Emerging Trends in Real Estate®: Europe 2019

Emerging Trends in Real Estate® Europe is a joint survey by PwC and the Urban Land Institute. Now in its sixteenth edition it provides an outlook on real estate throughout Europe for 2019 and beyond.

Creating an impact

Europe's Real Estate leaders remain optimistic about their business prospects in 2019, albeit a little less confident than they were a year ago, as an air of late-cycle caution settles on the industry.

The geopolitical backdrop remains a concern, with Brexit uppermost in the minds of many, though global investors are less bothered by Brexit than their European counterparts.

Emerging Trends in Real Estate® Europe 2019 shows an industry in search for secure, stable income as they question traditional investment structures and look at real estate in a much broader context.

etre 2019 word cloud

Key findings

Nearly half of survey respondents expect the availability of suitable assets to worsen over the next five years.

As has been the case over several years, the primary concern for the industry is the availability of suitable assets - cited by over two thirds of respondents.

This serves to underline the enduring appeal of European real estate on the global stage, and with the search for yield and income, this is now edging the industry out of its core comfort zone.  Some are moving into alternative or niche areas, like student accommodation, which require more operational expertise.

Others are going down the value-added, build-to-core or development route.

In terms of sectors identified by respondents as having the best prospects for investment and development, six of the top 10 sectors represent some form of residential product.

We see demand for alternatives remaining very strong because of yields, compared with the more mature sectors.” - Pan-European Institutional investor

The combination of the late property cycle, geopolitical uncertainty and the rising interest rate environment has reinforced the need for secure, long-term income. For many, the search for income is the main, guiding narrative for European real estate investment in 2019.

Real estate may still have the edge over other investment asset classes according to some, while others are allocating more capital to less cyclical alternative real estate sectors - like housing in its many form - or going down the value-added, build-to-core or development route.

The blurring of boundaries between traditional and alternative real estate is now a fact of life in the industry.

“There is an enormous amount of risk in the system - geopolitical risk is everywhere, there is no safe haven today.” - Global investor

The geopolitical backdrop to investment is hard to ignore.  The threat of International political instability is by far the biggest concern among survey respondents, just as it was last year.  The threat of trade wars is now on the industry agenda too, but its impact is difficult to quantify at the moment and will most likely materialise after 2019.

European political instability is a close second (69%), where Brexit remains a matter of growing concern as the due date of 29 March 2019 draws closer, without any clearer sense of the outcome.

“Every major city in Europe has the same issue: lack of affordable housing, lack of social housing and lack of senior care...the problem is just getting worse and worse.” -Partner, pan-European private equity firm

Though social inequality is not the main concern for 2019 amongst the people who took part in the survey, some interviewees refer to it as one of the biggest issues facing the industry over the medium term because it will set the political agenda across Europe.

More than half of the survey respondents are concerned about housing affordability as the significant social issue in 2019.

Nearly 60 percent of survey respondents believe the industry is moving towards using a wider range of non-financial measures to assess the value of real estate and real estate businesses.  

And, half agree that non-financial metrics are increasingly important in measuring returns, while just 18 percent disagree.

Companies are responding to consumers and a general change in society - and it seems that those that focus solely on profit will soon lose out to their competitors.

Numerous investors interviewed are attempting to measure environmental, social and governance (ESG) factors.  But it takes a lot of effort, simply because there are no internationally agreed standards for measuring impacts on society.

Opportunities in new asset classes

Some 70% of survey respondents believe that achieving target returns will require a widening of the definition of traditional real estate to include real assets and related service businesses.

Investing in infrastructure need not mean traditional assets, such as railways or utilities.  Rather, whole new investable asset classes are opening up to service the digital economy, including 5G infrastructure, data centres and charging points for electric, and - increasingly - autonomous vehicles, all of which provide a social return to consumers through better connectivity or the environment in terms of lowering carbon emissions.

Not all investors or property companies are set up to take a real assets approach, nor may they feel comfortable with such a strategy, as it is a different type of risk and requires more intricacy than with traditional asset classes.

“We’re going to see investments in network communications in the same way we may have looked at hard infrastructure investment in the past.”

Real estate consultant

The Brexit effect

Brexit is doubtless one reason why European political instability is second only to international political instability as the key social/political issue for the industry in 2019.

The interviews indicate that global investors are less bothered by Brexit than their European counterparts. Even so, an overwhelming 83 percent of respondents expect a divergence in economic growth between the UK and the European Union in 2019.

Whether it’s a soft, hard or no-deal Brexit, 70% of Europe’s senior property professionals believe that the UK’s ability to attract international talent will fall following 29 March 2019, which is bleak news for the UK.

For the majority, the Eurozone is seen as a safer and more fruitful investment destination than the UK in 2019, whilst others equate the risk with opportunity.

Impact of Brexit on real estate investment in 2019

Happy tenants

Not so long ago, the idea of promoting health and wellbeing would have been dismissed as irrelevant to the real estate industry, yet nearly half the survey respondents believe it will have a moderate impact on strategies over the coming five years.  More tellingly, perhaps, 43 percent acknowledge it will have a significant impact.

As it turns out, the survey puts health and wellbeing almost on a par with such long-established influences on the industry as sustainability and energy efficiency.

There is also demand for more flexibility among occupiers, so that they can respond to the needs of their workforce.  This requires more intensive asset management and investment.

“The days of buying real estate, holding it for 20 years and doing nothing, are long gone.” - Global fund manager

“We have to be ahead of the game as far as possible in thinking about the happiness of tenants. In the end, they pay the rent and we want to find the highest rent and the most loyal tenant in the long term.”

Pan-European fund manager

Lisbon takes the lead

Emerging Trends in Europe 2019 ranked the real estate markets in major European cities according to their overall investment and development prospects.  

With some of Europe’s major markets judged to be peaking, attention is shifting to smaller, dynamic cities; the “risking stars”.

This year’s choice for overall prospects is Lisbon, rising 10 places to number one. Interviewees cite the city’s “quality of life” and “positive” leadership. Plus, it’s seen as a late-cycle play.  

Portugal’s economy is growing healthily and its capital is now an international destination for companies, investors and tourists.

The 10 European cities that are expected to fare best in 2019 are a mix of smaller newcomers, such as Lisbon and the larger, tried and tested markets.  It is no surprise, for instance, that German cities still dominate the top spots for 2019.

  2019 2018
1 Lisbon Berlin
2 Berlin

=Copenhagen

=Frankfurt

3 Dublin  
4 Madrid Munich
5 Frankfurt Madrid
6 Amsterdam Hamburg
7 Hamburg Dublin
8 Helsinki Stockholm
9 Vienna Luxembourg
10 Munich Amsterdam
Emerging Trends in Real Estate

Emerging Trends in Real Estate®: Europe 2019

Download our report Emerging Trends in Real Estate®: Europe 2019 in PDF format.

Contact us

Gareth Lewis
Emerging Trends in Real Estate Project Leader, PwC United Kingdom
Tel: +44 (0) 207 804 5537
Email

Bart Kruijssen
EMEA Real Estate Leader, PwC Netherlands
Tel: +31 (0)88 792 60 37
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