London no longer favoured
by real estate professionals
A report by the Urban Land Institute
and PricewaterhouseCoopers

12 March 2008: Moscow and Istanbul are ranked first and second, respectively, among this year’s top real estate markets in Europe for both investment and development prospects. Hamburg and Munich held the third and fourth spots as top investment markets, and the two cities switched places as the third and fourth top development markets. Paris, which held the top investment rating in past years, slipped slightly, taking fifth place for investment prospects and sixth place for development prospects. London fell to 15th place.

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According to the real estate forecast, Emerging Trends in Real Estate Europe 2008, published by the Urban Land Institute (ULI) and PricewaterhouseCoopers LLP. the changes in the top markets suggests a desire by industry professionals to branch out of “Old Europe” cities and “investigate new markets and diversify current holdings and developments.”

One of the sharpest rating drops among the European markets occurred with London, a long-time favourite that fell to 15th place for investment prospects and 13th place for development prospects. That city, more than other markets in the report, is experiencing declining economic conditions similar to those in the US, including a drop in consumer spending, falling house prices, a rise in personal indebtedness, worries over home repossessions, and turmoil in the financial sector.

Emerging Trends, which covers 27 markets in countries throughout Europe, is based on surveys and interviews with nearly 500 of the industry’s leading authorities. The report contains predictions for individual property sectors as well as markets, along with insights regarding real estate capital markets and the economy in general.

“Without question, Europe is facing a bumpier ride this year than the last few years. The findings in Emerging Trends show how markets in Europe have become more globally connected and more vulnerable to economic shifts occurring in other parts of the world,” said Richard Rosan, president, ULI Worldwide. “However, the fact that many respondents remain confident about European markets points to the still-local nature of real estate. We are seeing a lot of guarded optimism.”

“Tighter credit conditions, higher energy prices, a reduction in euro-based exports and a cooler housing market will have an impact in the months ahead,” said William Kistler, president ULI EMEA/India. “But, we firmly believe that most markets will weather the downturn with a soft landing, due to relatively stable property fundamentals and reasonable economic growth. Those who are patient and prudent will succeed.”

In terms of markets ripe for investment, top-ranked Moscow was rated first or second in terms of “buy” recommendations for all property types, with office and retail particularly strong. “This market has huge depth and breadth, nobody has begun to scratch the surface,” the report says. Istanbul scored equally high as a strong “buy” market. Says one Emerging Trends respondent: “Turkey is the India of Europe.”

An improvement in Germany’s economy is reflected in the inclusion of four German cities – Hamburg, Munich, Berlin and Frankfurt – on the list of top ten investment markets. “Despite all the turbulence in the international markets, the German property market is still on the upturn,” the report says. Other cities listed as strong “buy” markets: Paris, Lyon, Stockholm and Helsinki. In terms of development prospects, the top markets are: Moscow, Istanbul, Munich, Hamburg, Lyon, Paris, Prague, Warsaw, Stockholm and Helsinki. One factor that could affect future investment and development decisions is an “expansion in the definition” of Europe to include parts of the Middle East and Africa, the report says, noting that many interviewees mentioned Abu Dhabi and Dubai as potential markets for business.

Some capital market highlights from the report:
• Due to the sub-prime crisis in the US, unleveraged equity investors will lead the capital march in Europe after losing out for years to highly leveraged players. This capital will come mainly from institutions, private property vehicles, and open-ended funds, mostly from the Middle East and the Asia Pacific region.
• The publicly traded real estate market indices have continued to decline over the past year, tumbling over 30 percent in 2007.
• Institutional investors are becoming aware of the benefits of adding global real estate equity funds to their portfolios. Currently, there are more than 250 available global funds managing more than $81 billion in capital.

For specific property types, retail is again expected to provide the best investment prospects, followed by mixed-use developments, hotels, industrial/distribution and office space. The residential sector is viewed least favourably, with rental apartments ranked slightly ahead of for-sale units. Specifics on property sectors include:

• Retail – Best Bets: Southern, central and eastern Europe are potentially strong markets, not least due to strong tenant demand as “retailers are piling into these markets. While some markets in central Europe are reaching saturation, the best opportunities are seen in the new European markets east of EU members.

• Mixed Use – Best Bets: Mixed-use schemes are topical in nearly all parts of Europe, with all capital cities offering these types as (investment and development) possibilities. Such projects have excellent prospects in central and eastern Europe, where master-planned communities will become more attractive.

• Hotels – Best bets: Moscow and Istanbul are considered first choices in the ranking of potential hotel investments, as they are undersupplied in nearly all hotel categories. Interest in tourist hotels in some central European cities is also emerging. In Germany, there is potential for hotel developments near infrastructure hubs such as airports and seaports.
• Industrial – Best Bets: A lack of supply is drawing investors to industrial and supersheds in eastern markets such as the Ukraine, Turkey and Russia. Distribution properties are hotly pursued investments in other parts of Europe, particularly Germany, Scandinavia, France and the Netherlands.

• Office – Best Bets: In most of Europe, city centre offices are regarded as the best bets of all property types. In eastern Europe, Istanbul and Moscow are mentioned favourably; in western Europe, Hamburg and Munich are rated highly, as are Paris and Lyon. Prime space in the Dutch office market holds potential.

• Residential – Best Bets: Infatuated with population growth and rising incomes, investors see Turkey as a market offering phenomenal prospects. Moscow is viewed as an underserved market and Munich, Berlin, Hamburg as well as Frankfurt are also cited as markets in which demand exceeds supply.

Yield compression (which improves values) is no longer the main rationale for investments in any of the standard property sectors, Emerging Trends points out. As a result, many real estate professionals are seeking better yield results through alternative investments such as nursing homes, self-storage, petrol stations, car dealerships, wind farms and solar chimneys. “Yield is part of the chase, but they are also hoping to spot the Next Big Thing,” the report says. European infrastructure, with a market size totaling between €4 trillion and €5 trillion, is viewed as a long-term, fixed-income investment and continues to draw investors such as pension funds and endowments.

In terms of worldwide investment by asset class, Asian real estate—including both private direct real estate investments and real estate investment trusts—tops the Emerging Trends investment picks for 2008. European private direct real estate investments—particularly in Russia and Turkey—are also rated highly, and all forms of European real estate assets, except European commercial mortgage-backed securities, rank above all forms of US real estate assets.

Environmentally conscious, or ‘green’ development, “has reached a tipping point,” driven by market demand and government regulations, Emerging Trends says. Shopping centre investors and developers are greener than most, primarily because large retail complexes have the scale and activities that lend themselves to waste management, solar panels, grey-water systems and energy-efficient lighting. “We believe it’s good for our team, good for our tenants, good for shoppers and good for our stakeholders,” explains one Emerging Trends respondent. Says another: “It’s daft to build something else.”