Investors shift focus to cities, assets; Berlin, Hamburg top list
Among the many prognoses issue at this time of year about the prospects for the coming twelve months, one that always features prominently come January is the Emerging Trends in Real Estate Europe study, jointly published by consultants PricewaterhouseCoopers (PwC) and the Urban Land Institute.
This year's 2016 study (the 13th in the series) highlights a number of key attitudinal changes among investors, none of which will damage Germany's prospects of attracting even more inward investment throughout 2016 and beyond. The study was carried out among 550 European real estate professionals
PwC and ULI conclude that this year investors were being pointedly more influenced by disruptive factors such as technology, demographics, social change and rapid urbanisation. These have led to investors sharpening their focus on to cities and assets, rather than the somewhat blunter criterion of country allocation.
The combined survey also cites the five leading cities for investment prospects through 2016, which sees Berlin defending its position as the top investment location, followed this year by Hamburg, Dublin, Madrid and Copenhagen.
Having the two German powerhouses of Berlin and Hamburg heading the list sends out a strong signal about the transformation of industrial prospects in Germany's biggest cities. The report highlights the influx of firms in the creative industries and the technology sector has been a key driver behind the most robust office uptake Berlin has ever seen.
According to the authors, “A young, international and diverse employee base and a lower cost of living have also driven the city’s progress. Berlin’s status as a cultural centre and a trendy location has boosted housing and retail prospects as well.”
They add that “Many interviewees expect the German capital to thrive well beyond 2016, based on its young population and its growing reputation as a technology and cultural centre, as well as the land available for development,” the report said.
Hamburg, which displaced Dublin from second spot in this year's ranking, also garners plaudits for its forward-looking approach. With low office vacancy, and a fresh pipeline of nearly 130,000 sqm of supply due to come on stream this year, the authors say, “Hamburg has proven a dynamic city that responds to the needs of future occupiers. With more than €5bn in investments over the year to 3Q15 – over half of which originated from foreign buyers—Hamburg is the sixth most active market in Europe.”
The report, released ahead of this week's ULI Europe Annual Conference in Paris, examines why investors are now more inclined to avoid the strightforward country approach more typical of the past. "These…(disruptive factors)… have led to investors focusing on cities and assets rather than countries. This is also visible in investors demonstrating more interest in alternative, operational sectors that have benefited from rapid urbanisation and demographic shifts, such as healthcare, hotels, student accommodation and data centres.”
This shift among investors to looking at alternative sectors for returns is another key finding of the study. This year 41% of respondents said they would consider investing in niche sectors such as healthcare, student accomodation, hotels and data centres – this is a marked increase on the figure of 28% looking at these sectors only a year ago
Behind the Top 5 in the PwC/ULI ranking come Birmingham, Lisbon, Milan, Amsterdam and Munich. London, while falling out of the Top 10 this year, remains the favourite for many investors intent on preserving their wealth, by virtue of its traditional transparency and liquidity, along with the strong performance of the UK, and particularly the London, economy.
More than 40% of the survey's respondents expect that competition for top assets in desirable European inner-city locations will further increase this year, with less and less pure 'core' properties available. However, such assets and locations are still seen as representing a safe haven for investment resources. According to Jochen Brücken of PwC, "In the current ongoing phase of very low interest rates, real estate still offers better yield prospect than bonds. This trend will continue throughout 2016."
Commenting on the study's finding, ULI Europe's CEO Lisette van Doorn said, "Investors are getting more creative in trying to access future prime assets at reasonable prices through more focus on alternatives and development. They are taking more risks in the short term to fulfil their long-term objectives for core assets.’
"Some of the industry’s biggest challenges right now are how to become less about bricks and mortar and more about service, and the implications this may have for the traditional business models of real estate operators," said Van Doorn.
Among other sectors predicted to do well this year are high street retail and logistics, both of which are benefiting from technological advances and rising economies. 78% of respondents also took a favourable view of development as a strategy to acquire assets.
PwC director Gareth Lewis added, "Low interest rates, and the weight of capital bearing down on European real estate, mean that most remain bullish about the industry’s business prospects in 2016. But they acknowledge that the global field for real estate is increasingly competitive, and if the current wall of capital recedes, there will be an even stronger focus on underlying market fundamentals, active asset management and operational skills."
The study also points to an improving climate for real estate financing with liquidity remaining high, while most European economies are in a visible recovery phase. This, of course, is also attracting new financing competitors into the field. With prime property now reaching fresh record prices, the study sees prices in all other risk categories also heading upwards.
PwC also took advantage of the survey to produce a separate "Real Estate Investor Survey Germany", which focuses on yields in Germany's larger cities. The survey claims that prime yields for first-class office properties are now lower in Berlin than in Frankfurt. They fell 30 basis points in Germany's capital during 2015 to 4.0%, while in Frankfurt, the fall was only 10 basis points to 4.1%. Among the top 7 cities, Munich (3.7%) offers the lowest prime yields on office space, and Cologne (4.5%) the highest.
Core properties in Germany's Big 7 cities also saw average yields slipping by 30 basis points, down to 4.8%, with high-risk office buildings providing smaller surcharges. Investors said they expect the highest annual growth for 2016 in rental income in Munich (2.2%), followed by Berlin (2.1%) and Frankfurt (1.9%). Prime yields on retail property also decreased in the Big 7 by around 40 basis points. Munich, again, is the most expensive (-30 basis points to 3.3%), and investors expect particularly high growth for rental income there (2.4%). These are followed by Stuttgart (2.2%) and Berlin (2.1%).