The report Emerging Trends in Real Estate Europe 2018, jointly published by the Urban Land Institute (ULI) the research and education organisation and PwC showed that the pessimism of last year has dissipated considerably, with better general economic outlook and increased tenant demand. Continental European countries have mixed feelings about the UK, with uncertainties about the future impacts of Brexit.

Investment and development forecasts for next year

In this new ranking of the 30 most attractive European cities for real estate investors, made according to the investment and development forecasts for 2018:

• Berlin consolidates its dominance and still ranks first for the fourth year in a row.
• Frankfurt wins a place and ranks second after a year of robust growth, due in part to the consequences of Brexit on the financial sector
• Copenhagen is tied for second place (with a four-place increase) thanks to a very favourable economic situation
• In the fourth place, Munich, although expensive, is gaining a place and remains an attractive market for both investors and promoters
• Madrid, finally, enjoys good growth prospects in office rental and thus passes from ninth to fifth place

In France, investors are talking of an “environment more favourable to companies” than in recent years following the election of Emmanuel Macron. Paris has launched its project “Greater Paris” and will host the 2024 Olympics, enjoys a renewed optimism and makes up three places to get to the 14th place ranking.

Improving European context

The real estate sector regains investor confidence thanks to a favourable European geopolitical context.The macroeconomic outlook for the euro area and the continued attractiveness of real estate as an asset class is giving investors some optimism for 2018. The year 2017 saw a surge in overall investment volume and an improvement in investment. In 2018, the availability of capital and debt is expected to remain as high as in 2017 and, despite the risk of rising interest rates, investment is expected to remain at a high level. The results of the French presidential and legislative elections in the Netherlands have also restored some confidence in the continent’s political stability: more than one in four respondents believe that the political environment will improve in 2018.

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Jean-Baptiste Deschryver, PwC partner responsible for the real estate and hospitality sector, said, “While the macroeconomic horizon is brightening and real estate demand is strengthening across most of Europe, the real estate industry is cautious, although optimistic. In fact, the market is characterised by low levels of return in the short term in a context of historically low interest rates. We also note an awareness of the disruptive impact, in the medium term, of technological and social evolutions.”However, several questions continue to worry investors. As in recent years, the main concern of the real estate sector in Europe is the availability of assets corresponding to the investment criteria. More than 75 per cent of respondents believe that investors are now likely to take more risks to achieve targeted returns.Brexit is also an issue for the real estate sector. While last year’s pessimism has dissipated considerably and few respondents doubt that London will continue to attract international capital for long, the uncertainties surrounding the conditions for the UK’s exit from the EU are a source of concerns for real estate professionals.

Logistic and residential niche sectors increasingly popular

Logistics stands out as the sector most coveted by investors for the year 2018 in a context of digitalisation of business and development of e-commerce.Residential sectors are also popular, with some niche sectors such as student housing, real estate for seniors and medical real estate that are also considered excellent alternative assets.

New technological trends are upsetting the sector

The sector is also upset by new technologies and data that impact current business models. The study points to the growing complexity faced by industry in addressing cybersecurity issues as well as new customer requirements and the “Space as a service” concept. Indeed, spaces are redesigned to serve multiple uses (work, make purchases, entertain) and optimise their profitability. Unibail, a major player in European commercial real estate, illustrates this trend by developing a development project in the city centre of Hamburg. Within this unique place, the new environment will consist of a set of shops, entertainment venues, office and residential spaces and a hotel offering. “Interviews with industry leaders show that technology is increasingly seen as one of the key trends affecting real estate. Respondents increasingly highlight the impact of technology on all aspects of real estate, be it changing user behaviour or asset management and valuation, and the new skills needed to adapt to this new reality,” said Lisette van Doorn, executive director of ULI Europe.Jean-Baptiste Deschryver, continued, “Real estate is experiencing a real digital transformation. Actors need new skills to leverage Big Data and new technologies to improve their investment decision-making, asset management and tenant relations processes.”

Paris back in the top 15 of the ranking

The ranking of the top 30 cities in Europe, based on the anticipated trend of investment and real estate development trends for the year 2018, places Berlin in the lead for the fourth year in a row. The German capital is closely followed by Copenhagen, which makes its entrance in the Top five.Frankfurt, second tied, wins for its first place in 2017. Munich is the third German city to confirm its attractiveness for the second consecutive year and gravity even a place (4th position).London remains the end of the ranking (27th position), just before Istanbul, Athens and Moscow and thus reflects the uncertainties output conditions of the UK from the EU.Paris, however, benefits from the “Macron effect” and wins three places in the rankings to climb to 14th position. In fact, investors are showing increased confidence in France and its capital; in particular, they expect tax and labour market reforms. The “Grand Paris” project and the organization of the Olympic Games in 2024 should also contribute to the development of the city’s attractiveness. Finally, Paris remains the city most likely to enjoy Brexit. Mr Deschryver, added, “The favourable image of Emmanuel Macron’s policy and the upturn in French growth are benefiting the Paris real estate sector. In addition, with the “Grand Paris” and the organization of the Olympic Games in 2024, major works are underway to modernise the infrastructure and transport of the Ile de France Region. 

Top five European cities

According to the report Emerging Trends in Real Estate Europe 2018, the five main European cities that should attract real estate investors in 2018 are:

1. Berlin –For the fourth consecutive year, the German capital dominates the rankings. Berlin benefits from its population growth and vigorous economic expansion. In particular, the technology sector should maintain an already high level of valuation. The city is also distinguished by the degree of qualification of its workforce and by its creative dynamic.
2. Copenhagen (joint) –The leap in the ranking of the Danish capital can be explained in particular by the strength of its residential real estate. The price of apartments has returned to its pre-crisis level thanks to low interest rates and continued urbanisation, thus favouring investment. Copenhagen is also a popular city for tourists, consumers, co-workers and retail brands/consumer goods, which makes it more attractive for investors. The city has recently opened up a little more to foreign investors, who are active in the acquisition of property.
3. Frankfurt (joint) –As predicted by the previous PwC study, Frankfurt is one of Brexit’s main real estate beneficiaries. For the Federation of Foreign Banks in Germany (VAB), the decision of the British to leave the EU could potentially create 3,000 to 5,000 new jobs. Four major financial institutions have already made the choice of Frankfurt to establish their European headquarters. The city experienced a surge in investment in 2017, a trend that is expected to continue in 2018.
4. Munich –Although the Bavarian capital is one of the most expensive in Europe, it remains very well ranked by investors. In mid-2017, the office vacancy rate reached a floor level (4 per cent), encouraging the recovery of real estate activity. Due to the high level of rental demand and the limited amount of space to be built in the centre, some investors expect a sharp increase in rents during the year 2018.
5. Madrid –After a cycle of yield compression, the growth of office rental in the Spanish capital is finally beginning to bear fruit. This helped to save four places in the city in one year. The outlook for the Spanish economy is very positive. GDP growth of 3 per cent last year is expected to continue for the next two years. Rents, meanwhile, are increasing, giving real estate activity a real potential. 

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