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Emerging Trends in Real Estate - Beyond the capital - Europe 2016

A publication from PwC and the Urban Land Institute.

Capital flows and city rankings will always attract the headlines, but this year Emerging Trends Europe shines a spotlight on fundamental changes at the business end of the real estate industry. It reveals an industry trying to come to terms with the needs of occupiers and the disruptive forces of technology, demographics, social change and rapid urbanisation.

These ground-level disruptions are permeating through the entire real estate value chain. Investors are focused on cities and assets rather than countries. They also favour alternative, more operational assets for accessing outperformance, with 41 percent of respondents against 28 percent last year considering taking the plunge into alternatives. Healthcare, hotels, student accommodation and data centres are all expected to shine as sectors benefiting from urbanisation and longterm demographic trends.

Development is seen as another way to achieve outperformance in 2016, with 78 percent agreeing it is an attractive way to acquire prime assets. The more progressive developers and investors are innovating – attempting to anticipate and adapt to rapidly changing occupier demands. Those canvassed by Emerging Trends Europe hold polarised views on issues like optimal lease lengths, shared office space and the impact on established valuation models and traditional assessments of covenant strength. 

Low interest rates and the sheer weight of capital bearing down on European real estate mean that most remain bullish about the industry’s business prospects in 2016. However, concerns over geopolitical issues like immigration and terrorism, Britain’s potential exit from the European Union, economic decline in China and uncertainty over Europe’s economic recovery, have led to a strong undercurrent of caution, most obviously highlighted by lower levels of confidence in the outlook post 2016.

According to Emerging Trends Europe, the five leading cities for investment prospects in 2016 are Berlin at Number 1, followed by Hamburg, Dublin, Madrid and Copenhagen. Many interviewees back the German capital to thrive well beyond 2016, based on its young population and its growing reputation as a technology centre, as well as the land available for development.

The vast majority of respondents are confident in their ability to thrive in 2016. However, they acknowledge it is an increasingly competitive global field for real estate. They are aware that if the wall of capital recedes, European markets could be left exposed. Then it will be the strength of the underlying market fundamentals and management’s operational skills that come into focus.

Which brings us back to occupiers. The clear challenge to the industry is to be less about bricks and mortar and more about service. As one interviewee concludes: “Twenty years ago we had tenants, now we have customers. In 20 years' time we'll have guests.”

To see the publication, please click here.