Real Estate in Europe 2020: Key emerging trends
03 January 2020
Real estate investors are starting the new decade in a positive frame of mind, despite a sense of caution and unease around the global economic outlook for 2020. As the new year dawns, investors are confident in property’s secure and stable returns – although the year won’t be without its challenge
1.Low rates mean high interest
Political uncertainty is a key theme of the report this year, driven by the escalating trade tensions between the US and China, and continuing uncertainty over Brexit is helping to cloud sentiment in Europe.
But despite this, investors’ outlook is broadly positive, mainly due to the expectation that interest rates will remain low – 74% of respondents to our ETRE 2020 survey think rates will stay the same or decrease in the short term, and 59% in the long term.
It’s a key difference to last year, and is the reason the outlook for real estate is positive despite the expected global economic lowdown and political gloom. With rates low, real estate is expected to remain appealing for investors who are searching for secure, stable income.
2. Development dilemma
The high demand for real estate is leading to a theme we described as the ‘development dilemma’. Around 65% of prime assets are overpriced as a result of limited availability, meaning 68% of our respondents think development, rather than acquisition, is the best way to access prime real estate.
But there’s a problem here too - rising construction costs mean development isn’t a cheap option either. Just over two-thirds (67%) in our survey said they’re concerned about rising costs of construction.
3. Environmental pressures
At the same time, there is growing awareness of climate change and broader environmental and social issues among real estate investors – a theme we’ve covered in ETRE for a number of years now.
In 2020 though, this is ramping up, becoming more multi-dimensional and covering the full spectrum of environmental, social and corporate governance (ESG), health and wellbeing, and community impact.
It’s strongly reflected in our data – 48% think that the climate change risk on their portfolio has increased in the last 12 months, and 73% think it will increase in the next five years. This, combined with factors like rising construction costs mentioned above and increased obsolescence risk due to an ever more demanding tenant base, is translating into expectations of increased expenditure, both capital and operational.
4. Beds and sheds
There are relatively few surprises in terms of where investors are choosing to put their cash. The broader trend towards asset classes that are more operationally intensive continues.
But logistics came out top of the investment rankings again, with continued faith in the underlying structural trend. However, its residential in all its various forms that dominated this years sector rankings, accounting for six of the top ten. The message from the research indicates that if you are comfortable with the risk, and have the right skills or partners, then the underlying supporting trends are strong for ‘anything related to a bed’.
Affordable housing is an area of particular growth. 61% of respondents cited concerns over housing affordability and the industry has responded to this opportunity with capital. It jumped to 6th place in the investment rankings. The downside for investors is that cities across Europe – from Germany to the UK – are considering the application of rent controls as a response to high housing costs.
Elsewhere in the investment market, retail continues to suffer difficult structural headwinds. Our respondents expect more forced sales of retail assets in the next 12 months (62%) and more consolidation in response to the changes being experienced (73%).
At the same time, retail assets are being repurposed. Around 50% of respondents have increased the number of assets that were repurposed in the past year, and around 70% expect this number to increase over the next five years.
The most common assets that are being repurposed are office and retail; the assets they are mostly likely to be turned into are residential and mixed use.
5. Paris tops the ranking
This year Paris is ranked number one for real estate prospects, with its Grand Paris project, Europe’s largest transport scheme, widely seen as a game-changer for the French capital. Berlin, Frankfurt, Munich and Hamburg all feature in the top ten, as do Amsterdam and Madrid.
London’s prospects are highly rated and the city reached number four on the ranking, rising from 29th in 2019. Our interviews suggest there’s a large volume of capital waiting for a resolution to Brexit before moving in. There are lower expectations are lower for regional UK cities, however.
There was also a notable rise for Brussels, from 21st to 13th on the list, driven by the residential, hotel and office sectors. It’s a city that has arguably operated a little below the radar but its stock seems to be rising which is perhaps surprising given its good transport links to other top performing cities such as Paris, Amsterdam and London.
6. Getting smart about mobility
There is an emerging consensus that real estate is ‘growing up’ - becoming a more complex industry and asset class in the process - as it starts to respond to its social and environmental responsibilities, an ever more demanding customer and competition from new entrants with new business models.
The interaction between mobility and real estate is a great example of the above. Among our respondents, 92% say smart mobility is now an integral part of any urban development project, and 82% say there is an increasing role for real estate investors to work with the public sector in the delivery of smart mobility solutions.
In addition, 69% believe the private sector should take a more active role delivering a green infrastructure, and 80% say emerging mobility and infrastructure solutions in cities play a role in current investment decision making.
We expect the search for secure, stable income to drive a strong interest in real estate investment in 2020. There’s also a growing recognition that, as a sector, it is starting to embrace complexity and respond to its true role as part of society’s infrastructure. It’s a sector that funds, builds and operates the spaces in which we live, work and play, and the industry is beginning to respond in a meaningful way to the challenges and opportunities this brings.
The survey shows a growing awareness in the real estate industry that embracing this complexity is not just about achieving returns, but is likely to be required for survival.
As a result, more market participants are thinking strategically about the bigger picture, in which mixed-use, smart mobility, density and greater use of technology are integral to the success of the locations they invest in.