2% 1% 3%
10% 18%
estate, for some in the industry this 24% 13%
32%
has been offset by central banks’
37%
move to maintain or cut base rates –
a big boost for investment, albeit not Inflation Short-term Long-term
interest rates interest rates
yet for the underlying economy. “It
is hard to express strongly enough
46%
what an extraordinary turnaround 57% 56%
that has been. The cycle feels like it
is going to go longer. Nothing seems
to be overheating,” says a global Increase significantly Increase somewhat Stay the same
investment manager. Decrease somewhat Decrease significantly
Source: Emerging Trends Europe survey 2020
Nearly three quarters of respondents
expect short-term interest rates to
stay the same or reduce in 2020,
while the majority believe inflation Figure 1-7 Eurozone property yields and interest rates, 2010–2019
will hold steady. In the eyes of most
6
interviewees this monetary environment
has reinforced real estate’s attraction 5
relative to bonds and equities. As one 4
private equity player says, “There’s 3
not a significant enough slowdown %
2
in growth to really undermine the
fundamental value proposition that 1
real estate provides, given a negative 0
interest rate environment.” -6
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
EURIBOR Eurozone bond yields Eurozone property yields Five-year swap rate
Source: CBRE, Datastream from Refinitiv, European Central Bank
Figure 1-8 UK property yields and interest rates, 2010–2019
8
7
6
5
%4
3
2
1
0
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
LIBOR UK Government bond yields UK property yields Five-year swap rate
Source: CBRE, Datastream from Refinitiv, European Central Bank
Emerging Trends in Real Estate® Europe 2020 11Image: Harbour, Hamburg, Germany
European real estate has been “brought As oneFigure
global1-10
investment manager Figure 1-11
back into focus for a lot of investors Returns targeted inwealth
observes, this “incredible 2020 of Returns tar
Figure 1-9 compared to previous year
Appetite for European versus other asset classes”, and many capital going into the market pushed
real estate in 2020 – but importantly, not everyone – in the down cap rates in2% logistics
2%
and in some 4
industry expect capital to keep being cases, offices, by another11%25 basis 9%
17% deployed. Just over half of respondents points” during 2019.
53%
say they expect to be net buyers of real 53%
estate in Europe in 2020, and nearly Even in highly priced but economically
a third are buying and selling in equal challenged Germany, there is the
measure. But nearly a fifth expect to 32% of more to come. “Since 21%
possibility
30% be net sellers, reflecting perhaps the interest rates are unlikely to rise and
economic uncertainty in this late-cycle may even go down, we see even
market and the risk of a geopolitical Significantly
further yield higher says one
compression,” 0-5%
shock to the system. Somewhat higher
German interviewee. 5-10%
A net buyer Same 10-15%
Buying and selling
similar amounts
“The insurance companies, the Somewhat lower 15-20%
A net seller open-end funds and high-net-worth Significantly lower 20%+
individuals will continue to seek yield
in the real estate sector,” says one
of the more bullish pan-European
It just feels as if we’re
Source: Emerging Trends Europe survey 2020
fund managers. “That low interest in a lower return
rate – that force – will drive continued environment for a longer
high allocations to real estate. There’s
a lot of business to be done, still, just
period of time. If there’s
allocating money into core real estate.” no underlying growth
in the markets, rates will
stay low.
12 Emerging Trends in Real Estate® Europe 2020Even so, few are relying solely on On a cautionary note, one fund “I’m not totally uncomfortable buying
cap-rate compression. Sustainable manager adds: “This is an environment very core assets at very high prices,
income has been the key objective some institutional players still have to because they will still be there in five,
for institutional investors for several accept because they have their pay- 10, 15, 20 years. They will still have a
years, and 2020 will be no different. out requirements based on historical value depending on cycle, depending
“And that will mean the overall return is higher returns.” on the quality of our management.
significantly lower than what we have But they will be okay,” says one pan-
seen over the last three, four years If anything, the interviews indicate there European manager.
because the income return component is no pre-eminent means of achieving
will come back to something between attractive risk-adjusted returns at this Another pan-European player is even
three and five percent, depending on point in the cycle. “Europe still offers more trenchant in support of core:
the sector,” says one pan-European a huge amount of complexity, a huge “We’ve been unremittingly disciplined
investment manager. amount of diversity,” a global fund on asset quality because most of the
manager suggests. “That means skilful threats to real estate today, when it
Return expectations have been scaled investors can extract higher returns. I comes down to it, are on product that
down over successive Emerging Trends just think you have got to be honest to for one reason or another is going to
Europe surveys, and once again a third your investment committee and your become obsolete. People say core is
of respondents are targeting lower investors about the risks you are taking too expensive, and that may be true.
returns compared with a year ago. Two so they then have the opportunity to But when the market turns, I’d rather be
thirds are pencilling in up to 10 percent offset those elsewhere.” holding the better assets, for so many
risk-adjusted returns in 2020. reasons, than the secondary assets.”
Last year, core-plus and value-
“It just feels as if we’re in a lower return added strategies seemed to prevail There are counter arguments. Investing
environment for a longer period of as investment managers and fund in “everything but core”, one global
time. If there’s no underlying growth managers sought to squeeze higher player says: “These are good times
in the markets, rates will stay low. We returns on behalf of their clients. for people who actually work their real
don’t see that really moving out in the This year, the monetary policy shift estate, who know how to do real estate,
next three to five years,” says a global has helped spark, as one global who are not just expecting cap-rate
investment banker. manager puts it, “a recovery in investor compression and easy money to
enthusiasm for core real estate”. be made.”
Figure 1-10 Figure 1-11 Figure 1-12
Returns targeted in 2020 Returns targeted in 2020 Time horizon for holding
compared to previous year investments
2% 2% 4% 7%
11% 9%
21%
53% 23%
32% 21% 38%
44% 33%
Significantly higher 0-5% 1-3 years
Somewhat higher 5-10% 3-5 years
Same 10-15% 5-10 years
Somewhat lower 15-20% 10+ years
Significantly lower 20%+
Source: Emerging Trends Europe survey 2020
Emerging Trends in Real Estate® Europe 2020 13Chapter 1: Business environment
And when it comes to development, For others, alternative real estate
the definition of risk is open to investment has been one of the notable
interpretation. The develop-to-core defensive strategies. The survey and
strategy has been a feature of the interviews indicate that the less cyclical
European market for the past few income from the likes of purpose-built
years. Many interviewees still see it student accommodation, healthcare
as a prudent way of securing quality and senior living will remain highly
offices and logistics without paying coveted in 2020.
over the odds. “At this point in the cycle,
and given the secular trends, it’s the Though trending upwards, alternative
right thing to be doing,” says a pan- real estate is still a minority play from a
European manager. short-term capital perspective. “Despite
all of the zeitgeist around alternative
But one global investor active in Europe assets,” says one pan-European
is less sanguine: “In order to get a good investor, “the most liquid product in
margin, in a lot of cases at the moment the real estate sector in Europe today
you have to do development. There remains a newly built, fully let office
is no question it’s riskier. That is what building in a gateway market in a
happens in every cycle: you can no fantastic location. That is where liquidity
longer buy income at measurable levels, resides. I can always sell that building.”
and you are forced into a position where
you have to go up the risk curve. I don’t
like it, but that’s the reality.”
14 Emerging Trends in Real Estate® Europe 2020 Image: Dumbiedykes residential area, Edinburgh, UKMobility matters Thus, it is little surprise that Paris tops There is also a reasonable expectation
the 2020 city rankings; the Grand Paris that smart mobility, just like big-
project, Europe’s largest transport ticket infrastructure, can be a catalyst
Many in the industry believe returns – as
scheme, is repeatedly praised by for urban regeneration. “Low-cost
well as market liquidity – can improve
interviewees. Says one: “It will change mobility solutions can make areas that
if they take account of the bigger
the way the city works for good. It is a are currently underserved by public
urbanisation and demographic trends
tangible example of how transportation transport once again accessible,
and attempt to invest through the cycle.
can directly influence investment as an especially to younger people, and
To that end, the boundaries between incubator for new markets.” thus bring additional stock of spaces,
traditional and alternative real estate often more affordable, back to the
are being blurred, as highlighted by One global player and long-time Paris market,” says one interviewee. “This
Emerging Trends Europe in recent investor adds: “Every single decision has the effect that increased interest
years. The significance of alternative we make when we look at an emerging will attract investment and provoke a
real estate is not simply the capital location in Paris is about how the gradual rejuvenation of areas that may
it attracts but the way it has helped new train or metro system will impact be considered unattractive by end
advance the idea of real estate as a that location. Is it going to benefit users today.”
service, and turn practitioners into, residential? Or are we going to create a
as one says, “operators as opposed new office location?” Right now, as one pan-European
to asset allocators”. At the same time manager says: “Mobility is one of the
a blurring of the boundaries between For many of the industry leaders key considerations for the locations in
real estate and real assets – especially canvassed for Emerging Trends Europe, which we invest.”
transport infrastructure – is encouraging the opportunities extend beyond
investors to examine more closely how large-scale public infrastructure. The
their buildings will be used and how consensus is that they need to factor
cities may develop. in the harder-to-define solutions and
cultural changes that are already
Speaking for many interviewees, one “transforming urban mobility”. They
pan-European manager says: “We are also acknowledge that, further out,
trying to bring the infrastructure thought investment needs to reflect the
process and investment activity closer adoption of electric and autonomous
to what we are doing in real estate.” vehicles. “Smart mobility will change
our behaviour when it comes to moving
around quite substantially in the future,”
says a German asset manager.
Emerging Trends in Real Estate® Europe 2020 15Chapter 1: Business environment
Top trends
Environmental The interviews suggest the growing Indeed, 26 percent of respondents
public outcry over the effects of climate do not see any material impact from
tipping point change is influencing sentiment in climate change on their portfolio
the industry. That public pressure is today, although around a fifth believe
Climate change is seen as having the translating into a general tightening of it is already leading to greater capital
biggest impact on real estate over the environmental, social and corporate expenditure, higher operational costs
next 30 years, but it is clear that some governance (ESG) requirements among and faster obsolescence.
industry leaders are already rising to the institutional investors.
challenge, not least because they bear “Global climate change is reducing
some responsibility. This tougher ESG regime is in turn the amount of land that’s viable for
being imposed on the real estate habitation and occupation,” concludes
“We have reached a tipping point specialists in those organisations, their one pan-European investor. “Some of
around environmental issues generally, external investment managers and on our most valuable agglomerations of
and 40 percent of global emissions publicly quoted companies. “People are real estate value are in global cities,
are from real estate,” says a pan- waking up to the world’s environmental places that are hugely exposed to
European investment manager. “We issues. Shareholders enquiring about those risks and being transformed on
have ambitious targets around going the environmental impact of our the basis of those risks. And the real
net carbon neutral that will impact how buildings has gone up five-fold,” says a estate market is only just beginning to
buildings are built, used and managed.” UK REIT director. evaluate that.”
Almost half of survey respondents say Some investors are also responding to
the risk of climate change has increased national emissions reduction targets
in their portfolio, and 73 percent expect imposed under the Paris Agreement.
that risk to become greater over the For them, making their assets “Paris-
next five years. proof” overrides short-term political
Shareholders enquiring
and economic concerns. As one about the environmental
Dutch investor says: “The biggest risk impact of our buildings
for us is more the long-term risk – is
your property good enough to deal has gone up five-fold.
with the Paris treaty? But I don’t think
every institutional investor shares our
concerns over sustainability, at least
not yet.”
16 Emerging Trends in Real Estate® Europe 2020image: Bosco Verticale, Milan, Italy
Figure 1-13 Current climate change Figure 1-14 Climate change risk on
risk on portfolio portfolio in the next 5 years
3% 11% 3% 1%
23% 26%
49%
37%
47%
Increased significantly Decreased somewhat Increase significantly Decrease somewhat
Increased somewhat Decreased significantly Increase somewhat Decrease significantly
Stayed the same Stay the same
Source: Emerging Trends Europe survey 2020
Figure 1-15 Climate change impact on portfolio
No material impact 26%
More capital expenditure 22%
Higher operational expenses 20%
Faster obsolesence 18%
Higher insurance premiums/non-insurabiility 6%
Declining values 5%
Lower liquidity 2%
Increased number of sales 0%
Source: Emerging Trends Europe survey 2020
Emerging Trends in Real Estate® Europe 2020 17Chapter 1: Business environment
Regulatory risk “That is why we think that residential Similar measures are expected in other
could be potentially exposed to a German cities and beyond. Residential
for residential certain yield shift ... to move out and regulation is one of the common talking
reflect more the political and regulatory points for interviewees active in markets
A lack of affordable housing has been risks investors are facing,” says an as diverse as France, the Netherlands,
highlighted by Emerging Trends Europe investment banker. the Nordics, Spain and the UK.
as a serious problem in many European
cities for years, and there is no let-up A French CEO puts it more bluntly: Though much more wary of the
in sight. “When not enough people have enough regulatory pitfalls than before,
wealth, the easy way to get votes is experienced residential investors still
Some 61 percent of survey respondents to stop rent increases, so politicians inherently believe the long-term supply/
are concerned about housing do it and mess up the market. demand dynamics make housing
affordability in 2020 – sharply up on last Political decisions don’t go with good relatively secure and “defensive on
year – and half believe the problem will management a lot of times.” the downside”.
worsen over the next five years.
So far, Berlin has made the biggest “Rent control is an issue, but it will
With the supply/demand imbalance headlines with a plan to introduce a impact mostly in the first years of
acknowledged as long-term, it is no rent freeze for five years, which has investment,” says a pan-European
coincidence that the industry has already hit sentiment. “The story of player. “If you want to have a real policy
responded by deploying increasing that city is really strong, and we have in residential you know that quite an
amounts of capital into various forms of assets there. But it’s just un-investable important part of your value is not in
rental housing. at the moment, so we’re going to yield but in capital gains, which means
manage what we’ve got and watch for you have to be patient.”
However, several governments across a resolution,” says one longstanding
Europe – mainly at a city rather than residential investor in Berlin.
national level – are also responding now
to the affordability issue with proposals
to set rent controls.
Image: Dortheavej Residence affordable housing
18 Emerging Trends in Real Estate® Europe 2020 project, Copenhagen, Denmark (Bjarke Ingels Group)Construction costs Two thirds of respondents nonetheless For those intent on development, the
believe that (re)development is the capacity issue – a legacy of the financial
developers dear most attractive way to acquire prime crisis, too – is squeezing margins.
assets. But as one Dutch investor “If yields cannot continue to come
Invariably flagged as a big issue in says: “Development has become down, then obviously, you have to be
Emerging Trends Europe, construction more expensive due to the fact that prepared to have a lower return on your
capacity has been thrown into sharp construction costs have increased investment,” says a German CEO. A
focus this year by those who would dramatically, and buying land is also pan-European investment manager is
pursue a late-cycle, develop-to-core an issue. Develop-to-hold is still a “insisting” on pushing the cost risk back
strategy were it not for rising costs. feasible business model. But let’s say, on to the contractors, but even so “the
percentage-wise, it’s lower today than it vendors are having to understand that
More than two thirds of survey used to be.” this is impacting on site valuations”.
respondents – a higher proportion
than last year – cite increasing A private equity player points to a few An investment manager with a long
construction costs as having the development hotspots around Europe, European development track record
biggest impact on their business in such as Berlin, before adding: “All we concludes: “We are quite cautious at
2020. Interviewees across Europe point generally see are very low vacancy this point in the cycle, especially with
to labour and material costs combining rates but no development response. construction costs rising significantly
for 5-7 percent inflation per annum in And part of that is because there’s not a in many markets. We are more
this sector. huge amount of construction capacity.” likely to reduce risk and unlikely to
pursue speculative development.
Achieving target returns will require a widening of the definition of traditional real estate to
This is a dilemma for investors, who
include real assets and related service businessesWe like income. The bar is higher for
Nor is there much debt, which means
can see that the post-financial crisis Achieving target returns will require a widening of the definition of traditional real estate to
developers must rely on equity. “For risk development at this point.”
include real assets and related service businesses
over-supply has disappeared, much transactions, whether it’s development,
stock needs modernising and sourcing
suitable standing core assets is as
refurbishment, speculative, lending
23%
into vacant or a building that you 48% 21% 8%
expensive as ever. With constraints on know is going 23%
Agree
48%
to go vacant, the debt 21%
Neither/nor
8%
Disagree
1%
1%
Disagree
the development pipeline, however, market remains cautious and Agreerelatively
strongly strongly
there is reassuringly little sign of a new selective. ThereAgree the sponsor is Neither/nor Disagree Disagree
strongly Agree strongly
over-supply emerging. extremely important, and the providers
Use this as "bubble diagram" in Ch 1 - in the final section of the main piece - ie near the crosshead "Mobility matters for real estate
are not that many,” says another private
Use this as "bubble diagram" in Ch 1 - in the final section of the main piece - ie near the crosshead "Mobility matters for real estate
equity investor.
(Re)development is the most attractive way to acquire prime assets
(Re)development is the most attractive way to acquire prime assets
We are quite cautious
at this point in the 21% 47% 23% 7%
cycle, especially with 21%
Agree
47% 23%
Neither/nor
7%
Disagree
1%
1%
Disagree
construction costs strongly
Agree
Agree
Neither/nor Disagree
strongly
Disagree
rising significantly strongly Agree
Use this as "bubble diagram" in the construction costs Top Trend
strongly
in many markets. Use this as "bubble diagram" in the construction costs Top Trend
The bar is higher for
Prime assets are overpriced
development at this point.
Prime assets are overpriced
18% 47% 23% 11%
18%
Agree
47% 23%
Neither/nor
11%
Disagree
strongly Agree
Agree Neither/nor Disagree
strongly Agree
Use as "bubble diagram" in chapter one, with Construction costs Top Trend
Use as "bubble diagram" in chapter one, with Construction costs Top Trend
Source: Emerging Trends Europe survey 2019
Source: Emerging Trends Europe survey 2019
Emerging Trends in Real Estate® Europe 2020 19Chapter 1: Business environment
Technology boost Figure 1-16 Proptech investment / Figure 1-17 Proptech investment /
for business usage in the past year usage in the next 3–5 years
1%
“To be a winner in the next five years 18% 12%
you will need to be faster and smarter,
39%
and being digital is the key to being fast
and smart,” says the director of a pan- 37%
European lender. The industry is largely
following this advice.
48%
44%
Nearly two thirds of survey respondents
have increased the use of technology Increased significantly Decreased Increase significantly Decrease
in their operational businesses over the somewhat somewhat
Increased somewhat Increase somewhat
past year. Nearly 90 percent indicate it
Stayed the same Decreased Stay the same Decrease
will carry on trending upwards over the
significantly significantly
next five years.
Source: Emerging Trends Europe survey 2020
These results bear out what Emerging
Trends Europe has signalled in previous
years when many interviewees hailed Many industry leaders view technology Two thirds of respondents may be
technology as a critically important as an enabling force for efficiency users, but they are not actually investing
long-term influence on real estate. It gains, not just for their business in technology despite the perceived
is natural that such sentiment would but in the work they undertake for improvements it can bring to real estate.
sooner or later turn into day-to-day use. clients and occupiers, whether it is Like one Polish investment manager,
building information modelling used they are “wary of spending a lot of
The survey reveals two main ways by architects and developers or data money on something which will be
of harnessing technology – a third of management tools used by investors old in three, four years”. Some believe
respondents are buying products from and asset managers. their scale of operation is too small
third-party suppliers, while a quarter to warrant investment. Others are put
are investing or partnering with start- Expressing a common view, one global off by the confusing array of proptech
up proptech firms. “Originally the idea manager says: “We are investing start-ups out there.
we had was to invest in start-ups and internally in democratising access to
get a return on our money. Now we see our own data and creating operational Perhaps this reflects some anxiety
this as learning money to keep track of efficiencies for the business as well over jobs. As one German lender says:
what’s happening in different segments as better decision-making. Most of “People talk about jobs lost from Brexit,
of the market. All this is part of our core our focus, however, is on our real but a bigger impact will be the role tech
business now,” says one enthusiast estate portfolio and how we can plays and the number of support staff
from the Baltics. use technology within it to drive roles in financial services that become
user experience, sustainability and, redundant. That space might be taken
ultimately, investment performance.” up by the tech companies themselves.”
In any event, there is a consensus that
real estate is nearer the start than the
end of its “digital transformation”. But it
is gathering momentum.
20 Emerging Trends in Real Estate® Europe 2020Figure 1-18 Methods of proptech investment
Buying proptech products from
third-party suppliers 32%
To be a winner in the next
Investing in/partnering with proptech
five years you will need to
businesses/start-ups directly
24%
be faster and smarter, and
Investing in proptech businesses/start-ups
5%
being digital is the key to
via the company’s venture capital provider
being fast and smart.
Investing in proptech businesses/start-ups
3%
via a third-party venture capital provider
Not investing 36%
Source: Emerging Trends Europe survey 2020
Image: EDGE Suedkreuz Berlin project, Germany (EDGE Technologies) Emerging Trends in Real Estate® Europe 2020 21Chapter 2
Real estate capital markets
“We’re investing with a recognition that this does all
end. And even if we can’t say when or how, we should be
experienced enough to understand the consequences and
what happens in the unwind when that process begins.”
Chairman, private equity firm
Image: Student accommodation in Castelldefels, Spain
22 Emerging Trends in Real Estate® Europe 2020 (AXA Investment Managers – Real Assets)With interest rates set to stay Between a quarter and a third think
lower for longer and bond equity and debt will increase in the
yields in many European next 12 months, which is about the
same proportion as predicted for last
countries in negative territory,
year’s increase.
equity and debt for real
estate are expected to remain “There is never going to not be a
plentiful for most of 2020. demand for real estate,” one very
bullish global investor says. “There
That said, market participants are being is $31 trillion of negative yield debt
more careful than ever about how and out there, and you need to find yield.”
where they deploy that capital. They are Consequently, on an overall basis, the
acutely aware that this real estate cycle weight of capital might actually cause
is now more than a decade old and values to rise in prime markets.
prices in many countries and sectors are
at record highs. “When German cap rates compressed
to three percent, everyone felt it would
More than half of survey respondents be hard for them to go much lower, but
believe that equity and debt for in the last six months they have,” one
refinancing or new investment will be the investment manager says. “Can it keep
same in 2020 as in 2019. going? Look at Japan.”
Figure 2-1 Availability of equity and debt in 2020
2% 3% 1% 2% 4% 3% 1% 3%
15% 19% 28%
26% 23% 20%
36%
26%
40%
55% 51% 42%
Equity for refinancing Debt for refinancing or Debt for development Equity for development
or new investment new investment
Increase significantly Increase somewhat Stay the same Decrease somewhat Decrease significantly
Source: Emerging Trends Europe survey 2020
Emerging Trends in Real Estate® Europe 2020 23Chapter 2: Real estate capital markets
Yet there is little evidence of complacency
Figure 2-3 Impact of Brexit on real estate in 2020
among investors about the risks inherent
in a market where values are above %
historic norms. “The fact is we are
probably getting slightly lower returns
UK 25 51 15 7 1
from the same level of risk,” a private Real estate
equity investor says. “On balance, I am investment
not going to go for more risk at this stage Rest 1 13 43 41 3
to juice returns.” of EU
Not all markets are equal when it comes
to availability of capital. Following a
decline in UK investment volumes in
2019, there is a clear belief among UK 19 60 17 3
three quarters of respondents that the Real estate
downward trend will continue in 2020 as a values
result of Brexit. Rest 1 8 61 31 1
of EU
“People are risk-off on the UK at the
moment for everything except residential, Decrease substantially Decrease somewhat No significant impact
and a lot is going to have to change for Increase somewhat Increase substantially
investors to feel more comfortable again,”
one global investor says. From the point Source: Emerging Trends Europe survey 2020
of view of lenders: “Those assets that
people feel strongly enough to support
are being bid aggressively, but as soon as
you move a few yards from the centre of
the fairway, the brakes go on.”
Figure 2-2 Country transaction volumes Q4 2018–Q3 2019 (€bn)
Finland 7
Norway 6 Sweden 14
3 Russia
Other 4
Denmark 4
Ireland 6
UK 53 Netherlands
20
Czech
Republic 7 Poland
67
3
Belgium 3 2 Hungary
Germany
France 41 Austria 9
2 Luxembourg
Switzerland 6
Spain 20 10 Italy
Portugal 4
Source: Real Capital Analytics
Note: Countries with transactions over €1 billion.
24 Emerging Trends in Real Estate® Europe 2020However, the UK is still among the largest With pricing high for existing core assets, “In 2018, 60 percent of our investments
markets in Europe. There is an underlying investors are increasingly willing to look were forward funding,” another
feeling that even in the event of a hard or to development to find higher returns. institutional fund manager says. “There
no-deal Brexit, there is so much capital in The fact that survey respondents feel is a smaller competitive set of players for
the world that values would be supported there is more likely to be an increase in those deals. We do get a premium, but
in the UK by opportunity funds and other equity compared to debt for development even that has eroded to around 25–40
investors quickly stepping in, looking highlights two trends, one cyclical, one basis points at best.”
for bargains. secular: the willingness of institutional
investors to adopt a build-to-core The steady march of alternative real
“For a lot of investors, the UK has been strategy and the pullback of traditional estate sectors has been charted in detail
off limits for a while, but some of the lenders from development finance, which by Emerging Trends Europe for the
private equity guys who have not invested regulation is making less profitable for past five years, and again interviewees
here before are starting to hire teams,” them. are keen to highlight the fact that, with
one adviser says. “If you don’t have a values high almost across the board,
legacy UK book, now is not a bad time to “We are going up the risk curve; we are sectors with demographic support, such
start looking.” supporting development, but we don’t as rented residential in all its forms, are
call it development, we call it build-to- increasingly appealing.
“We are very active in the UK today, and core,” one pension fund investor says.
not everyone is,” one more optimistic “I don’t want to say we are riding up the This thesis is spreading beyond the equity
debt fund manager says. “We are risk curve, but we are looking for resilient sphere and into debt, where lenders
underwriting things that would still be assets and operators that can pick had been more reticent to lend outside
okay and survive if the UK dropped out good locations.” of mainstream real estate. More than
of the G20.” 40 percent of respondents think niche
sectors would see the biggest increase in
availability of senior debt this year.
Figure 2-4 Access to senior debt in 2020
Niche sectors
We are going up the risk
11 32 48 8 1%
curve; we are supporting
Value-added real estate
development, but we
8 29 51 10 1 %
don’t call it development,
Core real estate
we call it build-to-core.
7 31 54 8 0%
Operating businesses
6 23 62 8 1%
New investment
5 30 53 10 1 %
Development finance
4 25 53 17 1%
Refinancing
3 19 67 10 0 %
Increase significantly Increase somewhat Stay the same
Decrease somewhat Decrease significantly
Source: Emerging Trends Europe survey 2020
Emerging Trends in Real Estate® Europe 2020 25Chapter 2: Real estate capital markets
“We’ve had a development finance “We are very cautious on retail, and
mandate for a while, which is continuing we would only lend to clients who are
to grow for anything with a bed,” one already active in the sector and only
fund manager says. on high street units,” says one bank, We are very cautious on
speaking on a pan-European basis. “We
retail, and we would only
Investors are almost as confident that are not lending on shopping centres or
senior debt will increase in availability for retail in the regions.” lend to clients who are
core real estate. Lenders are continuing already active in the
to back assets with values which on the “A lot of lending institutions have red-
whole are likely to be supported by the lined retail, and that makes it harder to
sector and only on high
benign interest rate environment that has wade in,” one UK adviser says. street units.
caused yields to compress or remain flat
in core markets. In terms of where debt will come from,
survey respondents expect the long-
The exception is retail. Survey term shift away from banks towards
respondents are not asked specifically debt funds and institutional lenders like
about the sector, but interviewees pension funds and insurers to continue.
report that lenders are far less willing More than 70 percent believe alternative
to lend on shopping centres and retail lending platforms will increase their
parks, particularly in the UK, where the lending in the next 12 months, more
sector is facing precipitous falls in both than three times the 22 percent who
income and capital values. expect banks to lend more.
Figure 2-5 Sources of debt in 2020
Alternative lending platforms
17 54 21 6 1 %
Non-bank institutions
12 49 30 7 1 %
Other non-bank lenders
12 52 29 7 1%
Issuance of commercial mortgage-backed securities
5 30 51 12 1 %
Banks
1 21 42 32 3 %
Increase significantly Increase somewhat Stay the same
Decrease somewhat Decrease significantly
Source: Emerging Trends Europe survey 2020
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