European real estate seeks safe havens
The European economic crisis has left the local real estate industry in limbo, with preferred markets chosen more on their potential as safe havens than high-growth hubs, and with highly specialised non-core investments gaining attention as alternatives to traditional property types, according to Emerging Trends in Real Estate® Europe 2012, the annual forecast published by PwC and the Urban Land Institute.¹
The prospects for any turnaround in 2012 hinge on how recent regulatory measures will affect banks’ willingness to make commercial loans, as well as the ultimate severity of the sovereign debt crisis, according to the report.
This year marks a time when the real estate industry is adapting to an environment with what appears to be lacklustre economic growth for the foreseeable future. On the positive side, the survey shows the industry coming to terms with this, as business confidence has improved since 2011 and the amount that respondents are investing has increased.
The debt crunch
Emerging Trends, which includes interviews with, and surveys of, more than 600 leading commercial property professionals across Europe, predicts that this year property financing will become a major casualty of the measures banks take to tackle regulatory and macroeconomic pressures. Deleveraging will not free up capital for fresh property lending; debt will become more short term and expensive; and the need to find alternative sources of funding will become imperative.
Interviewees consistently cited three major sources of regulatory concern: the Basel III, Solvency II and AIFMD regulations. Of these, Basel III is having the most dramatic and immediate impact. Banks are facing a stark choice between raising new capital or disposing of assets. Our interviewees thought that commercial real estate lending would shoulder a disproportionate share of the burden. Debt, or lack of it, will be the main story of 2012.
There’s general pessimism regarding the availability of new debt this year and, significantly, lenders are the gloomiest of all. A mere 6% of lenders believe that new debt will be as available as it was in 2011, with 42% believing that it will be moderately less available and 52% believing that it will be substantially less.
Equity opportunities
This will be a huge challenge for many, but will create opportunities for others. Notably, equity investors who are less reliant on debt, investors who are able to take advantage of the opportunities from bank deleveraging and new debt providers entering the market, such as insurance companies and debt funds, will gain.
The good news is that respondents took a more positive view regarding the availability of equity. Institutional investors’ response is most promising: 65% believe that equity will be moderately more available, with a further 10% believing that it will be substantially more available. The key question is when and how investors will deploy that equity. Institutional investors do not currently feel under pressure to invest. The slight recovery in confidence in 2011, particularly for development, has evaporated again.
A granular business
An environment with no economic growth, no rental growth, no real estate capital growth, virtually no new lending and an increasing regulatory burden, does not look promising. It’s no longer possible to make money by picking a city and an asset type and letting a rising market do the rest. For the foreseeable future, European real estate investment will be a highly granular business, success or failure being highly dependent on the specific building. So investors will need to look very carefully at the skill set, experience and track record of the managers with whom they deploy capital.
A long road to higher returns in Asia and the US
The tone of the 2012 European edition of Emerging Trends echoes those of the US and Asia editions, released respectively in October and December 2011. The US survey predicted that local real estate players should resign themselves to a slowing, grind-it-out recovery following a period of mostly sporadic growth. Meanwhile, for Asia Pacific as a whole, the regional survey pointed out that economic woes in the US and Europe were weighing upon local economies and investor sentiment across the region.
The US report predicted that return expectations would further recede, although well-leased core real estate in leading markets would continue to produce solid single-digit, income-oriented returns. According to the report, more opportunistic investors would ratchet down forecasts, with even projections of returns in the mid-teens appearing to be a stretch as risk increased from questionable supply/demand fundamentals.
Overall, Asian respondents were slightly less positive about the outlook for their region than a year ago, given the debt and political issues in the US and Europe, and the soft landing and credit crunch in China, all of which was seen as reducing the volume and pricing in the real estate market. The top five investment markets for 2012 were identified as: Singapore, Shanghai, Sydney, Chongqing and Beijing.
Footnotes
- Based on interviews conducted in the closing weeks of 2011.
Author:
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John Forbes PwC (UK) |
