7 February 2011 – Tougher regulations, Austerity Europe, the sovereign debt crisis, and a still-tight lending market will challenge Europe’s real estate industry in 2011, according to Emerging Trends in Real Estate 2011, published by PwC and the Urban Land Institute (ULI). The commercial real estate forecast, based on the opinions of 600 industry experts, predicts that 2011 will not be the turnaround year that the European real estate industry had hoped for, with a “two-speed” market likely to emerge that reflects a widening gap between investment hotspots and second-tier property markets.
“In future years we may look back on 2011 as a transformational year for the property industry. Real estate professionals face a challenging time. Traditional sources of debt, for refinancing properties with vacancies or in need of refurbishment, will not be available, although new sources of lending are expected in the shape of sovereign wealth funds and insurance companies,” commented Glen Lonie, Partner and Head of PwC CEE Real Estate Industry Group, on the European industry trends.
Last year, the industry was concerned that the large amount of debt maturing across Europe over the next five years would prevent banks from undertaking new lending, but the new questions for 2011 are how much impact regulatory changes will have on the appetite of banks to lend to property and, when they do, how expensive this debt will be.
Respondents expressed serious concerns about areas outside prime regions, even within the same country. With capital so risk-averse, winning cities like Munich, London and Paris will continue to absorb investment as the only places where tenant demand will be robust. Other investor favourites are likely to be Istanbul, Stockholm, Berlin and Hamburg. Investors are expected to avoid Dublin, Athens, Lisbon and Budapest.
"Among the markets of Central Europe Poland is the most favoured. Sentiment for the Czech market is fairly neutral with an improved view on prospects for development. Russia is an improver whereas Budapest remains muted. While these results are interesting, in considering the overall picture focus will remain on quality albeit, that investors may consider a wide range of opportunities and sectors than in the past year," commented Glen Lonie.
"While 2011 may not be the turnaround year all of us in the Real Estate Industry were hoping for, for the Czech market, it looks like being the year in which the turnaround begins. Focus as elsewhere is going to be on quality, and the ability to differentiate on quality aspects will dictate success. The strength of the Czech market should continue to rely heavily on the underlying economy, and in particular the automotive industry," Richard Jones, Director and Head of PwC Czech Real Estate Industry Group, added.
Even within the most favoured markets, investment will be drawn mainly to the prime buildings, the report predicts. The result is that values for secondary properties will remain at distressed levels and decline further in the months ahead.
The good news, the report says, is that improvements in the availability of real estate equity are anticipated this year. This is expected to come from an increasing number of investors from Asia Pacific and institutions such as insurance companies and private equity funds. But the consensus view is that even if new players do emerge, they will take a long while to do so and will only partially relieve congestion.
While all property sectors show improved investment prospects in the quantitative part of the survey, central city offices, street retail and shopping centres were most frequently cited as offering the most promising prospects.
Interviewees anticipate that well-established firms with defensive strategies will fare best in the months ahead, while prospects are less bright for niche or new players. As firms prioritise resources in 2011, there will be those in the industry who find their skills in demand. The expected downsizing will reflect the dropping out of those who find themselves totally unequipped for the new climate.
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