London, 08 November 2023, According to the latest Emerging Trends in Real Estate^® Europe report from PwC and the Urban Land Institute (ULI), 75% of real estate leaders agree current valuations “do not accurately reflect” all the challenges and opportunities in real estate, as a wedge continues to be driven between market price expectations and book valuations.  Fears over “catching a falling knife” are expressed by many of the more than 1000 industry leaders canvassed for the report, as huge uncertainty continues to pervade the market in Europe and contribute to record low investment volumes. MSCI has recorded a -42% drop on the pre-Covid average (2015 – 2019).

With one third of respondents ‘optimistic for increased profitability in 2024’, the report does indicate improved business confidence compared to the previous year (an increase of 8% of respondents), although from a low base and well below long term averages. The outlook is tempered by the backdrop of sluggish economic growth in Europe and the ‘realistic concern’ of a looming recession.

Lisette van Doorn, CEO, ULI Europe, comments, “Our report this year highlights the complex challenges confronting Europe’s real estate sector and there is a sense that the industry stands on the brink of a serious downturn in demand across key occupier markets. Opinions are mixed as to what’s needed for market activity to resume. Stabilising interest rates, a soft economic landing and a decrease in interest rates for the balance with yields to be restored, would all have an impact, as would increasing levels of refinancing, leading to more distress on the back of higher financing costs, as well as capex required to make assets fit for purpose under difficult and uncertain circumstances.”

Gareth Lewis, PwC Director adds, “Whilst the sentiment from the research points towards an industry ‘in wait and see’ mode, it also suggests an environment and point in the market cycle where the rewards could be significant for those who are brave enough to make the big calls. There is some hope that the stars are aligning — namely clarity on inflation, interest rates and valuations — to facilitate greater transaction activity in 2024. However, there is unlikely to be a single timeline for this across Europe’s diverse markets.”

Jean-Baptiste Deschryver, PwC EMEA Real Estate Leader, says, “Our understanding is that expectations for debt and equity availability are mixed in the coming years, when capital will be required for refinancings and generally making real estate fit for purpose. The denominator effect on institutional allocations to real estate — a major impediment coming into 2023 — remains problematic one year on.”

With so much uncertainty in play, real estate investors are naturally more careful than ever about how and where they deploy their capital in Europe. For many, this means targeting cities that offer liquidity in riskier times and it is therefore no surprise that London (1) and Paris (2) take the top two places in the report’s city rankings once again. The two cities accounted for around 15% of total real estate transaction volumes in Europe in the first nine months of 2023. And the premium on liquidity allied to economic performance is also evident in other cities in the ascendancy in this year’s survey: Madrid (3), Milan (6) and Lisbon (8).

Though still relatively highly placed, the German cities of Berlin (4), Munich (7), Frankfurt (9) and Hamburg (11) have slipped in the rankings in terms of investment and development prospects. The overall gloomy economic outlook for Germany in 2024 is influencing sentiment for cities that were, not so long ago, revered as safe havens for capital. According to Oxford Economics, German cities face stagnant economic growth prospects with average real GDP growth of just 0.1% yoy for 2023. MSCI data shows that investment volumes across Germany are down -55% yoy in the first nine months of the year. Some interviewees also suggest that real estate pricing in Germany has been slower to adjust than across most of Europe.

As the industry grapples with a market burdened by inflationary pressures and high interest rates, four fifths of the survey’s respondents agree that ESG credentials will have material effect on asset valuations over the next 12-18 months and, taking a longer term view, they feel that ESG issues are expected to have the most significant impact on real estate by 2050.

In line with this increased focus around sustainability requirements, global megatrends such as climate change, digitalisation and demographics are seen to be driving investor appetite for niche sectors, with the report ranking new energy infrastructure (1), data centres (2) and healthcare (3) as the sectors most likely for investors to ‘increase their exposure to.’ These trends, combined with a push for ESG compliance, will pave the way for new development and investment opportunities in areas such as battery storage for renewable energy, solar farms and electrical vehicle infrastructure.

Lisette van Doorn concludes, “The medium term outlook for real estate becomes significantly more positive assuming that rates will have stabilised by then and the economic uncertainty will have been largely resolved. Considering ongoing urbanisation, technological and demographic megatrends in addition to an evergrowing focus on health, wellbeing and sustainability by users and investors, there lies a huge opportunity for real estate ahead of us. The more we can collaborate to address the issues, such as valuations and climate change, the more and sooner we can tap into the opportunity.”

Poland in the Emerging Trends in Real Estate^® report

Amidst a generally challenging investment environment, Warsaw has reasons for optimism as it has risen from the 16th place in last year’s survey to the 14th position in this year’s overall ranking of Europe’s most attractive investment cities. Poland’s capital city surpasses Vienna, Zurich, Rome, Copenhagen, and Stockholm in this ranking. Additionally, Warsaw outranks Prague and Budapest in the list of the Top 30 most attractive European cities. Prague advanced to the 25th position, marking a two-place rise in a year, while Budapest remains at the lower end of the ranking at the 28th place. An interesting trend highlighted by the ULI and PwC survey is the notably optimistic outlook toward Warsaw’s prospects among respondents from Central and Eastern Europe.

Marcin Juszczyk, Investment Director and Financial Board Member at Capital Park Group, as well as the newly appointed Chairman of ULI Poland, asserts, “Despite the conflict in neighboring Ukraine, Poland maintains robust fundamentals. It represents the largest market in the region, characterized by appealing prices, and real estate assets exhibit strong operational performance and high occupancy rates. Properties with potential operational underperformance, however, hold significant promise for revitalization or re-purposing.”