In the search for safe havens, German cities will be Europe’s preferred real estate investment and development destinations in 2017, according to Emerging Trends in Real Estate Europe 2017 report.
Berlin, Hamburg, Frankfurt, and Munich occupy four of the top five spots for 2017 investment and development prospects in the annual forecast published jointly by the Urban Land Institute (ULI) and PwC. The report is based on the opinions of almost 800 real estate professionals in Europe, including investors, developers, lenders, agents, and consultants.
'The fallout from the Brexit vote gives an extra boost to the already-strong German real estate market,' commented ULI Europe CEO Lisette van Doorn. 'With considerable political and economic uncertainty in Europe, many real estate investors are willing to sacrifice some yield in return for lower risk. In this risk-off environment, the stability of German cities becomes even more attractive.'
Germany edges out UK
According to the report, Germany is currently the most popular destination in Europe for real estate investors and developers, with recent data from Real Capital Analytics confirming that Germany has overtaken the UK in post EU-referendum investment volumes.
London remains Europe's primary magnet for global real estate capital, attracting €31 bn of inflows in the 12 months to end-September 2016 London, Real Capital Analytics found. Yet, the UK capital has fallen from number 11 in 2016 to number 27 in 2017 in the Emerging Trends Europe city rankings for investment and development prospects. A total of 90% of industry leaders surveyed by ULI and PWC predict that UK investment and property values will continue to fall over the next 12 months. Despite this short-term uncertainty over London, most interviewees have faith in its medium-to-long term future as a key global city, the report says.
The dominant performance of German cities in the report demonstrates the strong fundamentals of the German market. Berlin has maintained its top position for the second year in a row, while Hamburg remains in second place. Frankfurt, Germany’s business centre, has soared 11 places to number three, pushing Dublin into fourth position, while Munich holds steady at number five.
Political instability fears
International political instability is expected to pose significant challenges in the coming year, with 89% of respondents listing it as their top concern for 2017. Forthcoming elections in France, Germany, and the Netherlands, as well as concerns about migration and terrorism, add to this uncertain outlook.
Some 46% of respondents believe that the migration crisis will get worse in the coming year, and interviewees reported terrorism as a key threat to investor confidence. This international political instability is not expected to dissipate quickly: nearly two-thirds of survey respondents expect political uncertainty in Europe to worsen over the next three to five years.
'Given the timing of this year's report, which coincided with a period in which people are coming to terms with the result of the UK referendum on the EU, it was inevitable that this would become be a common reference point for the real estate industry's uncertain view of the future,' said PwC's Real Estate Director Gareth Lewis. 'But after taking the pulse of the real estate industry's leaders, it's clear that below the surface, there are complex and significant influences at play beyond today’s geopolitical issues. These are changes which are altering society and our industry's view of the future role of the built environment. Technological disruption and the growing relevance of the sharing economy is shifting the centre of gravity from financial asset to product, or more broadly 'real estate as a service'.'
Optimism remains
Despite high levels of uncertainty and change in Europe, respondents are only slightly less confident about their business prospects than they were last year. Just under half expect no change to confidence, profitability, or staff numbers in 2017.
The report also finds that capital flows will remain strong and investors will continue to value European real estate for yield in comparison to the attractive risk/return expectations in other asset classes.
Sector-wise, the report notes that despite the challenges associated with investing in alternative real estate sectors, they are growing in popularity and are predicted to offer some of the best returns. Urbanisation and changing consumer habits have paved the way for alternatives such as hotels, student housing, and assisted living facilities. Eight out of the top ten sectors for investment prospects in 2017 relate to residential real estate — leaving traditional offices and shopping centres to be classed among the riskiest assets.
