Real Estate Investors Anticipate Profitable Year, Finds Survey by PricewaterhouseCoopers
15 March 2006 - European real estate investors are optimistic about the industry’s potential to generate healthy returns over the coming year, according to a real estate investment report, Emerging Trends in Real Estate Europe 2006, just published by the Urban Land Institute (ULI) and PricewaterhouseCoopers.
With an overabundance of capital continuing to drive markets, investment prospects for 2006 have improved for both real estate and equities relative to a year ago, said the report based on surveys and interviews with more than 250 of the industry’s leading authorities.
In the markets to watch, Paris reigns supreme, for the second year running, as the top overall investment market for risk-adjusted returns out of 27 markets surveyed. However, this enthusiasm for Paris has driven prices up and yields down, leading some investors to look toward second-tier French cities, such as Lyon, for investment opportunities.
London runs a close second to Paris in the overall investment category, with low risk and solid total return prospects: investors in all property sectors find it a “buy or hold” market in 2006. Many respondents see London as a recovery market gathering pace in 2006 and, believe the office sector has two to three good years of performance ahead.
Prague and Budapest were ranked in the “middle of the pack”, with both garnering fair prospects for both investment and development. Istanbul dropped from middle market ranking to “challenging”, yet still captures “top ranking for development, capital growth and total returns and fourth place for rent growth”. While Moscow languishes near the bottom at 26th, survey respondents “overwhelmingly indicate strong ‘buy’ signals for all property types, especially industrial.”
Cities where investors will be looking to buy properties include Warsaw, Moscow, Prague and Budapest for industrial properties; Moscow for office; and Prague and Budapest for retail. Sixty percent or more of respondents recommended buying in these sectors and markets.
“One of the most notable changes from last year is the growing number of investors now prepared to take development risk. In some Central European cities, it is the only way to obtain high-quality product. And, the report adds that speculative development is making a comeback,” said Glen Lonie, Partner in the Tax and Legal Services department at PricewaterhouseCoopers, Czech Republic.
The report points to “an industry struggling for product", driven by plentiful capital from a variety of sources: institutions, private equity funds, public companies, limited partnerships, venture capitalists, hedge funds, private syndicates and individuals.
This excess of capital is seen as one of the most serious problems facing investors over the coming year, according to the report. A question mark also looms in the German open-ended funds where recent fund activities and closures sent shock waves across the industry in mid-December.
A shortage of conventional real estate is turning niche products into mainstream investments. Hotels, nursing homes, retirement communities, student housing, self-storage, parking facilities, pubs, spas, resorts, condo-hotels, are all examples of this broadening market.
By property type, retail parks and shopping centres tie for first with the highest total returns expected in 2006, while hotels fall into third place with a strong buy (44 percent) or hold (41 percent) recommendation. A mixed-use property, a new category, holds its own with fourth place. Residential ranked seventh on total returns, but second for rent increases and supply/demand balance prospects. “Notably, residential is the only sector in our survey where respondents believe yields are more likely to move up than down,” says the report.
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Notes to the editor:
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Emerging Trends highlights for individual property sectors include:
- Retail – Outlook: Shopping centres and retail parks are considered to have the best performance prospects of any real estate sector. However, there are concerns over rental growth, development prospects and weak consumer spending. Germany is seen as a “restructuring opportunity” but supply is a problem. Istanbul, Prague, Budapest, Lyon and Helsinki are the top-rated ‘buy’ cities for retail while the U.K. is a “no-go area". Of all property types, retail parks offer the best development prospects.
- Hotels – Outlook: The highest rated sector for rent/rate increases in 2006 and a top prospect for total return and development outlook, according to the survey. Fuelled by leisure travel, the hotel sector shows “promising growth” for 2006. The U.K. and France are seeing growth in their hotel sectors. For new development, Russia and Turkey are best bets.
- Industrial – Outlook: Yields are expected to remain stable in 2006. Central and Eastern Europe are best bets with Moscow, Prague and Budapest ‘buy’ markets, according to 70 percent of survey respondents. Southern Poland offers best prospects as it is already connected with the Czech Republic and Germany. Barcelona and Madrid received strong ‘buy’ recommendations for warehouse/distribution.
- Office – Outlook: Downward pressure on office property yields will continue in 2006 across Europe, which will be most noticeable in city centre offices, says Emerging Trends. However, city centre offices are the second most favoured sector to ‘buy’ at 47.4 percent. Business parks and out-of-town properties are ranked near the bottom with 39.2 percent wanting to sell. Best bets for office with solid return are Paris and London. Helsinki, Moscow, Lyon, Madrid and Istanbul are the top buy markets with 60 percent of survey respondents.
- Residential – Outlook: Demographic changes – rising numbers of households and an aging population – will affect the housing market. Poland and the Czech Republic, represent strong opportunities, with Turkey’s larger cities showing potential. On the other hand Spain and the U.K. show signs of being overvalued.
- The released report today is the third annual European edition of Emerging Trends in Real Estate® Europe 2006. The version covering U.S. real estate has been published for 27 years. Full copies of the European and U.S. reports are available at www.uli.org.
- The Urban Land Institute (www.uli.org) is a nonprofit education and research institute supported by its members. Its mission is to provide responsible leadership in the use of land in order to enhance the total environment. Established in 1936, the Institute has more than 28,000 members representing all aspects of land use and development disciplines.
- PricewaterhouseCoopers (www.pwc.com) provides industry-focused assurance, tax and advisory services to build public trust and enhance value for its clients and their stakeholders. More than 130,000 people in 148 countries work collaboratively using Connected Thinking to develop fresh perspectives and practical advice.
“PricewaterhouseCoopers” refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.
