Executive Summary
Optimism has returned to Europe’s real estate industry. Sentiment among industry leaders about the prospects for their businesses is more positive than at any time since 2008, despite the uncertain macroeconomic outlook. Equity for investment in prime commercial real estate is expected to increase, but bank debt is predicted to contract further. Emerging Trends Europe’s respondents are adjusting to this “new normal.” Those with access to capital are focusing on opportunities in areas they know best. They recognize that traditional stock selection and micro asset management skills are crucial to generating returns. The environment offers very little certainty and definitely no quick wins. Europe’s real estate markets continue to be challenging, but all sectors offer new investment potential, too.
Emerging Trends Europe respondents’ optimism about 2013 does not mean they believe resolutions have been reached on how the industry’s debt mountain will be refinanced, or that they have any clear idea about what might happen to the region’s swaths of unloved, overgeared subprime property.
The new sources of equity and debt that are emerging will be insufficient to fill the refinancing gap and, in any event, will be focused on prime or low-risk assets. Debt is expected to be available primarily to those who do not need it. This, however, will create opportunities for those with access to finance as distressed assets are brought to market.
It is a new world that is being shaped by two major forces. Capital is increasingly global in nature, flowing into European property from across the world to the larger, well-capitalized or well-established businesses. At the same time, decisions about the way that capital is deployed will become increasingly granular, as investors shut out of the core markets chase yields worth working for.
What is distinct about 2013 is investors’ willingness to take on slightly more risk. Those surveyed by Emerging Trends Europe are still wary of southern Europe, but they are prepared to dig deeper into more stable markets to find opportunities.
As the survey’s rankings of cities’ investment prospects reveal, markets such as Munich and Berlin have overtaken “noncore” locations such as Istanbul, a two-time winner in recent years. London climbs to third best from tenth in 2012 for the same
reason. But within these markets, investors are looking for value beyond prime locations and sectors.
Southern European cities, Dublin, and Amsterdam remain at the lower end of the rankings, though Dublin has risen to 21st place, boosted by recent investment activity and the prospect of greater flows of distressed assets in the coming months. Accepting more risk requires more rigor—and this is where those who are specialized, who have detailed local knowledge, and who can create networks in regional markets will prosper. Investors are exploring off-the-radar locations, learning how the local economies of those areas function, and seeking relationships with local operators to help them do that.
Lenders are specializing, too. Pan-European strategies are out of favor. Now it is about depth and detail, as banks become more local themselves, seeking security in knowing how the demographics or economy of an area works.
Investors and lenders, as they keep one eye on refinancing risk, want to know whether an asset will stand the test of time. The need for flexibility and “future-proofing” buildings will see the green agenda take a significant step forward in 2013.
However, it is not just sustainability that is changing the nature of what is built, and where. Across all sectors, macro trends are emerging that provide opportunities for those able to grasp them.
E-commerce is injecting momentum into Europe’s immature logistics market. Asian tourism—a booming industry in Europe—is presenting retail and leisure developers with an entirely new consumer to cater to. In offices, the rise of the technology, media, and telecommunications sector looks set to change the way the real estate industry thinks about workspaces.
For those hunting distressed-property loan portfolio deals, more interesting prospects will materialize in the months ahead. Dublin will attract more private equity capital as banks in Ireland release more assets this year. Investors will also be watching to see how Spain’s “bad bank” organizes itself. And European banks will be dealing in the small stuff as well as the big portfolios, creating opportunities for more businesses in 2013.
But as with all else this year, nothing is going to come easy. Europe’s real estate industry is more confident about its revival, but recovery is still a ways off.
