Joint analysis by ULI and PwC Examines European Real Estate Industry Market Prospects for 2017

  • Clouds on the Horizon for parts of the European Real Estate Industry- but there is a silver lining
  • Birmingham remains top UK property hotspot according to new real estate report

Despite a general post-EU referendum slump in sentiment towards the UK, real estate investors continue to see opportunities to bankroll the market –as other currencies flourish against the pound.

Investors continue to see value in real estate across many parts of the UK and Europe, but they are remaining understandably cautious, the annual analysis published jointly by the Urban Land Institute (ULI) and PwC found.

Ninety percent of almost 800 real estate professionals in Europe, including investors, developers, lenders, agents and consultants industry leaders surveyed in Emerging Trends in Real Estate Europe 2017 predict that UK investment and property values will fall over the next 12 months as a result of the UK referendum vote to leave the European Union.

Many industry leaders fear that the UK capital will experience difficulty in maintaining and attracting new EU-focused business and part of its highly-skilled workforce to rival cities over the medium term.

Gareth Lewis, PwC real estate director, said,

“Given the timing of this year’s report, which coincided with a period in which Europe’s real estate industry participants are coming to terms with the result in the UKs referendum on EU, it was inevitable that Brexit would be a reference point for the industry’s uncertain view of the future.

“But what is clear after taking the pulse of the real estate industry’s leaders, is 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’.”

Birmingham Property Investment and Development Prospects
Birmingham ranks as the highest UK city for investment prospects in the Emerging Trends in Real EstateR Europe 2017: New market realities report.

However, Birmingham – which was one of last year’s top 10 property hotspots in Europe – has dropped 15 places to number 22 based on investors’ views of the city’s prospects in 2017.

Commenting on the report’s findings, regional chairman of PwC in the Midlands, Matt Hammond said:

“Birmingham may have dropped out of the top 10 leading European cities for investment prospects in 2017, reflecting how increased uncertainty due to the impact of Brexit could deter investors, but it remains the highest performing UK city, ahead of Manchester, Edinburgh and London.

This may be in part due to the big improvements in the city’s infrastructure, including the continuing development of HS2, the extended tram lines and the halo effect created by the redevelopment of New Street Station and the opening of Grand Central.

“The report also shows that office take-up in Birmingham in the first six months of 2016 was very healthy, exceeding 500,000 square feet. Added to this, earlier this year, PwC announced our own investment in the city’s property market.

We will be relocating our Birmingham office in early 2019 to One Chamberlain Square, a landmark building in the city’s £500 million, transformational Paradise development.

This investment reflects our commitment to our clients and people in Birmingham and our desire to offer them a truly first-class working environment.”

Nicola Hewitt, Commercial Director of inward investment agency Marketing Birmingham, said:

“A third consecutive year of Birmingham outranking the capital city as the UK’s most investible destination in the country, is testament to the strength of the city’s assets, infrastructure and talent.

“However, as indicated by PwC’s Emerging Trends for Real Estate Report for 2017, an element of market volatility has impacted cities UK-wide following the decision by the electorate to leave the EU.

As a result we are likely to see a period of uncertainty amongst potential international investors in the short term – though long-term, Britain remains a well-placed innovative, highly-skilled economy and an attractive place for business within the global field for real estate.

“This latest report demonstrates a continued trend in investors seeing better growth prospects in regional UK cities over London, with Birmingham’s regeneration and development opportunities, and scale of investment in the city’s infrastructure cited as key draws.”

Dublin takes the No 4 berth in the list, (3rd in 2016) however investors believe there may be an opportunity provided by financial services back –office functions looking to set up there.

Despite falling to 27th place in the table from number 11 in 2016, London is still Europe’s primary magnet for global capital, attracting €31 billion of capital inflows in the 12 months to end September 2016* the Emerging Trends Europe report found.

Office take-up in Birmingham in the first six months of 2016 was very healthy, exceeding 500,000 square feet, 57 percent more than the five-year average for the first half, according to CBRE.

Several investors also believe that there will be opportunities in the budding purpose-built private rented sector (PRS) housing market.

“We target all large UK cities with significant urbanisation: Birmingham, Bristol and perhaps Manchester,” said one investor.

Manchester has been increasingly on the radar of international investors for some time, garnering €2.6 billion of investment in the 12 months to June 2016.*

Accordingly, some argue that Manchester now rivals Birmingham for the status of the UK’s second city, the report found.

“We have investments in different secondary cities in Britain, and Manchester is second in a row after London in many respects,” said one continental investor.

In Edinburgh a number of developments have launched, in the wake of a limited supply of office space, sparking a “buoyant” market, according to one real estate leader.

What is more, some interviewees believe the referendum result may ultimately benefit the market.

A pan-European investor said:

“We are interested in Edinburgh, which is a little bit related to Brexit. It remains a back-office hub for international banks and institutions. There is a well-educated workforce, and it is a very transparent and professional market.”

What’s the picture across Europe?

According to Emerging Trends Europe, the five leading cities for overall investment and development prospects in 2017 are Berlin at Number 1, followed by Hamburg, Frankfurt, Dublin and Munich.

Lisette van Doorn ULI Europe CEO, said:

“The fallout from the Brexit vote gives an extra boost to the already-strong German real estate market.

“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.”

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.

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.

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.

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.

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.

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