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Emerging trends in the European market for real estate investors

With real estate capital values already falling, 2023 could be a great buying opportunity for core investors that are still under-allocated to the sector.

Emerging trends in the European market for real estate investors
For the second successive year, London remains the most favoured city in Europe for its overall prospects.

Europe is on the cusp of quite a significant slowdown, both in the real economy and in the underlying real estate markets. A recently published report titled, Emerging Trends Europe 2023′ jointly undertaken by PwC and the Urban Land Institute (ULI), provides an outlook on real estate investment and development trends, real estate finance and capital markets, cities, property sectors and other real estate issues throughout Europe.

The report identifies that with real estate capital values already falling, 2023 could be a great buying opportunity for core investors that are still under-allocated to the sector.

Presently, with inflation and rising interest rates, the real estate market is not looking conducive for investors. The report finds the property world is stalling at an uncomfortable crossroads, as rising interest rates hitched to soaring inflation drag Europe towards recession. Seven out of 10 survey respondents believe Europe will move into recession before the end of 2022.

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Further, the outbreak of war in Ukraine has cast a long shadow over Europe, and real estate, like every other industry, will have to deal with the economic and political fallout for the foreseeable future. While the industry leaders think that there will be little direct impact on their property portfolios from Russia’s invasion of Ukraine, the war’s consequences are seen in surging energy costs, historically high inflation and, latterly, rising interest rates.

There is a widespread belief that high energy prices and a recession will lead to occupancies and rents falling, even in previously robust sectors. The report paints a gloomy outlook for the sector next year and development activity that slowed in 2022, is further expected to fall sharply in 2023. The report is clear on one front – 2023 will be a tough year in any event, and as some industry leaders contend, a recovery may not emerge until early 2024.

Although real estate companies are not as leveraged as they were going into the global financial crisis largely due to the regulatory changes of the past decade and a half, double-digit inflation in some territories — and the spectre of stagflation — continue to weaken investor demand going into 2023. With economic uncertainty afflicting the whole of Europe, overall investment and development prospects for all 30 cities covered by Emerging Trends Europe have deteriorated since last year’s report.

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For the second successive year, London remains the most favoured city in Europe for its overall prospects, especially for offices and logistics. The depth of London’s investment market reflects the extent of its broader metropolitan area, something that is only rivalled in Europe by Paris, which takes over second place from Berlin this year.

Residential investment in particular is viewed as promising given a perceived shortage of supply. As one developer notes, prices are rising as a result of the scarcity of ready-to-build or fully permitted land: “The pricing dynamics for those that have land and can build are good and will remain good.”

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First published on: 06-12-2022 at 11:45 IST