Trends in real estate

Highly regarded surveys show a wall of capital targeting real estate

The Emerging Trends in Real Estate® United States and Canada, Europe and Asia Pacific reports are produced annually by the Urban Land Institute and PwC following extensive surveys and interviews with the most senior property professionals. Over the years, these reports have become key indicators of sentiment in their respective regions.

We have summarised these reports in this article, highlighting the most relevant investment and development trends.

It is clear there is still a wall of capital targeting real estate in many markets and it is performing strongly against other asset classes. It is clear too, though, that investors must strike a fine balance between the need to deploy capital and the ability to achieve adequate returns when there is such a wide variance in underlying fundamentals and economic conditions across the globe.

But it is also clear from all three regional reports that many investors are thinking about the future and paying greater heed to such megatrends as urbanisation, demographic change and technology. This year's reports, therefore, reflect not just the outlook for 2015, but offer a glimpse of just how those megatrends will influence real estate in the long term.

United States and Canada

For the United States and Canada, the 2015 survey identifies ten top trends.

1. The 18-hour city comes of age
   The urbanisation of America has given life to cities that had been historically nine-to-five. Buyers have more markets to consider now that the 18-hour centres are putting the elements in place to ratchet up their investment capital flows.
   
   
2. The changing age game
   While the tendency of millennials to postpone homeownership and rent longer will affect the apartment sector over the next several years, many survey interviewees noted that investors should consider how the housing preferences of millennials could change in the 2020s. Planning for a nation with lesser household formation, fewer new consumers and a meagre number of workforce entrants is the challenge ahead.
   
   
3. Labour markets are trending towards a tipping point
   Forward-looking businesses are waking up to a realisation that retirements will accelerate while the peak of millennial labour force entrants has already passed. Within a few years, the talk will be about labour shortages. Survey respondents place job growth at the top of the list of most important issues for real estate, closely followed by the related concerns of wage and income growth.
   
   
4. Real estate's love/hate relationship with technology intensifies
   No form of real estate is exempt from the exponential expansion of technology. Interviewees see technological disruption as providing new business tools and environments, opening new business paths, and cycling forward as a source of user demand in an era when more traditional industries may be sluggish.
   
   
5. Event risk is here to stay
   Distinctions from "core" to "opportunistic" will be heightened over time, and 2015 looks to be a year when this will be especially evident. The reason is that the concern about "event risk" is troubling the minds of more and more interviewees (geopolitical risks, global unrest, and natural disasters).
   
   
6. A Darwinian market keeps the squeeze on companies
   Competition is unrelenting, and the need to have a clear "brand identity" is important as firms seek to navigate in the swift stream of capital. Recent spin-off activities in the retail, office, and hospitality real estate investment trust sectors will be a trend in 2015. The drive for efficiency and effectiveness in both service delivery and cost will filter from investor expectations down to the service providers.
   
   
7. A new 900-pound gorilla swings into view
   The Defined Contribution Real Estate Council has been set up to help plan sponsors and their participants achieve better investment outcomes through the institutional quality real estate. With a combined $12.6 trillion in capital, individual retirement account and defined contribution funds will look to the benefits of high-quality commercial property in a mixed-asset portfolio.
   
   
8. Infrastructure: time for the United States to get serious?
   For all our vaunted technological innovations, the foundation of our commerce is eroding around us. It's not just bridges and roads - since 2009, spending on educational buildings and health care facilities (by both public and private sectors) is down by one-third in real-dollar terms.
   
   
9. Housing steps off the roller coaster
   Housing seems to be putting the excesses of the bubble and the ensuing collapse behind it. The trend in residential real estate looks to be returning to the classic principles of supply and demand. Confidence in housing should continue to rise.
   
   
10. Keeping an eye on the bubble: emerging concerns
    The generally positive outlook does have a dark side. Excessive optimism can promote overbuilding and excess leverage. However, that hasn't happened yet. The industry looks like it has learned some lessons in self-regulation and self-correction.

Europe

Europe's real estate industry expects to be busier and more profitable in 2015. This optimism is clear, despite weak fundamentals and economic conditions as well as an undercurrent of concern about the geopolitical situation in parts of the world.

The confidence comes from the availability of capital. Real estate is awash with equity. Most ofEmerging Trends Europe's survey respondents and interviewees anticipate an increase in both prime and secondary values as a result of greater liquidity and the need to deploy capital in this asset class.

In many of Europe's main markets, growth in values has far exceeded any rise in occupier activity. Across the Eurozone, in particular, rental growth remains elusive. This disconnect between capital flows and fragile occupier demand is expected to be, once again, a feature of the markets in 2015.

Nearly two thirds of those surveyed by Emerging Trends Europe believe that core property is overpriced in almost all markets. In this respect, the major influences are the equity-rich sovereign wealth funds and pension funds and insurers from Asia, which have helped drive up the price of core assets in “gateway” cities such as London, Paris, Milan and Berlin. These players are expected to play an even bigger role in European markets in 2015. Private equity firms from North America will also remain a force.

What's true of equity is almost equally true of debt. Non-bank lenders, such as debt funds and insurance companies, are expected to raise their game significantly, providing much-needed diversification from the bank-dominated landscape of the last boom.

Though credit has eased considerably for real estate in Europe, it is not the same everywhere. The most liquid markets of Northern Europe expect the flow to swell further. In Southern Europe, where domestic lenders are still constrained, respondents think 2015 will bring an improvement, while in the Nordics and Central and Eastern Europe they are less exuberant in their expectations. Finding finance for development remains a challenge. And yet there is just a seed of doubt among some that the debt market has rebounded too far, too fast.

Spending the money effectively is also a challenge, but there is no doubt that it wants to go into real estate. The overwhelming majority - 70 percent - of those surveyed by Emerging Trends Europeexpect more equity and debt to flow into their markets in 2015.

Any concerns over pricing are being assuaged by the fact that in a low interest rate environment, the income return of real estate remains attractive compared with other asset classes. The high price tags and scarcity of acquisition opportunities for core assets is forcing some to consider taking on more risk, simply to participate in real estate investment. But capital nonetheless remains choosy, both about the kind of assets it wants and where it will go.

According to Emerging Trends Europe, the five leading cities for investment prospects in 2015 are a mix of German stalwarts and recovery plays: Berlin is Number 1, followed by Dublin, Madrid, Hamburg and, in a remarkable revival, Athens. Dublin's ranking and Athens' rise reflect the opportunistic streak that runs through Europe. Madrid's ranking, too, reflects a capital surge into Spain that started in 2013 and shows no sign of easing up. If anything, there are signs of it spreading across Southern Europe.

Asia

Asia's real estate markets are beset by an abundance of riches. Whether derived from new sources of institutional capital that continue to build across the region, or from almost six years of global central bank easing, a seemingly endless stream of money is now pointed at real estate assets across virtually all jurisdictions and asset classes, pushing up prices and further compressing yields. Too much capital, however, has the tendency to distort markets, and in this case there have been a variety of consequences.

Investors are opting not to buy.
Transaction volumes across Asia fell 24 percent year-on-year in the third quarter of 2014, compared with significant gains in the United States and Europe. Although much of the decline is due to lower sales (in particular, sales of land) in China, transactions have dropped in most Asian markets, with the notable exception of Australia.

Product is scarce.
The structural shortage of investment grade assets across the region is compounded by growing volumes of capital held by local institutions and the lack of incentive to sell, given that relatively little commercial real estate is held by investment funds that will recycle their assets into the market after a few years.

Investors seek other asset classes.
With core product both expensive and hard to source, investors are looking for alternative strategies. This includes value-add deals and, in general, more-complicated asset management situations, and finding specific types of assets that may have been left behind by the market.

Investors are wary of secondary locations and assets.
Given the lack of trust in the current market, most investors prefer to remain in gateway cities, where they have more confidence in the resilience of pricing and liquidity. This applies especially in Australia. In China, many buyers are avoiding secondary locations because of a spate of overbuilding. Meanwhile, secondary assets such as retirement homes, self-use storage, and student housing have proved to be less investable than previously anticipated due to difficulties of working in specialist sectors.

Interest in emerging markets cools.
Fast-growing markets such as the Philippines and Indonesia remain on investors' radars, but the attraction has dimmed somewhat this year as investors become cautious over the potential for capital outflows in the wake of upcoming U.S. interest rate hikes.

Investors are increasingly willing to adopt development risk.
Forward-funded and build-to-core strategies are popular, especially in Australia. In Japan, however, development is less attractive given increased construction costs.

Distressed developers provide opportunistic returns in China.
As a government-mandated squeeze in debt financing for developers takes effect, small and mid-sized Chinese developers will seek rescue capital or other types of private equity to make ends meet.

Strong asset prices compare with weak rentals.
Occupational markets are weak in many countries, especially Australia and Japan. Many investors project that further upside will come from improving rentals rather than from more price rises.

Read the original report

Read the original Asia report