London On The Up And New Digital Asset Classes: 7 Things We Learned From This Year’s Emerging Trends Report

Last week, the Urban Land Institute and PwC launched their flagship Emerging Trends in Real Estate Europe report, which surveys and interviews just shy of 1,000 real estate professionals about the state of the European real estate market. 

The report was unsurprisingly more bearish than in recent years, with respondents expecting profits and returns to be subdued. But within an overall prevailing mood of caution were some key trends to look out for in both the short and long term. Here are some of the main takeaways.

London On The Up

London rose two places to rank as the second most popular destination in Europe for investment and development. Although there remained worries about the impact of the UK not securing a trade deal with Europe and the impact of the coronavirus pandemic on office rents, it is seen as well-priced for long-term investors.

“We’re looking at deals for top-quality office assets in London that are 100 basis points, 150 basis points above equivalent deals in Berlin or Munich,” one European investor said.

Berlin came out top of the pile — it was popular before the pandemic, and Germany is seen as having dealt with the pandemic better than its European peers. Regional UK cities Manchester, Birmingham and Edinburgh came in the bottom half of the table of city picks among report respondents. 

The Digital Switch

The pandemic has clearly turned attention toward real estate asset classes that benefit from the way the world is increasingly moving online, a trend accelerated by the pandemic. Data centres was the top pick for most appealing investment, with logistics in second place, new energy infrastructure like battery storage facilities in fourth place and communications towers in ninth.

As the world has been focused on healthcare and vaccines, life sciences was deemed the sector with the third best prospects and healthcare sixth. Residential asset classes, such as BTR, retirement living and affordable and social housing, have proved resilient in the face of the pandemic and also feature high up the list. 

Rising Repurposing From Abundance Of Obsolescence 

Sectors based around retail, leisure and hotels were among the least favoured by those questioned for the report. And more generally the survey found that assets becoming obsolete was the biggest worry for respondents over the next three to five years, with 47% feeling that asset obsolescence will get worse in the years to come. This will lead to a rise in the need to repurpose buildings, with 71% thinking that more assets will be repurposed over the next five years. In terms of the most common types of asset to be repurposed, 51% of respondents cited offices and 37% said retail. 

Profits And Returns Less Than Previous Years…

In spite of the perception that there are always good deals to be had in a crisis, the majority of those questioned for the report don’t foresee profits and returns increasing any time soon. Almost half (44%) of those interviewed and surveyed said profitability will likely decrease in 2021. As a follow on, a quarter of respondents said headcount would likely drop in 2021. Almost half (46%) also said they expect returns to be lower or somewhat lower in 2021 compared to previous years. 

…And Yet, People Are Still Buying

In spite of this expectation, low interest rates mean that investors are still keen to keep buying. More than half of respondents (55%) thought they would be net buyers in 2021, with just 15% thinking they would be a net seller. 

Sustainability Still A Key Concern

Just like last year, industry leaders believe climate change and the environment will have the biggest impact on real estate over the next three decades. The difference this time is that there seems to be a greater urgency in mitigating such risk as part of the overall environmental, social and governance agenda. 

Nearly 8 out of 10 survey respondents thought energy efficiency, carbon emissions and climate adaption will increase in importance in their portfolios in 2021, and the number is higher still over a five-year horizon. 

And when it comes to impact investing, cutting the carbon footprint of real estate is regarded as by far the most effective measure with which the industry can make a difference. 

Far from obscuring the industry’s sustainability objectives, many interviewees believe the coronavirus pandemic has provided renewed impetus.

“Carbon neutrality, the benefits to the environment from reduced travel, to me this is just a massive ESG accelerator,” one private equity player said. “COVID-19 accelerates ESG, the ESG focus accelerates repurposing. It’s going to trigger a whole tenant debate about what needs to change with respect to existing space.”

Property Still Hearts City Centres

If the respondents to the Emerging Trends report are anything to go by, professionals in European real estate are not buying the theory that people are going to abandon city centres for the outskirts over the long term. Of all the potential impacts of the coronavirus, the idea that there would be a move away from dense urban areas was the trend that found the least support, with just 37% saying this is likely. Suburban offices were also not a particularly favoured asset classes for investment, coming 21st in a list of 27 sectors, below city centre offices in 17th.