The Survivors

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Lucy Phillips, author of the ULI/PWC Emerging Trends report, finds optimism among Europe’s property professionals.

When the European Commission cut its eurozone growth forecast in November, warning of a “difficult” rebalancing process ahead, it was a reminder that the economic climate is little changed since this time last year.

Unemployment is still rising in France, Germany’s manufacturing output is slowing, and unspectacular Christmas sales in the UK have raised fears that the economy will show contraction in the fourth quarter.

Yet in spite of this, sentiment in the property industry is more positive than it has been at any time since 2008. Although economics are still limp and there is no improvement in the debt market, the recovery is well under way, shows a report published by the Urban Land Institute and PWC this week.

As the opening line of its Emerging Trends in European Real Estate report states: “In terms of the recovery, we are at the start of the second act.”

This buoyancy marks a turnaround since the same report last year concluded “Europe was on the precipice of absolute implosion” and urged the industry to “do nothing” and sit tight. Twelve months on, however, interviewees are now extraordinarily optimistic about the months ahead — as 80% report the eurozone crisis created opportunities for them.

For those who argue this optimism is merely characteristic of a “glass half-full” profession, an analysis of the past 10 years’ data is included. It shows the predictions of Emerging Trends surveys have proved reasonably well correlated to outcomes over the last decade (box, below).

Emerging Trends at 10

As Emerging Trends celebrates its 10th year, how useful have its predictions been?

An analysis of how market sentiment has matched up to outcomes shows the industry has been pretty good at predicting the future over the last 10 years. Changes in the market have been detected earlier than general economic confidence indicators. And there was 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, Dirk Brounen, professor of real estate economics at TiasNimbas Business School in the Netherlands, sees a strong relationship between expectation and fact.

“Respondents are telling us more than what general economic indicators do. In eight of the last 10 years, these industry experts have correctly predicted what the trend of European real estate returns will be.”

Andrea Boltho, emeritus fellow of Magdalen College, University of Oxford, says respondents have been consistently overoptimistic about some markets, while underrating others. Frankfurt, Hamburg, Berlin and Munich have been overrated by the survey, IPD performance statistics show. Munich is the most highly rated city this year, and Hamburg and Berlin also feature in the top five.

But Zurich, Vienna and Copenhagen have been regularly underestimated over the years, argues Boltho. The Swiss city ranks seventh 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.

Anxiety attack

The confidence is based on a widespread attitude that it is important to set anxiety about economics aside and try to make progress. Interviewees also believe that, having survived the last five years means it is likely they will survive the next five, too.


Joe Montgomery, chief executive of ULI Europe, explains: “While we do not anticipate economic and market conditions getting any easier in 2013, organisations have an increased confidence that they have the right plans in place to adapt to the ‘new normal’.”

Simon Hardwick, real estate partner at PWC Legal, adds: “There are many reasons to be cheerful for those with access to capital and debt.

“These businesses are well placed to take advantage of the opportunities that have arisen out of the eurozone crisis and the fact that there are still ‘golden postcodes’ across Europe where the prospects are attractive.”

It is time we considered the dynamics of growth more closely. There are pockets of positivity that could be profitable over the long term

Emerging Trends interviewee

Therefore business confidence, profitability and investment intentions are noticeably better for the 500 professionals interviewed across Europe.

Listed firms and fund managers register as the most optimistic and lenders are the least.

As one interviewee says: “There is nothing we can do about the eurozone. But we can manage the risks and focus strategy around the medium-term trends: demographics, technology and urbanisation.”

For those determined and able to make progress in 2013, the key themes will be working with micro-opportunities that exist within core European markets such as Germany and the UK. Survival in the “new normal” is about being much more specialised and “micro” in approach.

Opportunities for the most able are defined by the “three Rs”: refocusing, renovating and repositioning assets.

Top-rated investment prospects 

1 Munich
2 Berlin
3 London
4 Istanbul
5 Hamburg
6 Paris
7 Zurich
8 Stockholm
9 Moscow
10 Warsaw
11 Frankfurt
12 Copenhagen
13 Vienna
14 Edinburgh
15 Lyon
16 Milan
17 Prague
18 Brussels
19 Helsinki
20 Dublin
21 Rome
22 Amsterdam
23 Barcelona
24 Madrid
25 Budapest
26 Lisbon
27 Athens

It is a standpoint that goes hand in hand with a stark change in investors’ attitudes to risk.

Interviewees believe the best opportunities remain in the UK or Germany but outside of the prime slice of those markets. So although London is the third most popular destination for capital — after Munich and Berlin — there is a growing interest in exploring what value-added locations in the city might offer.

As the opportunistic explore the “massive price disconnects” between capital and secondary cities, regional locations begin to get a look-in.

“Prime stock in capital cities is expensive but outside, no one is bidding for assets. When the UK economy kicks back, everyone will realise Manchester was OK after all,” says one respondent.

Interviewees are also exploring angles brought about by the economic slowdown itself. Retail is one sector where investors are seeing opportunities to cater for more cost-conscious consumers.

“In a time of high petrol costs, the local co-operative or shopping parade looks attractive,” says the report.

Growing interest in demographics is another key theme, as the industry is forced to be more long term about its projections. Interviewees are getting to grips with changes in population to secure income growth. As the UK is now experiencing a higher birth rate, lower death rate and net inward migration, businesses are considering what opportunities this creates in rented housing and retail.

Population increases in cities such as Copenhagen are also identified as an opportunity: the city council of the Danish capital estimates a shortage of 33,000 homes over the next decade.

Real Estate Business Issues 2013

“It is time we considered the dynamics of growth more closely. There are pockets of positivity that could be profitable over the long term,” says one interviewee. This focus on the micro sits alongside themes of globalisation throughout.

Interviewees are confident that equity for the industry will be greater than in 2012, deriving from locations far and wide. But global tourism in Europe from the BRIC (Brazil, Russia, India and China) countries has given retail and leisure investors new ideas to play with.

Asia is identified as a “force” in European real estate, and catering for this consumer of retail and residential is identified as a key opportunity. Chinese tourists spent €35bn in Europe in 2012, as they flocked to Paris’s luxury shops and Frankfurt’s factory outlets.

As one interviewee put it: “It’s mathematical. The developing middle classes of China and elsewhere in the world have the financial wherewithal and ambition to travel. There is no constraint in demand. And it’s going to grow ever further.”

Techno fans

Technology features as more friend than foe in 2013. Online sales continue to decimate the high street, but the rise of “e-tail” has increased prospects for Europe’s industrial sector. Emerging Trends reports that every €1bn of online sales now generates 72,000 sq m of warehouse demand in Germany, France and the UK.

Respondents say demand for high-quality, efficiently managed and well-located industrial property is “healthy”, as investors such as Blackstone place faith in the sector.

For retail investors, social networking sites such as Twitter are becoming intrinsic to asset management initiatives.

Availability of debt in 2013

As one says: “Social media is a conversation with your customer. It’s not just about having followers, you have to interact.”

Interviewees say they are installing free wi-fi in shopping centres, collecting email details to push offers from stores, and using location data to understand more about their catchment area.

“We’re monitoring feedback about asset management initiatives and seeing where we can make slight adjustments on the back of it. Through Twitter, we’re learning what’s going right and what’s going wrong.”

And as TMT (technology, media and telecoms) companies overtake banking and finance firms in European leasing, the industry is beginning to consider how this new occupier is influencing the office sector. Smartphones, tablets and cloud computing are driving growth, and investors in tech capitals such as London, Berlin, and Dublin say these companies demand a “fundamentally different kind of office space” to a glass and steel box.

“Building design has not changed, but people have. It’s not about giant lobbies, but great public realm and interesting environments,” says one.

The need for a more creative style of office space will be reflected across many of the best occupier groups, however. And landlords are advised to discover how businesses want to use the space both in and around the office.

Methods and names

Emerging Trends in Real Estate Europe is a trends and forecast publication now in its 10th edition. Undertaken jointly by PWC and the Urban Land Institute (ULI), it provides an outlook on real estate investment and development trends, real estate finance and capital markets, cities, property sectors and other real estate issues in Europe.

Emerging Trends in Real Estate Europe 2013 reflects the views of more than 500 individuals who completed surveys or were interviewed. They represent a wide range of industry experts, from investors, fund managers, developers, property companies, lenders, brokers, advisers and consultants.

Lucy Phillips authored the report and undertook interviews along with ULI and PWC researchers between October and December 2012.

View the list of interviewees here

“Office developers these days need to know what their occupiers want to eat for lunch and how they want to spend their time before and after work,” says one. “Do they eat sushi? Where do they want to drink their coffee?”

But all these trends are framed in the context of a market where access to capital flows most freely to where it is needed least. Attracting debt and equity remains hard work for the ordinary mid-sized property company or non-core assets. The report finds most of the market is “off limits”, struggling to make itself relevant to the capital markets.

As one interviewee concludes: “Europe: a great place to deploy capital, but a tough place to find it.”

Coming Soon: Other key themes for 2013

Saddle up for distress

Ireland and Spain will be a top story in 2013. A significant increase in the flow of distressed opportunities is expected from banks in Ireland, following on from the emergence of a trading market at both the prime and distressed ends of the market in 2012.

“Everyone is there and everyone is having a look”, but the report finds “horrific” standards of documentation are holding up many sales.

Investors are expecting Spain will be a dynamic market over the coming months. Hopes are high that its €100bn “bad bank”, Sareb, will begin selling assets towards the second half. But some predict it will face the same issues as NAMA (Ireland’s National Asset Management Agency).

“It will buy bad assets and pay too much. At the moment it’s quiet as everyone tries to figure out how it’s going to work. The year after next will be the most active year,” says one.

Expect some choice cuts

Forced sales by lenders are an important issue for 70% of interviewees. They predict lenders will head off further value declines for assets on their books, underwriting “considerable” tenant distress to be on the safe side.

“Prospects do not look good for non-prime and secondary properties. There is still a lot of downside potential,” says one banker.

As a result, lenders have begun to get rid of good assets — and at decent prices.

Would-be core players that have moved down the risk curve are especially optimistic about this. Driven out of the prime market by high prices, these investors are now more prepared to buy institutional-quality properties with flaws, and are reporting more such assets from banks.

“Most of the time the impairments are correctable. Almost always when you talk to the tenant, you’ll find it wants to stay. You just need to refurbish the lobby or fix the lift.”

Debt remains dull

Expectations over debt for new investments or refinancing are as downbeat as last year’s report.

Banks continue to undertake a structural reduction of their commercial real estate lending, and new debt providers — such as insurers and debt funds — are not expected to make a material difference to the market in 2013. Between 35% and 43% of interviewees say their business found it harder to access finance in 2012. As for 2013, 56% predict less debt for refinancing and new investment. Only 20% think more will be available.

Who are the optimists?

The well-capitalised are hopeful of a bigger deal flow in 2013, while those who have asset management expertise believe there could be more value-added opportunities coming from banks or others “flipping” distressed assets on.

Half of respondents believe there will be more equity available for investments or refinancing, as capital seeks safe havens and relatively stable income return. Those that specialise in a particular field are also confident about attracting capital.

Even those finding life tougher are confident they can work with routes that allow them to grind out the hard times ahead.

“It’s about doing business in a different way.

We have forgotten about raising money and are looking at how we create income in other ways: fees for asset management, fees for finding deals and a small profit share,” says one.

Publicly listed companies are the most upbeat. More than half believe profits will increase this year, as they make the most of their low cost of capital and relatively good access to debt to take advantage of bank deleveraging.

Fund managers are also buoyant, equally encouraged by continued capital flows into real estate and the expectation of a bigger flow of distressed stock from banks.

Lenders are the least cheery of all. Only 21% expect to be more confident about their business this year. Around half (47%) see no change ahead. On the question of profits, they are quite evenly split: 37% expect an improvement, 32% predict no improvement and 32% forecast no change.


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