This year will not be the turnaround year that the European real estate industry had hoped for, with a two speed market likely to emerge that reflects a widening gap between investment hotspots and second tier property markets, according to the Emerging Trends in Real Estate® 2011 report published by PricewaterhouseCooper and the Urban Land Institute (ULI).
‘In future years we may look back on 2011 as a transformational year for the property industry. Real estate professionals face a challenging time. Traditional sources of debt, for refinancing properties with vacancies or in need of refurbishment, will not be available,’ said one of the report’s authors, John Forbes.
‘Although new sources of lending are expected in the shape of sovereign wealth funds and insurance companies, a big theme will be the continued downsizing of the industry and the winners will be those who are best able to manage their assets, rather than those who make clever stock selections,’ he added.
Last year the industry was concerned that the large amount of debt maturing across Europe over the next five years would prevent banks from undertaking new lending, but the new questions for 2011 are how much impact Basel III will have on the appetite of banks to lend to property and, when they do, how expensive this debt will be, the report points out.
Some of the 600 respondents expressed serious concerns about areas outside prime regions, even within the same country. With capital so risk averse, winning cities like Munich, London and Paris will continue to absorb investment as the only places where tenant demand will be robust, the report says. Other investor favourites are likely to be Istanbul, Stockholm, Berlin and Hamburg.
Investors are expected to avoid Dublin, Athens, Lisbon and Budapest and even within the most favoured markets, investment will be drawn mainly to the prime buildings, the report predicts. The result is that values for secondary properties will remain at distressed levels and decline further in the months ahead.
The good news, the report says, is that improvements in the availability of real estate equity are anticipated this year. This is expected to come from an increasing number of investors from Asia Pacific and institutions such as insurance companies and private equity funds. But the consensus view is that even if new players do emerge, they will take a long while to do so and will only partially relieve congestion.
'As is the case with so many positive trends today, they do not constitute unqualified good news. Equity, which is now choosier and more risk averse, will be funnelled towards a smaller slice of the industry, ensuring that the capital-raising environment is set to be tough for a good while yet,’ added Forbes.
While all property sectors show improved investment prospects in the quantitative part of the survey, central city offices, street retail and shopping centres were most frequently cited as offering the most promising prospects.
Interviewees anticipate that well established firms with defensive strategies will fare best in the months ahead, while prospects are less bright for niche or new players. As firms prioritise resources in 2011, there will be those in the industry who find their skills in demand. The expected downsizing will reflect the dropping out of those who find themselves totally unequipped for the new climate.
