Geopolitical uncertainty in the European Real Estate Industry

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Analysis by ULI and PwC Examines Market Prospects for 2017

A post-EU referendum slump in sentiment towards the UK, geopolitical uncertainty across Europe and complex changes in the role of the built environment are significantly influencing the outlook for European real estate in 2017, according to industry leaders surveyed in ‘Emerging Trends in Real Estate® Europe 2017’.

The annual forecast published jointly by the Urban Land Institute (ULI) and PwC is based on the opinions of almost 800 internationally renowned real estate professionals in Europe, including investors, developers, lenders, agents and consultants.

Although investors continue to see value in real estate across many parts of Europe, return expectations are being scaled down, and the importance of active asset management and investment in real estate ‘alternatives’ as a means to access income is being talked up.


Top Markets for Real Estate Investment and Development in 2017

This year, the ranking table is based on the scored awarded for both investment and development prospects. According to the report, the top five European markets for real estate investment and development in 2017 are predicted to be:

1. Berlin The German capital scored the highest on all four survey categories: investment, development, and prospects for rental and capital growth. Berlin has established itself as a large, highly-liquid real estate market with global appeal—evidenced by the €3.9 billion invested in the city in the first six months of 2016. Despite steep pricing, the office and housing markets are still thriving due to their strong growth potential.


2. Hamburg At number two for the second year running, Hamburg’s success is due in part to the local government’s massive investment in transport and the development of new, high quality urban districts along its waterfront. Hamburg’s liveability and its diverse economy, which encompasses manufacturing, media, life sciences, and information technology, also bolster its high standing.  Rental growth of 4% over the past year helps to explain the popularity of Hamburg’s office market, together with yields of 3.75% for prime assets, which although expensive are still cheaper than those achieved in the city’s German rival, Munich.


3. Frankfurt Investors are largely optimistic about Frankfurt, which has climbed 11 places to number three. Not only is it considered a stable market amid post-Brexit uncertainty, but it is also predicted to provide an office destination for bankers relocating from the City of London. However, questions remain about the potential consequences of relocating large retail banking operations to Frankfurt, as Germany is already over-banked.


4. Dublin While it has slipped one place to number four, Dublin is still seen to be an overall beneficiary of Brexit. One private equity investor predicted that while the city will likely not pick up financial services headquarters from the UK, it will pick up back-office functions, which could still have a big effect on the market. Continued economic growth, foreign direct investment, and strong demand in the housing market also play an important role in Dublin’s prospects for 2017. 

5. Munich Rounding out Germany’s near-dominance in the top five is Munich. Investors perceive Munich as a perennially solid bet, a quality that is particularly valuable in a risk-off environment. Survey respondents indicated that buying property in cities like Munich allows investors to take on more risk without worrying over the basic security of their investment. While vacancy rates in Munich are at a 14-year low of 4.8%, finding assets to buy is challenging and the city remains one of the priciest markets in Europe.


Brexit impacts ranking

London has fallen from number 11 in 2016 to number 27 in 2017 in the Emerging Trends Europe city rankings for investment and development prospects. However, it is still Europe’s primary magnet for global capital, attracting €31 billion of capital inflows in the 12 months to end September 2016, according to provisional estimates by Real Capital Analytics. 

Based on surveys undertaken in the immediate aftermath of the EU Referendum vote, ninety percent of respondents predict that UK investment and property values will fall as a result of the UK referendum vote to leave the European Union. 

But despite the uncertainty, interviews with the industry’s senior leaders reveal that most have faith in London’s medium- to long-term future as a global city and there were frequent references to the opportunities presented in the UK’s regional cites given the impact of devolution-driven infrastructure investment and the recent devaluation in sterling. 

In this ‘risk-off’ climate, in which many real estate investors are clearly willing to sacrifice some yield for lower risk, Germany is widely regarded as the new haven for capital, with Berlin, Hamburg, Frankfurt and Munich taking top spots for investment and development prospects in the Emerging Trends Europe city rankings for 2017.  Dublin, ranked at number 4 and many of the Nordic cities, including Copenhagen, Stockholm and Oslo are also favoured. 

The UK’s second-tier cities are also feeling the effects of the EU referendum, with respondents showing low confidence in the near-term investment prospects of Birmingham, Manchester and Edinburgh for 2017. 


Geopolitical uncertainty

According to the report, 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. Forty-six percent of respondents believe that the migration crisis will get worse in the coming year, and interviewees reported terrorism as a key threat to the security of public spaces and private buildings. 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. 

But as well as the geopolitical risks and economic growth prospects in both the short and long-term, the report draws attention to a number of potentially more significant influences that are taxing the minds of Europe’s real estate leaders. 


Business prospects

Despite much uncertainty and change in Europe, however, 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 headcount in 2017. Furthermore, the report 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 urbanisation and changing consumer habits have paved the way for alternatives such as healthcare, hotels, student housing, and assisted living facilities. 8 out of the top 10 sectors for investment prospects in 2017 relate to residential real estate —leaving traditional offices and shopping centres to be classed among the lower performing assets for 2017.

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