The start of the second act
Optimism has returned to Europe’s real estate market. According to the 10th edition of the PwC/Urban Land Institute report, industry leaders are more positive than at any other time since 2008.
Almost 80 per cent of the interviewees say that the Eurozone crisis has created opportunities for them. About forty-one per cent think that business confidence will improve and 44 per cent are confident profitability will go up. Whereas in 2012, the slogan of the survey was “Prepare for the Big Freeze”, the story is much more positive now. It is no wonder that the 2013 edition is called “The Second Act: Optimism Returns”.
Amaury Evrard, Partner and Real Estate and Infrastructure Leader at PwC, speaks about this encouraging trend. “In 2012 a lot of people thought the Eurozone would implode or were not sure in which direction Europe would go. Then decisions like the ones from the European Central Bank (ECB) helped improve the situation. Though we are not out of the woods yet, the situation is much better than it was a year ago”.
The cities that scored best in the rankings are the larger Western European centres with liquid international appeal and better economic prospects, as the survey puts it. Again, German cities came out on top of the rankings with Munich and Berlin leading the pack, with Hamburg also making it to the top ten. London, Istanbul, Paris and Zurich also have excellent investment prospects.
Kees Hage, Partner and Global Real Estate Leader at PwC Luxembourg, stresses that Europe-wide strategies have lost their attractiveness. Investors now operate according to a micro-selection, meaning that they pick opportunities within a city and do not go for a whole city. This means that countries, which garnered little favour with investors last year, are back on their radars, as Kees Hage explains, “Spain is now getting attention from some bigger overseas investors. It is difficult to say if American investors are in for the long term or just a quick flip. Spain, like Ireland, might still be low in the rankings, but investors are looking for opportunities in those two countries”.
Amaury Evrard adds that the trend in big cities like Paris is very positive with regard to hotels; the same tendency is seen in Belgium and Switzerland. Asian investors, specifically Chinese people who are travelling more and more, are driving this trend. Consequently, luxury and mid-level hotels are being developed to attract Asian clientele. Mr Evrard explains the difference between American and Asian investors.
“Americans now come to Europe because they see opportunities, like in Spain where banks have started deleveraging and where cities might be more attractive in a few years again; whereas the Asian investors are looking for prime and are willing to put in a lot of money for iconic assets, very well-rated with tenants for many, many years. The return is not their first goal. They are in for the long term”.
Although there is growing optimism amongst real estate companies, macro issues have not yet been resolved. Europe still faces about € 400 billion in deleveraging risks. And banks are undertaking a structural reduction of their real estate lending.
While banks offload their assets, this is an opportunity for new investors to step in, Kees Hage underlines. “Players like sovereign wealth funds and pension funds are coming into the game more and more; it is different for insurance companies because of regulatory requirements. You also have large private equity players looking for opportunities. US players especially are looking for those opportunities because Europe is more a distressed market to them”.
Refurbishing buildings to meet green standards is one of the trends in the real estate market. In Luxembourg, 16 per cent of the buildings are certified green, compared with an average of only 1 per cent in Europe as a whole. While Kees Hage says that the green standards are moving up more quickly than people expected, Amaury Evrard adds that “companies perceive this criterion as more than ‘just tick a box’, but really analyse it. Bankers and managers who think long term want buildings that they can sell in four or five years at a good price. By then it will be largely expected that the building is green certified”.
For 2013, the PwC experts foresee a more active market for Luxembourg in the short term, coupled with a return of relative optimism in Europe's real estate market. With an average office vacancy of 6% in 2012, the increasing demand for core real estate assets in addition to the low speculative pipeline should result in a further decrease of vacancy in 2013, reinforcing Luxembourg's position of choice in real estate investment strategies.
Philip Mauel, Director at PwC, Real Estate Advisory, lists the investors interested in the Luxembourg real estate market. “German investors are still interested, but you also see sovereign wealth funds and large institutional pension funds from Canada and Australia, which are looking at certain assets. The main issue is probably the size of the market”.
In terms of prime office rents, Luxembourg provides a strong and attractive revenue profile. Only cities like Paris, London and Moscow are recording higher rents. Stockholm, Frankfurt and Brussels are just behind Luxembourg. Rental levels for office space in Luxembourg have increased during the last 10 years up to around 11%, despite a drop from 2009 to 2011.
“Compared to other large European capital cities, the city of Luxembourg offers a reasonably high office prime yield in a politically and economically stable environment”, Philip Mauel continues. “Over the last two years, prime yields have remained remarkably stable at around 5.5% and the vacancy rate has also been moving around 6%. After a rise in vacancies between 2008 and 2010, vacant surfaces have dropped down again, mainly due to small development pipeline in 2011 and 2012”.
The PwC experts agree that the real estate market in Luxembourg should go hand in hand with the development of the financial centre. “We have to take a good look at the Alternative Investment Fund Managers Directive (AIFMD) and the potential benefits for Luxembourg. If AIFMD goes right for us, this will drive the financial services industry even higher”, Kees Hage of PwC concludes. CW