Berlin again tops ULI/PwC Emerging Trends survey for 2018
For the fourth year in a row, Berlin has topped the table of the 31 best European cities for real estate investment and development in 2018, according to a forecast published by the Urban Land Institute and PwC.
The annual ‘Emerging Trends Europe' study ranks Europe's leading cities for overall investment and development prospects in 2018. With Berlin heading the list, Germany accounts for four of the top six leading cities, with Copenhagen (in a tie with Frankfurt for second place) and Madrid in fifth place. Munich came fourth and Hamburg sixth.
Though values in the German capital have rocketed over the past year, the ULI and PwC researchers found that respondents believe the growth in Berlin is sustainable, supported by a rising population and a vibrant technology sector.
The survey of over 800 European real estate professionals also suggested that Copenhagen has been driven by a strong residential investment, while Madrid’s office rental surge has been helped by Spain’s 3% growth in gross domestic product.
With an improving macroeconomic outlook for the eurozone and less political instability, combined with real estate's continued attractiveness as an asset class, respondents were more optimistic than last year about their European business prospects. About half predict that profits and head-counts will increase next year, while 42% expect business confidence to increase, a 10% jump.
Equity and debt are expected to be just as plentiful in 2018, despite the threat of rising interest rates, while this year’s high levels of investment are forecast to continue.
The fact that German cities once again took four of the top 10 spots in the report's score card of prospects 'is no surprise' says the report’s section discussing Markets to Watch. 'Germany has been steady state for a long time now. With Berlin, people truly believe it’s going to become a major city', one respondent in the survey says.
The issue of Brexit looms large in respondents' outlooks, with one respondent quoted, “The UK has had a growth premium over Europe. That growth premium has gone now.” Although few question London's long-term status as a destination for global capital, the report says, "There is a strong consensus that it will be at least partly responsible for both investment and values falling in the UK during 2018."
London came in 27th on the list, and bottomed the rankings table, based on change expected in rents and capital values. It is the only city in the survey that is expected to depreciate in both areas.
The survey concluded that investors don’t believe London will have too much to offer over the next couple of years, having reached the peak in asset pricing and rental values, despite remaining a safe haven for Asian investment.
The influence of technology is having a major impact on, particularly, logistics – again the Number 1 sector for investment and development prospects for 2018, based on the growth in online retail activity. Niche residential sectors, such as student housing, senior living and healthcare also feature strongly on investors' priorities for next year.
Another key trend from the survey is the rise of the flexible office sector and co-working - much more than simply property buzzwords but, as the interviews in the full study reveal, a workplace phenomenon whose influence has taken hold of the European industry in a profound way since last year’s report.
“Collaboration between tenant and landlord will be more and more crucial,” says one interviewee. “There will be more mobility and intelligent ways to book space. As landlords, we have to cater for that,” says another. At the very least, co-working and the rapidly changing demands of occupiers are forcing the industry to confront the issue of obsolescence and, as one asset manager suggests, “It will be with the bigger buildings and landlords where the disruptive force is going to be more keenly felt."
Looking like a loser is retail, with many respondents reporting how they are shying away from the sector, which is subject to long-term restructuring effects. Out-of-town shopping centres ranked last out of the 23 sectors which were ordered by their prospects next year; retail parks were placed 20th and city centre shopping centres came only slightly higher in 16th place.
In another important study, the annual LaSalle E-REGI Index 2017, Berlin was the city that made the highest leap upwards in the rankings in terms of investor sentiment. The E-REGI (European Regional Economic Growth Index) identifies the European regions and cities with the best economic growth prospects, by approximating the relative strength of future occupier demand for real estate in the medium term. The study's main focus is on the 100 major city-regions with more than 500,000 inhabitants and all national capitals. The study attaches a score to each region based on its medium-term economic growth prospects, its level of wealth and the quality of its business environment – relative to the European average.
The study this year identified four groups of cities across Europe – the Consistent, the Affluent, the Movers and the Aspiring. This is based on the performance of cities over the past 18 years of E-REGI history. As LaSalle stress, these groupings can have major implications for investment strategies across Europe.
Although London regains top position from Paris, the outlook there remains hampered by Brexit uncertainties. Paris is next, based on its high Human Capital score and the reduction of uncertainty following Emmanuel Macron's election and decisive government majority. Stockholm, Istanbul, Dublin and Luxembourg follow.
The big German cities performed well, with the economy outpacing expectations, but capacity constraints including a shortage of skilled labour are holding it back from even better performance. Munich reached 7th position and Frankfurt moved up two places to 19th position. Berlin stands out as strongest improver in Germany reaching 13th position, its highest rank ever, on the back of an improving Human Capital score.