After a Darwinian struggle for survival by many European and US real estate companies in the past five years, the prospects are getting brighter, according to the Emerging Trends in Real Estate® surveys recently published by PwC and the Urban Land Institute (ULI). In Asia, where prospects have been more buoyant in last few years, survey respondents were also positive about 2013.
Stabilising economic conditions in some countries, along with investors’ increasing risk appetite, point to the likelihood of rising real estate prices in select cities. Equity capital is becoming easier to come by, according to the reports, as investors seek to boost yield. Yet the credit markets and debt availability remain subdued in the US and Europe respectively, with no clear resolution in sight about how Europe’s overhanging real estate debt mountain will be refinanced.
While the reports showed a reasonable high level of optimism, respondents were cautious in all three continents. In Europe, they anticipate that safe-haven core cities will give the strongest performance, while in the US & Canada they’re looking to cities with job-producing growth. Asia’s participants fear that core markets might be too expensive, and so foresee the strongest growth in non-core cities.
PwC and ULI jointly publish three Emerging Trends in Real Estate® surveys – for Asia, Europe and the US & Canada – reflecting the views of hundreds of real estate market professionals in each region. Over time, the surveys have become among the most highly regarded and widely read forecast reports in the real estate industry.
Giving greater authority to the surveys, Tilburg University in the Netherlands tested the predictive power of the European survey’s past 10 year-end results. The study showed a strong correlation between the forecasts and the following year’s actual real estate returns, recorded by the Investment Property Databank. In other words, in Europe at least the respondents’ views have predicted returns.
Safe-haven German cities lead in Europe
German cities dominate the 2013 investment prospects for Europe’s commercial real estate sector as investors continue to favour safe-haven locations, according to the European survey, which was published in January 2013. The ranking of 27 cities across Europe, based on respondents’ expectations of market performance in 2013, sees Munich top the league table followed by Berlin in second place and Hamburg in fifth. Investors took comfort from each of the cities’ strong micro-economic climates and resilient property market conditions.
Seen by many as Europe’s ultimate safe haven, London was the year’s largest riser, taking third place, up from 10th in 2012. The size and liquidity of its real estate market, and its ability to stand apart from the rest of the UK and Europe’s economic difficulties, proved attractive to investors.
By contrast, cities struggling to cope with the Eurozone crisis ranked poorly. Athens, Lisbon, Dublin, Madrid and Barcelona are all expected to perform badly in 2013.
But overall, survey respondents were more optimistic about the prospects for their own business than at any time since the financial crisis started in 2008.
Asians foresee value outside core markets
In Asia, respondents’ concern that prime assets in key real estate markets might be over-priced tempered the sense of optimism. As a result, they foresee non-core cities being the most attractive for investment and development, according to the Asia survey, which was released in late 2012.
Jakarta topped the rankings as 2013’s most favoured investment destination, in spite of its lack of investment-grade stock and the immaturity of its economy. Similarly, Kuala Lumpur, which has previously been overlooked, ranked fifth. China’s second-tier cities were also highly ranked.
The shortage of investible options in Asia is leading some investors to look into niche sectors, according to the report. For example, some respondents favoured the logistics sector in Japan and China. The former has been reorganised following the country’s earthquake, while the latter is struggling to keep pace with domestic consumers’ burgeoning demand, especially in e-commerce.
Job-producing cities lead US real estate
The US survey discovered a US real estate market primed to advance in 2013, with modest gains in leasing, rents and pricing extending throughout all real estate sectors across the country. Despite a slower-than-normal recovery, respondents to the survey published in late 2012 expected a noticeably better performance.
Jobs are the key. Respondents expect new jobs to push down vacancy rates in office, industrial and retail sectors. Similarly, demand for apartments should be robust and improving economic fundamentals should help rents and net operating incomes.
In a time of slight economic uptick, investors anticipate the best performance from the cities with the best jobs outlooks. As a result, they rank the top five locations respectively as: San Francisco, New York City, San Jose, Austin and Houston.
Selectivity is key
If the Europe survey’s forecasting record over the past 10 years is anything to go by, the results from our set of surveys suggest that Europe and the US & Canada are set for a gradual recovery. Meanwhile, in Asia second-tier cities will start to catch up with their fully-priced prime peers.The worst appears over for the beleaguered property markets of Europe and North America, while Asia’s prospects remain bright. Yield-seeking investors have opportunities and transaction volumes appear set to rise. But recovery remains slow and selectivity is key.