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Emerging Trends in Real Estate® Europe 2019 Summary

Core Content

The Emerging Trends in Real Estate® Europe 2019 report highlights the evolving dynamics of the European real estate industry in the context of a late-cycle market, geopolitical uncertainty, and the increasing importance of sustainability and long-term income generation. It reflects the perspectives of industry leaders, investors, and professionals on the challenges and opportunities they foresee for 2019 and beyond.

Main Points

Market Outlook

• The European real estate industry is in a late cycle, with valuations at historic highs and a scarcity of suitable assets.
• Despite a generally positive outlook, the short-term outlook is more cautious than in previous years.
• The industry is focusing on secure, stable income rather than capital growth, as the market matures and the need for sustainability grows.

Investment Strategies

• Build-to-core strategies are becoming more popular as investors seek predictable income streams.
• There is a shift towards alternative real estate sectors such as student housing, hotels, and flexible offices, driven by the need for sustainable cash flows and demographic changes.
• Residential real estate is gaining traction, with many investors looking to capitalize on the demand for housing in the face of structural shortages.

Interest Rates and Financial Risk

• Interest rates have moved to the forefront of industry concerns, following the ECB’s decision to end quantitative easing.
• While a moderate increase in rates is expected, the industry believes it can absorb these changes without significant impact on valuations.
• There is a growing emphasis on financial discipline and debt management, with a focus on avoiding over-leveraging.

Political and Geopolitical Risks

• Brexit remains a major concern, with the UK seen as a less attractive investment destination compared to the Eurozone.
• International political instability is a second-highest concern, with trade wars and geopolitical shocks seen as potential risks.
• National political instability in countries like Italy and Turkey is also a concern, though not as acute as before.

Global Investment Trends

• Asian investment is expected to increase, especially from Japan, due to the appeal of European real estate as a stable investment.
• Global investors are less affected by Brexit than European counterparts, but the UK is still viewed as a riskier market.

Operational and Demographic Shifts

• The industry is becoming more operationally focused, with an emphasis on managing risk and ensuring long-term income.
• Demographic changes such as an aging population and a digitally enabled younger generation are influencing investment strategies.
• The concept of "demographic investing" is gaining traction, with a focus on social infrastructure and mixed-use communities.

Key Concerns

• Construction costs and labor shortages are major challenges for developers.
• Operational risk in alternative sectors is being better understood and managed.
• Uncertainty surrounding the outcome of Brexit is a significant source of frustration for investors.

Key Figures and Data

• 69% of respondents consider international political instability as the biggest social/political concern.
• 66% of survey respondents want to increase their holdings in alternative real estate.
• 30% of respondents expect lower returns in 2019.
• Over two-thirds of respondents believe the availability of suitable assets will remain a challenge.
• More than 70% of European property professionals expect the UK's ability to attract international talent to decline post-Brexit.

Conclusion

The European real estate industry is adapting to a late-cycle environment by prioritizing sustainable income and long-term value creation over capital growth. The shift towards alternative real estate sectors and residential investments reflects a broader recognition of the industry's role in society and the need for operational expertise and risk management. While Brexit and geopolitical risks remain significant concerns, the industry is generally optimistic about the long-term prospects of European real estate, especially in the Eurozone, and is preparing for a gradual correction rather than a severe downturn.