Emerging Trends in Real Estate® Beyond the capital Europe 2016 Contents 26 Chapter 3 Markets to watch 4 Chapter 1 Business environment 2 16 Executive Chapter 2 summary Real estate capital markets Cover image: Marie-Elisabeth Lüders Building, Berlin, Germany 2 Emerging Trends in Real Estate® Europe 2016 Contents 71 About the survey Emerging Trends in Real Estate® Europe 2016 Beyond the capital A publication from PwC and the Urban Land Institute 60 Chapter 4 Changing places Emerging Trends in Real Estate® Europe 2016 1 Executive summary Executive summary 2 Emerging Trends in Real Estate® Europe 2016 Executive summary Capital flows and city rankings will always attract the headlines, The vast majority of respondents are but this year Emerging Trends Europe shines a spotlight on confident in their ability to thrive in 2016. fundamental changes at the business end of the real estate However, they acknowledge it is an increasingly competitive global field for industry. It reveals an industry trying to come to terms with the real estate. They are aware that if the wall needs of occupiers and the disruptive forces of technology, of capital recedes, European markets demographics, social change and rapid urbanisation. could be left exposed. Then it will be the strength of the underlying market These ground-level disruptions are Low interest rates and the sheer weight fundamentals and management’s permeating through the entire real estate of capital bearing down on European operational skills that come into focus. value chain. Investors are focused on real estate mean that most remain bullish cities and assets rather than countries. about the industry’s business prospects Which brings us back to occupiers. They also favour alternative, more in 2016. However, concerns over The clear challenge to the industry is operational assets for accessing geopolitical issues like immigration to be less about bricks and mortar and outperformance, with 41 percent of and terrorism, Britain’s potential exit more about service. As one interviewee respondents against 28 percent last from the European Union, economic concludes: “Twenty years ago we had year considering taking the plunge into decline in China and uncertainty over tenants, now we have customers. In 20 alternatives. Healthcare, hotels, student Europe’s economic recovery, have led years' time we'll have guests.” accommodation and data centres are to a strong undercurrent of caution, all expected to shine as sectors most obviously highlighted by lower benefiting from urbanisation and long- levels of confidence in the outlook term demographic trends. post 2016. Development is seen as another way According to Emerging Trends Europe, to achieve outperformance in 2016, the five leading cities for investment with 78 percent agreeing it is an prospects in 2016 are Berlin at Number 1, attractive way to acquire prime assets. followed by Hamburg, Dublin, Madrid The more progressive developers and and Copenhagen. Many interviewees investors are innovating – attempting to back the German capital to thrive well anticipate and adapt to rapidly changing beyond 2016, based on its young occupier demands. Those canvassed population and its growing reputation by Emerging Trends Europe hold as a technology centre, as well as the polarised views on issues like optimal land available for development. lease lengths, shared office space and the impact on established valuation models and traditional assessments of covenant strength. Emerging Trends in Real Estate® Europe 2016 3 Chapter 1 Business environment 4 Emerging Trends in Real Estate® Europe 2016 Chapter 1: Business environment “Business is good: value is there for the right deals. However, One reason for such a relatively benign we fully expect there to be shocks to the system along the way.” view of European markets in 2016 is that, against a backdrop of continuing low interest rates, the difference between real Europe’s real estate industry is very estate and bond yields remains optimistic about its business prospects in attractive. “Everybody wants to increase 2016, albeit slightly less confident than it allocations to real estate because it offers was a year ago. Over half of the property returns that you cannot achieve with a professionals surveyed by Emerging similar risk level in bonds.” Trends Europe indicate that headcounts will be static, and while profit expectations The sheer weight of capital bearing down are slightly down on 2015, very few – on European real estate has once again 7 percent – expect to do worse. boosted business for many of those canvassed for this year’s report. And as “Europe looks well set,” concludes one “Everybody wants to many as 87 percent of them believe that global investor. “There is an improving increase allocations global capital flows will continue to macro-economic picture, unemployment influence their investment strategy over to real estate is improving, supply has been minimal the next five years. because it offers for many years, and banks and investors are finally becoming active in terms of returns that you “There is a continuing appetite for real cleaning up their balance sheets and estate, and that demand is coming from cannot achieve selling assets. That is creating a lot a pretty broad spectrum of investor types of interest.” with a similar risk – pension funds, retail investors, wealth level in bonds.” management, sovereign wealth and the larger insurance companies.” Figure 1-1 Business prospects in 2016 2016 37 53 10 % Business condence 2015 47 43 10 % 2016 48 45 7 % Business protability 2015 56 33 11 % 2016 38 55 7 % Business headcount 2015 48 43 9 % Increase Stay the same Decrease Source: Emerging Trends Europe survey 2016 Note: Percentages may not total 100 due to rounding Emerging Trends in Real Estate® Europe 2016 5 The most bullish about their business them expect to increase their profits in 2016 are respondents from Southern in 2016. In interview, however, the UK Europe. No doubt this comes from a very contingent is more circumspect. low base, but none the less reflects economic recoveries in their countries. They are aware that their market is further Spain particularly is increasingly seen through the property cycle than anywhere as a destination for mainstream investors else in Europe. The CEO of one REIT rather than opportunistic capital. puts it bluntly: “We have been de-gearing since the end of 2014 when we committed Last year respondents in Ireland were to our last speculative development. the most confident in Europe about If you think the market is going to go up, improving profitability and they remain gear your balance sheet. If not, de-gear.” upbeat for 2016, as this one-time distressed market returns to normality. At the other end of the scale is Russia. Last year two-thirds of Russian respondents UK-based respondents, meanwhile, predicted a decline in fortunes. This time, have benefited hugely from being part of just less than a third say things will get Europe’s strongest economy and biggest worse in 2016, which is progress of sorts, property investment market; over half of but still grim. “It’s about survival,” says one. Figure 1-2 Business profitability in 2016 89 86 75 64 56 45 45 38 38 33 31 30 26 Increase 14 % Stay the 11 same 14 25 Spain 27 Decrease Portugal 41 45 45 Greece 54 57 57 9 63 69 70 Ireland 4 UK 9 9 France Germany 8 % Italy Central 17 & Eastern 29 Europe Nordic Benelux region Turkey Russia Source: Emerging Trends Europe survey 2016 6 Emerging Trends in Real Estate® Europe 2016 Chapter 1: Business environment “The last three or four But for the Eurozone, a key indicator for The global oil glut has sent oil prices 2016 can be gleaned from the fact that plunging, and with this a likely cut in years it’s just been business sentiment in both Germany and allocations to real estate from some a straight line going France is evenly split between those who oil-producing states. Russia’s conflict up, and that is not the believe they will do better in 2016 and with Ukraine remains a threat to the those who expect it to be the same as region. And Middle Eastern conflicts case now.” 2015. Says a German lender: “We are have led to terrorist attacks in Paris positive but not outright bullish; there is and the mass movement of people into a good number of deals to be done. Europe, on a scale not seen since the The last three or four years it’s just been Second World War. a straight line going up, and that is not the case now.” “Everybody has become a sideline economist and politician,” says a banker. No-one expects unbridled growth. “You have to be aware of what’s going on There is a significant undercurrent of because the windows to do things have caution across Europe as a result of become so much tighter, and the geopolitical issues, political uncertainty volatility in the markets moves so rapidly. and economic decline elsewhere, all of In the public markets you have to be which could escalate and impact on real careful. In the private markets you have estate. Last year’s concerns over Greece to have a view.” and the break-up of the Eurozone have eased for now, but only to be replaced by the possibility of Brexit. Figure 1-3 Real estate investment in European countries, Q4 2014–Q3 2015 (€ billion) Other 5 Norway 8 Finland Sweden 4 16 UK Denmark Russia 4 5 Ireland 4 91 Germany Poland Netherlands 3 12 64 France 3 Belgium Czech 3 28 Republic Austria Switzerland 3 4 Italy Spain 12 9 Portugal 2 Source: Real Capital Analytics Emerging Trends in Real Estate® Europe 2016 7 Figure 1-4 European business environment in 2016 Shortage of assets In some respects, the outlook for 2016 suffers by comparison with 2015 – how can such extraordinary investment be sustained? “The climate is good now but 39 we think the market will gradually become Improve more expensive and opportunities will 13 12 10 % narrow.