Europe’s property sector is in the midst of a cyclical downturn which is coinciding with long-term structural changes to real estate, according to the latest edition of the Emerging Trends in Real Estate Europe report issued by PwC and ULI. However, real estate generally is seen as one of the few asset classes to generate acceptable returns at a time of low or negative interest rates.
The PwC and Urban Land Institute (ULI) survey of almost 1,000 industry leaders across Europe says that retail and offices will be most affected, due to widespread uncertainty related to rent collections amid the pandemic. This has led to investors increasingly assessing the underlying operational risk of the occupiers, and focusing on their own strengths as operators of real estate to keep the income secured.
Capital flows into the sector are also altering how funds can be deployed and there is a strong likelihood that domestic and European investors will play a much greater role in Europe. While a majority still expects Asian capital flowing into Europe to increase, this percentage is significantly lower than previous years, with interviewees citing the inability of overseas investors to visit a property in Europe before buying it.
The challenges around business travel and potential future lockdowns is raising concerns about deal sourcing. The industry had been working through a pipeline of deals originated pre-pandemic, subject to conventional due diligence, and mostly with existing partners.
However, the assessment of new opportunities within restrictions and the difficulty of building up new relationships in a ‘zoom-era’ might significantly slow down the transaction volume further going forward. At the same time, this could give an advantage to those players with a greater footprint with resources in place on the ground in more countries and profit the real estate markets in the bigger countries, such as Germany, with sufficient critical mass and the possibility to travel domestically and overcome some of the restrictions.
The `Digital Switch’, the increased pace of digitalisation around the globe boosted by Covid-19, is also having impact on investors’ sector preferences, with logistics, data centres and communications towers and fibre identified as having strong potential. In addition, life sciences and healthcare are coming out favourably, a trend accelerated by Covid-19, as well as residential that is still high on the list of investors.
Lisette van Doorn, CEO of ULI Europe, said: ‘European real estate is at a turning point, trying to work out its future role in society while facing the cyclical challenges following the outbreak of the pandemic earlier this year and the ongoing uncertainty this creates. Covid-19 has fast-forwarded a number of trends already started, for example related to digitalisation, remote work and online shopping. The search for yield, which is now even more dominant than pre-Covid, continues to attract investors to real estate, especially core and income-generating, such as residential that continues to appeal to investors, in the ‘safest havens’ across Europe.’
