Real estate ‘on the brink’: PwC/ULI’s Emerging Trends

Current valuations do not accurately reflect the challenges and opportunities in real estate and a wedge continues to be driven between market price expectations and book valuations according to 75% of real estate leaders surveyed for the latest Emerging Trends in Real Estate Europe report, produced by  PwC and the Urban Land Institute.

Many of the 1,000 industry leaders canvassed for the report expressed fears of “catching a falling knife” as uncertainty overshadows the market in Europe where investment volumes have fallen -42% against the average in 2015 – 2019, prior to covid.

The report indicates improved business confidence compared with a third of respondents ‘optimistic for increased profitability in 2024’, 8% up on the previous survey 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.

“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,” said ULI Europe CEO Lisette van Doorn.

“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.”

But while the survey results point toward an industry ‘in wait and see’ mode, PwC Director Gareth Lewis added that “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, he said, “some hope that the stars are aligning”.  He added that clarity on inflation, interest rates and valuations could aid deal activity in 2024.

“However, there is unlikely to be a single timeline for this across Europe’s diverse markets.”

The denominator effect on institutional allocations to real estate remains a problem and the report found that the current level of uncertainty is making real estate investors more careful than ever about how and where they deploy their capital in Europe.

Many are targeting cities that offer liquidity in riskier times, such as London and Paris, which again ranked one and two respectively in the report’s city rankings. These cities accounted for around 15% of total real estate transaction volumes in Europe in the first nine months of 2023. Other cities in the ascendancy in this year’s survey included Madrid (3), Milan (6) and Lisbon (8).

German cities, Berlin (4), Munich (7), Frankfurt (9) and Hamburg (11), slipped in the rankings in terms of investment and development prospects and the gloomy economic outlook for Germany in 2024 is influencing sentiment for cities recently revered as safe havens for capital.

Emerging Trends quotes MSCI data which shows that investment volumes across Germany were down 55% year-on-year in the first nine months of the year. However, some interviewees suggested that property pricing in Germany has been slower to adjust than across most of Europe.

ESG credentials will have material effect on asset valuations over the next 12-18 months according to 80% of respondents and will have the most significant impact on real estate by 2050.

Global megatrends such as climate change, digitalisation and demographics are driving investor demand for niche sectors such as new energy infrastructure, data centres  and healthcare.

Real estate’s medium term outlook is significantly more positive “assuming that rates will have stabilised by then and the economic uncertainty will have been largely resolved” said Van Doorn. Continued urbanisation, technological and demographic megatrends and the growing focus on health, wellbeing and sustainability create an opportunity for real estate. “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,” she said.