Emerging Trends in Real Estate® A balancing act Europe 2015 Contents 24 Chapter 3 Markets to watch 4 Chapter 1 Business environment 2 16 Executive Chapter 2 summary Real estate capital markets Cover image: Modern apartment building in Dresden/Germany © Getty images Contents 52Sustainability 73About the technology and survey obsolescence 44 Chapter 4 Creating places to live 58 Appendix Emerging Trends in Real Estate® A balancing act Europe 2015 A publication from PwC and the Urban Land Institute Emerging Trends in Real Estate® Europe 2015 1 Executive summary Executive summary 2 Emerging Trends in Real Estate® Europe 2015 Executive summary According to , Europe’s real estate industry expects to be busier and more Emerging Trends Europe the five leading cities for investment profitable in 2015. This optimism is clear, despite weak prospects in 2015 are a mix of German fundamentals and economic conditions as well as an undercurrent stalwarts and recovery plays: Berlin is of concern about the geopolitical situation in parts of the world. Number 1, followed by Dublin, Madrid, Hamburg and, in a remarkable revival, The confidence comes from the Though credit has eased considerably Athens. Dublin’s ranking and Athens’ rise availability of capital. Real estate is for real estate in Europe, it is not the reflect the opportunistic streak that runs through Europe. Madrid’s ranking, too, awash with equity. Most of Emerging same everywhere. The most liquid reflects a capital surge into Spain that Trends Europe’s survey respondents markets of Northern Europe expect the and interviewees anticipate an increase flow to swell further. In Southern Europe, started in 2013 and shows no sign of in both prime and secondary values as where domestic lenders are still easing up. If anything, there are signs a result of greater liquidity and the need constrained, respondents think 2015 of it spreading across Southern Europe. to deploy capital in this asset class. will bring an improvement while in the Nordics and Central and Eastern Europe Of the mainstream sectors, logistics is In many of Europe’s main markets, they are less exuberant in their most popular, largely due to the impact growth in values has far exceeded any expectations. Finding finance for of e-commerce. City centre offices are rise in occupier activity. Across the development remains a challenge. not far behind, but suburban offices and Eurozone, in particular, rental growth And yet there is just a seed of doubt business parks languish near the bottom remains elusive. This disconnect between among some that the debt market of the league; only a third of respondents capital flows and fragile occupier has rebounded too far, too fast. rate their investment prospects as good. demand is expected to be, once again, a feature of the markets in 2015. Spending the money effectively is also Housing is an increasingly important part a challenge, but there is no doubt that of the mix. Two thirds of respondents are Nearly two thirds of those surveyed by it wants to go into real estate. The involved in residential in some shape or form and this year Emerging Trends Europe believe that core overwhelming majority – 70 percent – Emerging Trends Europe has taken a closer look at the sector. property is overpriced in almost all of those surveyed by Emerging Trends markets. In this respect, the major Europe expect more equity and debt influences are the equity-rich sovereign to flow into their markets in 2015. It is evident that shortages and wealth funds and pension funds and Any concerns over pricing are being affordability issues in many European insurers from Asia, which have helped drive assuaged by the fact that in a low cities are influencing a longer term move up the price of core assets in “gateway” interest rate environment, the income into housing by some investors and cities such as London, Paris, Milan and return of real estate remains attractive advisers that had once stuck resolutely Berlin. These players are expected to play compared with other asset classes. to commercial real estate. an even bigger role in European markets in 2015. Private equity firms from North The high price tags and scarcity of The green agenda is also embedded as a America will also remain a force. acquisition opportunities for core assets long-term strategy for many respondents, is forcing some to consider taking on but regulations and rapidly approaching What’s true of equity is almost equally more risk, simply to participate in real energy efficiency targets have brought it true of debt. Non-bank lenders, such as estate investment. But capital nonetheless into sharp focus. Regardless of the red debt funds and insurance companies, are remains choosy, both about the kind of tape, Emerging Trends Europe 2015 finds expected to raise their game significantly, assets it wants and where it will go. many convinced that sustainability is providing much-needed diversification synonymous with good business. from the bank-dominated landscape of the last boom. Emerging Trends in Real Estate® Europe 2015 3 Chapter 1 Business environment 4 Emerging Trends in Real Estate® Europe 2015 Chapter 1: Business environment “Overall, the key drivers of demand – occupancy, development etc And though the optimism is definitely – are improving. Moreover, the low level of development in some there, it isn’t evenly spread across markets has actually been a saving grace. We’re slowly coming out of Europe. While some European economies have emerged from the crisis but it’s different to what we’re seeing in the US and Asia.” recession, others are still struggling to achieve meaningful levels of growth. Emerging Trends Europe’s survey Nearly a third of those canvassed for suggests that European real estate Emerging Trends Europe think that the professionals are still very positive European economy will improve in 2015 about business prospects in 2015, but the majority – 59 percent – believe though somewhat less confident than that it will tread water. they were a year ago. Says a pan-European investor: “People “Some investors are Profit expectations are also slightly down. will cool on their acquisitions targets, This qualified view of 2015 is also ourselves included. We’re concerned not pricing in the reflected in over half of respondents about demand because some investors economic situation.” indicating headcounts will be static, are not pricing in the economic situation.” while 70 percent say the same about their corporate property requirements. Figure 1 Business prospects in 2015 48 43 9 % 2015 Business condence 60 31 9 % 2014 52 41 8 % 2015 Business protability 56 36 8 % 2014 38 53 9 % 2015 Business headcount 40 52 8 % 2014 Increase Stay the same Decrease Note: Percentages may not total 100 due to rounding. Source: Emerging Trends Europe survey 2015 Emerging Trends in Real Estate® Europe 2015 5 By and large, though, respondents in the Figure 2 Business profitability in 2015 recovering economies – the UK, Ireland, Spain, Portugal, Greece, and the Netherlands – are the most upbeat about business and improving their profitability next year. “If you compare the three markets of Benelux, the Netherlands is 78 the one that will be the next hot thing, 69 and there is a lot of investment capital 59 58 50 looking for opportunities there,” says 43 42 38 one global property fund manager. 25 Increase 11 % In Germany and the Nordic region, respondents are more evenly split between Stay the 22 22 same 31 33 those who think they will do better in 2015 38 42 48 47 % and those who expect it to be similar to Ireland Decrease 63 2014, with a minority of around 10 percent Southern 75 expecting profits to fall. Europe 3 17 UK Benelux 10 11 A big switch in sentiment has occurred Turkey 67 Germany Nordic in France, where only 40 percent of Region France respondents now think they will be growing their profits in 2015, whereas last year, half Central & Eastern had been expecting an improving trend. Europe Though Paris remains a go-to destination Source: Emerging Trends Europe survey 2015 Russia for many investors, France’s stuttering economy and government have clearly darkened the mood. Figure 3 Real estate investment in Europe, Q1-Q3 2014 billion Says a pan-European investor: “France is distressed but we can’t find anything Other to do there. The prices don’t reflect the 7 Finland 2 distress. Also, taxation is changing there Norway Sweden 2 4 all the time.” UK Russia Ireland 4 3 47 Germany Poland 2 Netherlands 6 30 France Austria 16 2 Italy Spain 6 3 Source: Real Capital Analytics 6 Emerging Trends in Real Estate® Europe 2015 Chapter 1: Business environment “The European market But the darkest mood is in Russia, where fully two-thirds say things will get worse has basically been for them in 2015. “It depends on the quite different from geopolitical environment – if it stays as it one country to another is it will be bad.” Investment in Moscow and also by sector. over the first three quarters of 2014 was already down, €2.7 billion against €4 billion I view it very positively, over the same period the previous year. but at the same time As one pan-European investor says: with caution.” “The European market has basically been quite different from one country to another and also by sector. So we have been adjusting, almost on a quarterly basis, our strategy based on our research on each of these markets and the opportunities that arose from the variation in each market ... I view it very positively, but at the same time with caution.” Figure 4 European business environment in 2015 30 27 Improve 11 11 % 53 53 Stay the same 59 59 % Get worse 11 14 The European 36 36 economy Cost of nance Availability of Political prime assets uncertainty Source: Emerging Trends Europe survey 2015 Emerging Trends in Real Estate® Europe 2015 7 Capital surge Figure 5 Interest rates and inflation in 2015 “It’s easier to get capital than it is to find 1% 10% 1% 2% 7% 1% 9% good deals.” Spending the money may be a challenge, but there is no doubt 26% 30% that it wants to go into real estate.