Confidence within the real estate industry is at its highest since 2008. This has come about despite little change in the economic climate or any sign that debt markets are returning to health.
Expectations over business confidence and profitability have improved but this doesn’t mean the industry expect the economic climate to be better in 2013. But investors have accepted “the new normal”.
Businesses are now focused on managing risks and designing strategies around positive trends such as demographics, technology and urbanisation.
Simon Hardwick, real estate partner at PwC Legal says: “Real estate investors have taken comfort from the fact that they have survived the turmoil of the past few years and are now turning their attention to the best bets for future investment.
“There are many reasons to be cheerful for those with access to capital and debt.”Key themes for the year ahead
As the “new normal” dawns, what are the key opportunities in 2013, and how can real estate businesses make the most of them?
Asset management: micro stock selection is key to returns
Prime assets are increasingly hard to access for most, so investors are forced to consider taking on more risk.
The report finds that in the search for deals, businesses are considering secondary cities, value added locations in prime cities or buying good assets with one of two impairments.
This trend will play into the hands of those with specialist management skills in 2013 and beyond.
But to ensure they back the right assets, interviewees are using ever-more detailed assessments of a particular location.
Emerging Trends finds businesses seeking assets in secondary locations with a local firm onside. Or they are hunting out cities – or parts of cities - where the demographics look promising.
So a property in a regional city that looks unattractive may be an opportunity because the specific asset and its location are very good.
Lenders are also looking for a more rigorous, detailed analysis of micro-economic factors.
Banks like credit documents that have analysis of demographics, employment, social issues and the micro-competition included.
Distress: bank de-leveraging becomes more accessible
Distressed deal flow looks sets to become more accessible for a greater number of investors.
Forced sales by lenders are a major issue this year for 70 percent of interviewees.
This trend will play into the hands of those with specialist management skills in 2013 and beyond.
Many investors are preparing for opportunities in Ireland and Spain.
But interviewees are also seeing increased deal flow for smaller lot sizes.
So this is creating opportunities for a larger number of investors than before.
Emerging Trends also finds that banks are increasingly seeking sophisticated players keen to take one or two assets, rather than selling large portfolios to maximise their return.
Confident asset managers can offer banks a better deal because they don’t seek to apply as big a discount as those who seek to just flip it on.
Meanwhile, property assets with sufficient value to repay debt will be vulnerable to enforcement action.
But underwater loans with sufficient rental income to service interest have a realistic chance of securing extensions if there is a credible management team in place.
Bank debt: expect even less debt for refinancing and new investment
Over half of Emerging Trends interviewees predict less debt for refinancing and new investment in 2013.
Banks’ reduction to real estate appears structural rather than cyclical - unlike in previous downturns.
Pessimism is Europe-wide. Portugal, Benelux and Greece are most downbeat and Spain, Italy and Turkish interviewees foresee scalebacks of varying severity.
Where new debt is offered, banks are seeking companies in need of a range of financial services, rather than one or two loans.
Borrowers must offer banks “a profitable franchise” and be in a position to undertake bond issues or private placements.
Meanwhile, there is little hope that new lenders – insurance companies, mezzanine funds and debt funds – will be significant enough or ambitious enough – to help plug the debt shortfall.
Sustainability: building today for tomorrow’s world
The industry is taking technology, media and telecommunications companies seriously.
As this sector overtakes banking and finance as Europe’s most active occupier, Emerging Trends finds businesses assessing how to best cater for the new cyber elite.
These occupiers are seeking; holistic environments not glass boxes, creative spaces that allow for spontaneous interaction, and buildings surrounded by an interesting public realm.
Meanwhile, investors and lenders are using sustainability as a tool to assess an assets’ potential. Both report sustainability as an increasing feature of due diligence.
Interviewees expect government will force developers to make buildings greener over the long-term through regulation and taxes.
But occupiers are demanding more too, and they don’t just want to reduce carbon footprint through building design.
Investors believe businesses - particularly in London – are seeking offices that enable them reduce carbon footprints and offer greener environments.
This could include incorporating bike parks that allow workers to cycle to the office, or landscaped green spaces.
Retail: new recipes for success
Retail is now clearly divided between winners and losers.
Prime shopping centres and luxury retail destinations continue to thrive. While local shopping parades and convenience stores are also well placed.
But surviving retail occupiers are seeking to change the way they do business, as online shopping impacts them.
Landlords must be internet savvy, ensuring their assets offer retailers the best opportunities to maximise a multi-channel strategy.
Working with brands that have long-term internet strategies in place is also fundamental to success.
Europe’s attraction to tourists from the BRIC countries is also reinforcing the pre-eminence of major shopping destinations such as London and Paris.
Investors with these new consumers in mind are seeking to create destinations for long haul visitors, which combine retail and leisure.
Technology: key changes in the built environment
There are high hopes that the industrial sector will be a key beneficiary in the growth of online sales.
Every €1 billion of online sales has generated warehouse demand for 72,000 square metres in Germany, France, and the U.K. over the last five years – according to ProLogis.
Emerging Trends reports that demand for quality, efficiently managed, and well-located industrial property is healthy.
Interviewees expect industrial to take advantage of changing patterns in global trade, distribution, and consumption—and predict increased demand for prime space.
Warehouses have become the new retail spaces. Occupiers are seeking large premises to store larger amounts of new stock and handle returns, or smaller facilities close to urban centres that allow for efficiency and speed between orders and the delivery of goods.
Demographics, technology and globalisation are changing the way people occupy buildings. But what do these opportunities mean for your business?
Fund managers are among the most buoyant of business types in 2013; forty-nine percent predict increased profits and confidence.
Reasons for optimism
Banks and distressed companies
Lenders are the least optimistic business group.
Only 21 percent are more confident about their business in 2013; the largest portion (47 percent) sees no change ahead.
On profits improving, they are evenly split: 37 percent say yes, 32 percent say no, and 32 percent expect no change.
Reasons for pessimism:
Property companies and developers
This group of businesses was among the least optimistic about access to debt in 2013; almost 70 percent said they expected less in 2013.
Despite this they are fairly confident about the year ahead; 40 percent think profits will increase.
Publicly listed companies and REITs
Publicly listed companies are the most upbeat about their business prospects.
Reasons for optimism:
Owners and occupiers
Emerging Trends doesn’t report specific data about owners and occupiers sentiment.
But there are themes across all sectors that are relevant to this group.
Retailers: is your internet strategy well developed and how can you maximise this to improve footfall and revenue in store?
Retailers: is your brand aligned enough with the local? As consumers seek unique experiences and globalised streetscapes lose favour, how does your product engaging with these new themes?
Office occupiers: seeks way to occupy buildings more efficiently and effectively to reduce carbon footprint. Don’t rely on technical design.
Office occupiers: what do initiatives such as green roof technology do to help reduce carbon footprint and improve corporate sustainability credentials?
Industrial: there’s growing demand for properties, which cater for the needs of online retail. How does your portfolio match up to new occupier demands?
How useful are predictions about the market? Can they really help real estate business leaders navigate the markets?
As Emerging Trends in Real Estate celebrates its tenth year, we take a look at how close to outcomes its predictions have been.
How good are we at looking ahead?
The industry has been good at predicting the future over the last ten years, according to an analysis included in Emerging Trends of how market sentiment has matched up to eventual outcomes.
The analysis finds the industry has been good at detecting a change in their market earlier than general economic confidence indicators.
Moreover, there is a high correlation between confidence indicators and the returns registered for the subsequent year.
Comparing sentiment of Emerging Trends Europe with property returns reported by the Investment Property Databank, Professor Dirk Brounen of TiasNimbas Business School discovered a strong relationship between expectation and fact.
“Respondents are telling us more than what general economic indicators do. In eight of the last ten years, these industry experts have correctly predicted what the trend of European real estate returns will be.”
City rankings: what are we missing?
Exploring the relationship between how surveys ranked cities against their actual performance, Andrea Boltho, Emeritus Fellow of Magdalen College, University of Oxford finds respondents have been consistently over-optimistic about some markets, while consistently underrating others.
Frankfurt, Hamburg, Berlin and Munich are overrated by the survey, according to IPD performance statistics.
Munich is the more highly rated city in 2013’s report, with Hamburg and Berlin also featuring in the top five investment locations.
But Zurich, Vienna and Copenhagen have been regularly underestimated. Zurich features in seventh place in 2013, while Copenhagen and Vienna are ranked in 12th and 13th place respectively.
“The city respondents have got exactly right is Dublin; it was last every year, bar 2007, in both total returns and rankings.”
This year, the Irish city is the biggest riser up the table, climbing from 26th place last year to 20th place in 2013.
80% say the Eurozone crisis has created opportunity for their business
42% say business confidence will increase
46% think investments in real estate will increase
75% of listed companies anticipate increased investment in 2013
50% say there will be more equity for new investment and refinancing
56% think there will be less debt around this year
60% see regulation as having greater impact on their business in 2013
70% think forced asset sales by lenders will increase this year
45% say European real estate values will be stagnant for another 5 years
Simon Hardwick, PwC Legal (UK) introduces the key findings of Emerging Trends in Real Estate Europe 2013 and discusses the implications of these on the Real Estate Industry with Andrew Sentence, PwC (UK), Michael Spies, Tishman Speyer and ULI Trustee, and Jos Short, Internos Global Investors and ULI Trustee.
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