Emerging Trends in Real Estate An uncertain impact - Europe 2021
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Emerging Trends in Real Estate® An uncertain impact Europe 2021
Emerging Trends in Real Estate® An uncertain impact Europe 2021 A publication from PwC and the Urban Land Institute Front cover image: Berlin, Germany (Getty Images) Image: Working from home during lockdown (Getty Images)
Contents
4 Business environment
20 Real estate capital markets
32 Markets to watch
46 Investing in society
56 City prospects
“COVID-19 will not be the last novel coronavirus,
so we’ve got to factor this into our thinking about
what the future looks like.”
Director, global investment manager
Emerging Trends in Real Estate® Europe 2021 1
Executive summary
“COVID hasn’t necessarily brought anything new. COVID-19 has transformed the way we
live and work. As Europe’s property
It’s just accelerating all of the trends. Everything leaders acknowledge, all aspects
that was being disrupted is being disrupted at a of real estate have been disrupted
by the pandemic and the resulting
much faster pace.” business upheaval.
CIO, pan-European investment manager This is a hugely challenging time for
European real estate, dealing first with a
sharp recession in 2020 and now facing
the prospect of a protracted and fragile
economic recovery with the added threat
of further waves of COVID-19.
The industry leaders canvassed
for Emerging Trends in Real Estate
Europe also acknowledge that we are
experiencing two shifts which are, as
one interviewee puts it, “not on the
same wavelength”: a cyclical downturn
juxtaposed with long-term structural
changes to real estate.
Throughout it all, real estate generally is
still seen as one of the few asset classes
to generate acceptable returns at a time
of low or negative interest rates. And the
conventional focus of institutional capital
towards core real estate during economic
uncertainty is once again evident, just as it
was following the global financial crisis.
However, Emerging Trends Europe’s
constituents also recognise that the
pandemic is posing immediate challenges
to the security of income from offices
and retail while accelerating long-term
trends in these two mainstay sectors of
real estate, by shaping a world where we
can expect more remote working and
online shopping.
Image: Cuatro Torres business district,
Madrid, Spain (Getty Images)
2 Emerging Trends in Real Estate® Europe 2021
Security of real estate income is one Some economies – notably Emerging Trends Europe also
of the big open questions facing Germany’s – have avoided outright reveals that the industry is starting
the industry. Emerging Trends catastrophe so far. If anything, to evaluate its wider role in society
Europe reveals that COVID-19 COVID-19 has served to reaffirm the more seriously – from addressing
and the widespread problems safe-haven status of German cities, diversity and inclusion in the
around non-payment of rent have which led by Berlin are once again at workplace to a far greater emphasis
encouraged – by default if nothing the top of the city rankings. on the environmental, social and
else – increasing numbers of governance agenda. As we explain
investors and investment managers The industry is also keeping faith in in Chapter 4, the social upheaval
to look beyond real estate’s bond- other cities it has backed in better brought about by COVID-19 has the
like credentials and to assess the times, including London and Paris. potential to accelerate the growth and
underlying operational risk of the From a long-term perspective, both prominence of impact investing in the
occupiers. And though it is too of these gateway cities are lauded built environment.
early to draw conclusions on the for the relative liquidity they offer
consequences for values, it is clear investors. London is also generating Though very early days, Europe’s
that the movement towards property interest among some investors for real estate industry is moving slowly
as a service, or operational asset class, Brexit-related pricing discounts to towards social impact becoming
is an accelerating trend. Continental markets. integrated in its overall investment
strategies rather than through
As one interviewee says, such But a broader debate has begun specialist funds or products.
uncertain and at times conflicting around future city opportunities, given
market conditions can lead to the lasting impact of COVID-19 on
“imperfect decision-making”, which office working and on where European
is why the overall industry outlook for businesses choose to locate. The
2021 is one of caution. industry sees the merits of small and “Tenants and
medium-sized cities, provided they are occupiers want us to
To a great extent, the global health well connected – transport connectivity
crisis has overshadowed otherwise is overwhelmingly judged the most
act. In the past, we
serious geopolitical issues influencing important factor in assessing cities. didn’t need to listen
real estate, but they remain significant but the sector will be
concerns for survey respondents and For 2021, the “flight to safety” for many
interviewees. The outcome of Brexit, investors involves technology, which challenged by society
the US election and trade wars all extends beyond national borders. to do more now.”
add to the uncertainty pervading the The two leading property types in
markets right now, and little respite is the sector rankings are logistics and
Pension fund investor
predicted for 2021. data centres. Both will benefit from
the increased pace of digitalisation
On a purely cyclical basis, the industry across Europe – widely regarded as a
draws some reassurance from the positive trend reinforced by COVID-19.
absence of a late-cycle development Rented residential is another favoured
boom, and consequently European sector but for what seems now like an
real estate supply and demand is old-fashioned virtue – the perceived
broadly in balance. But as many security of its income.
interviewees point out, there is wide
variation in individual governments’
responses to the pandemic. Markets
are adjusting to the conditions at
different speeds.
Emerging Trends in Real Estate® Europe 2021 3
Chapter 1 Business environment “COVID is a game changer to the property industry, like the global financial crisis was, but even more disruptive. As well as introducing uncertainty, it will continue to impact our prospects by accelerating a lot of things that were going on in our business anyway.” Director, global asset manager 4 Emerging Trends in Real Estate® Europe 2021 Image: Empty train station in Berlin, Germany (Getty Images)
The COVID-19 pandemic has “The pandemic makes us more inclined
been described as a classic to tilt that way,” says one institutional
black swan event that no one investor in social infrastructure. “That
could have predicted. Though
approach of only specialising in That approach of only
shopping centres, offices, or industrial
the global economy is expected just feels and sounds really outdated specialising in shopping
to recover from this exogenous to me now.” centres, offices, or
shock and eventually resume
industrial just feels and
its prior course, for the real The pandemic is also shining a light
estate industry, COVID-19 is a on the health and wellbeing of people sounds really outdated to
game changer. in the workplace – wherever that me now.
workplace may be – which plays to the
As Emerging Trends in Real Estate movement behind property as a service
Europe reveals, property professionals but to an altogether higher level than in
are coming to terms with the idea of pre-COVID-19 times.
a world where we can expect more
working from home, more online But at the same time, the health
shopping, and less international travel— crisis and the economic aftershock
all of which strike at the heart of how are serving to question some of the
the industry serves its customers and received wisdom around the built
conducts its business. environment, not least conventional
work patterns and the hitherto favoured
COVID-19 as an accelerator of move towards densification of Europe’s
such existing trends has been the bigger cities.
main narrative for European real
estate in 2020. It is likely to remain For many in the industry, real estate’s
so during the prevailing uncertain saving grace is as a provider of secure
economic conditions. income compared with other investment
classes. But even this previously
This is also a period of deeper reflection unshakeable virtue is at risk when
on the role the built environment businesses have no money to pay
must play in society. In the minds of their rent.
many industry leaders, the pandemic
has reinforced the importance of the This situation is perhaps at its
environmental, social, and governance most extreme in the UK, where a
(ESG) agenda. government-approved moratorium on
rent payments undermines the very idea
Some believe the social inequalities of property as a service and instead
exacerbated by COVID-19 demand a resurrects age-old landlord/tenant
greater response from real estate. Far tensions. As one institutional player
from simply shoring up their defences laments, it “threatens the sanctity of
against a cyclical downturn, they income”. In other words, “the [UK]
believe that COVID-19 presents an government is materially eroding the
opportunity to take part in a far bigger appeal of the asset class” in what has
investment universe. been the most liquid of all European
investment markets. By contrast, a far
more collaborative approach has been
seen to benefit both sides in Germany
and the Netherlands, for instance.
Emerging Trends in Real Estate® Europe 2021 5
Chapter 1: Business environment
Cautious outlook Figure 1-1 Business prospects in 2021
for the industry
While confronting long-term, Business confidence
fundamental questions about its place 2021 23 49 28 %
in society, the industry is facing the
immediate and difficult adjustment to 2020 25 62 13 %
life after the initial outbreak of COVID-19
and a European economy plunged into
recession during 2020. The interviews
and survey were conducted between
Business profitability
July and September, a period when
investment activity held up remarkably 2021 20 36 44 %
well. But with continuing business 2020 37 48 15 %
and travel restrictions, an undeniably
cautious outlook exists for the
coming year.
The survey shows a marked decline Business headcount
in business confidence for 2021,
2021 22 53 25 %
with almost half the respondents
expecting a fall in profits and a quarter 2020 45 46 9 %
anticipating job losses. “If most [real
Increase
0 20 same30
10 Stay the Decrease
40 50 60 70 80 90 100
estate] businesses aren’t planning
for staff reductions, I’d be pretty Source: Emerging Trends Europe survey 2021
surprised,” says one pan-European
investment manager.
Figure 1-2 Real estate business sentiment 2011–2021
If most [real estate] 6060
businesses aren’t
planning for staff 48
% Increase
reductions, I’d be 36
pretty surprised. 24
12
00
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Business Confidence Business Profitability Business Headcount
Source: Emerging Trends Europe survey 2021
6 Emerging Trends in Real Estate® Europe 2021
When it comes to social issues affecting Figure 1-3 Social-political issues in 2021
business in 2021, the ongoing pandemic
is unsurprisingly the biggest factor
behind the prevailing uncertainty. “It’s
hesitancy right now because there’s Epidemics/pandemics 25
not a lot of conviction in terms of the 41 47 8 4 %
longer-term solution here – a vaccine. International political instability
I always go back to that,” says one
29 50 11 9 1 %
global financier. “We’re all optimistic
people. We all want this to be behind Environmental issues
us. I sense once we have clarity on that, 22 43 18 15 2 %
the transaction flow will return and that Social equity/inequality
hesitancy will go away. Whereas now, it
17 45 20 16 2 %
seems like it’s pretty murky out there.”
European political instability
The pandemic has underscored the 14 48 17 18 3 %
risk of international political instability, Housing affordability
which is the second highest concern for
17 43 24 14 2 %
survey respondents already troubled
by Brexit and trade wars. According to National political instability
some of the interviewees, other long- 19 31 16 23 11 %
standing industry concerns – notably Termination of government support packages
the environment and social inequality
12 38 26 20 4 %
– have been reinforced by COVID-19 as
well. One global investment manager Mass migration
believes “the separation between the 9 30 27 27 7 %
haves and have-nots is becoming
untenable . . . that is really what 0 Very concerned
10 20 40 concerned
30Somewhat 50 60Neither/nor
70 80 90 100
the geopolitical issue is across the Not very concerned Not at all concerned
globe.” A private equity player adds: Source: Emerging Trends Europe survey 2021
“If COVID-19 hasn’t demonstrated
profound inequality, then what has?
It’s incredibly important because
carbon neutrality, housing . . . all of the
underlying issues that are driving an
ESG focus have just been heightened
by this inequality.” One global investment manager says:
“I am worried about whether in Europe
It is noteworthy that housing we’ll see unemployment come up quite
affordability, social inequality, and meaningfully at some point in Q4 [2020], It’s hesitancy right now
ESG are higher up the list of industry Q1, or whenever it might be. And that because there’s not a lot
concerns than the imminent termination spills over into consumer confidence
of conviction in terms of
of government support measures, and rent collections.” A pan-European
which will present an immediate investment manager is more emphatic: the longer-term solution
demand-side challenge to real estate. “Unemployment is going to be a here – a vaccine. I always
Even so, as many as half the survey massive issue. And that goes to real
respondents are uneasy about the estate fundamentals because it’s bums
go back to that.
ending of the various measures, which on seats, it’s consumers in shops, it’s
are estimated to have saved more than occupants of hotels, it’s everything.
40 million European jobs during the Very bad.”
worst of the crisis.
Emerging Trends in Real Estate® Europe 2021 7
Chapter 1: Business environment
Rising unemployment undoubtedly
Figure 1-4 European business environment in 2021
feeds into the uncertainty over
economic recovery – fragile at best.
Last year, when the industry was in
late-cycle mode, two-thirds of survey Business issues
respondents were steeling themselves European economic growth 25
for a downturn. Having already endured 41 49 5 4 1 %
a sharp recession in 2020, 90 percent
Business interruption
of respondents are understandably
concerned about economic growth in 40 41 7 10 2 %
2021. “I fear that we haven’t seen the Global economic growth
worst yet despite coming out of the 35 52 6 6 1 %
lockdown,” says one pan-European
Health and wellbeing of staff
consultant. “We’re going to see the
economic impact more clearly in 2021.” 24 46 15 13 2 %
Business liquidity issues
Continuing business interruptions,
16 46 16 17 5 %
consequential liquidity issues, and
insolvencies among occupiers are big Sudden shifts in consumer demand
industry worries, and they are clearly 17 46 17 17 3 %
affecting sentiment. “I’m very positive Cybersecurity
about the capital that will come into
13 41 23 19 4 %
the [real estate] market. Very negative
on the economy and how that will play Digital transformation
out because I think we’re only at the 13 28 30 22 7 %
beginning of some of the bankruptcies Deglobalisation
that we will see happen,” says one
9 31 30 24 6 %
pan-European investment manager.
Currency volatility
Adds a private equity player: “There is 8 27 26 30 9 %
no sign of rents going up. There’s no
Interest rate movements
sign of demand increasing. If anything,
7 21 20 37 15 %
both of those are going the opposite
direction. There’s a lot of asset classes Inflation
that are in trouble because of the 6 23 25 33 13 %
crisis. As long as government keeps
intervening and allowing tenants not Very concerned Somewhat concerned Neither/nor
0 10 20 30 40 50 60 70 80 90 100
to pay rent and not allowing banks to Not very concerned Not at all concerned
enforce, you’re sort of in a standstill.
Source: Emerging Trends Europe survey 2021
And it could be a prolonged standstill
because of that.”
8 Emerging Trends in Real Estate® Europe 2021Image: La Défense, Paris, France (Getty Images)
At the same time, the industry In that respect, “the perception
is paying close attention to how that Germany is a safe haven will
individual governments are managing be just further increased,” says one
the pandemic and subsequent interviewee, summing up a common Germany has got a strong
business interruptions, which in turn view. “Germany has got a strong economy, has managed
is influencing market confidence economy, has managed the pandemic
and investment strategies for 2021. pretty well, and is open for business.
the pandemic pretty well,
“The way governments handle the It’s back in action,” says an investment and is open for business.
crisis will have an impact on the banker. A pan-European investment It’s back in action.
attractiveness of the market for foreign manager puts it another way: “Our
investors, because there’s that sense business in Germany is growing more
of security that in times of crisis the than any other part of our European
government has stepped in, has taken network.” And as we explore further in
the right measures, and has protected chapter 3, German cities, led by Berlin,
the value of the economy,” says one are firmly established at the top of
private equity investor. Emerging Trends Europe’s city rankings,
as they have been for several years.
Emerging Trends in Real Estate® Europe 2021 9Chapter 1: Business environment
From deferrals Figure 1-5 European business environment over the next 3-5 years
to deglobalisation
Industry leaders are broadly
appreciative of the short-term boost Cybersecurity
provided by the various business- 52 27 21 %
support and stimulus measures
Global economic growth
across Europe, not least the European
Union’s overarching €750 billion 43 21 36 %
pandemic recovery fund. However, European economic growth
some are questioning the economic 43 23 34 %
consequences beyond 2021.
Business liquidity issues
“The tax deferrals, insolvency deferrals, 47 38 15 %
will have a huge impact on the demand Business interruption
side in the medium term because that 36 36 28 %
will impact which companies will survive
Currency volatility
and what governments will do,” says
33 54 13 %
a German investment manager. “Will
they keep dying companies alive, which Deglobalisation
possibly might have short-term benefits 30 45 25 %
for unemployment but a long-term
Health and wellbeing
negative impact on the recovery and the
26 40 34 %
dynamic of the recovery?”
Sudden shifts in consumer demand
Just over a third of survey respondents 21 49 30 %
believe that both global and European
Interest rate movements
economic growth will improve over
21 70 9 %
the next five years, but more than 40
percent expect it to get worse. “Even if Inflation
there is a vaccine, recovery will be slow 23 63 14 %
because we have just put on so much
Digital transformation
more debt in the system and so many
7 25 68 %
more stimulus packages. It seems as
if it’s not real money, but somebody Get worse Stay the same Improve
needs to pay for it ultimately,” says a 0 10 20 30 40 50 60 70 80 90 100
Dutch institutional investor. Source: Emerging Trends Europe survey 2021
The tax deferrals, insolvency deferrals, will have a
huge impact on the demand side in the medium term
because that will impact which companies will survive
and what governments will do.
10 Emerging Trends in Real Estate® Europe 2021There is also a sense that COVID-19 is Another lasting impact is evident with
changing some general assumptions Zoom, Google Meet, and Microsoft
around real estate investment and Teams meetings, which after the
management. Globalisation has been initial lockdown are still a regular part You would expect
such an accepted backdrop to capital of real estate working life, as they unemployment to
flows, for instance, yet now 40 percent are in all industries. Both the survey
of survey respondents are concerned and interviews testify to technology increase and to have a big
about deglobalisation. “COVID-19 has as a huge enabling force for good. impact on social issues.
caused a greater focus on domestic But with more remote working and
rather than global issues,” says an greater reliance on technology comes
The general population’s
institutional investor. “You would expect a greater awareness of cybersecurity desire for politicians
unemployment to increase, certainly – a concern for 2021 for just over half to focus on domestic
in the short term, and to have a big the respondents. Cybersecurity is only
impact on social issues. The general slightly more of a problem than last
issues will come to the
population’s desire for politicians to year, but the majority expect it to get forefront again.
focus on domestic issues will come worse over the next five years.
to the forefront again and could
be magnified.” Over that same period, the financial
difficulties facing many occupiers
This focus on the domestic agenda are unlikely to disappear altogether,
may even provide further investment according to nearly half the survey
rationale for logistics, which is already respondents. As one investment
a highly favoured sector, as part of a manager says, “We have rent deferrals
bigger move to strengthen supply chain for hotels, we have similar things
management. “There is still demand being asked for in retail and to a
for more logistics, given the fact that smaller extent from office tenants,
retail is turned off and that the logistics and I think that will be a regular part of
work streams have changed,” one asset management.”
pan-European investment manager
says. “People and countries will be
more dependent on their own logistics
facilities within borders . . . COVID-19
will have a lasting impact on that.”
Image: Socially distanced dining, Amsterdam, The Netherlands
(Anne Lakeman and Willem Velthoven for Mediamatic) Emerging Trends in Real Estate® Europe 2021 11Chapter 1: Business environment
Monetary policy boost One German banker goes as far as to Figure 1-6 Inflation and interest rates
suggest that the Eurozone “will not have in 2021
any significant interest rate increase
The industry draws comfort – even within the next 10 years.” 2% 4%
if only for 2021 – from central banks’ 13%
prevailing lower-for-even-longer interest Given this tailwind, many interviewees
rate policy. One global asset manager 30%
attest to reassuring levels of investment
articulates the widespread short-term activity during the dark days of 2020, Inflation
view: “Interest rates are low. Investors albeit lower than in 2019. Momentum
need yield, and they need return. is expected to pick up through 2021 51%
That means alternative forms of yield, although clearly a risk-off bias exists
where investors might have to give for most investors allied to an important
up some liquidity, are likely to benefit caveat: the continuing travel restrictions
from enhanced demand. There’s a could hinder the ability to source deals. 2% 2%
strong outlook for core real estate in 18% 22%
that environment. As a bond replacer, “All the markets across Europe more
as a diversifier, demand [for core] will or less have a cushion of supply and Short-term
be pretty much robust to anything that demand, so the release of the pressure interest rates
happens on the economic side.” might be even a good thing. I think
55%
we’re going to see more suffering in
Other interviewees express some secondary and tertiary stock and much
disquiet over the long-term implications less on prime. But obviously we cannot
of such a monetary policy combined expect rental growth when the economy 1% 3%
with abundant capital in the system. will be suffering,” says one consultant. 16%
As another global player points out: “At
some stage, someone needs to wake “What is saving parts of the real estate 32%
up and say, ‘How on earth can we keep market is the fact that you’ve got long Long-term
writing more debt as government? How leases to good credit tenants,” adds
interest rates
on earth can we keep printing money?’” an asset manager. “Where the market 48%
believes that credit will survive the scale
But with the prospect of an uncertain of the correction to come, then they’re
recovery from recession, more than buying that every day of the week; Increase substantially Increase somewhat
half the survey respondents believe they’re treating it as a bond.” Stay the same Decrease somewhat
interest rates will stay the same over Decrease substantially
the coming year.
Source: Emerging Trends Europe survey 2021
12 Emerging Trends in Real Estate® Europe 2021 Image: Lockdown in Brussels, Belgium (Getty Images)Such is the strength of demand that
Figure 1-7 Appetite for European real estate in 2021
more than half of survey respondents
expect to be net buyers of real estate
in 2021. The investment managers
canvassed for this report invariably A net buyer of real estate assets 55%
refer to “pent-up capital” raised
Buying and selling similar amounts of real estate assets 29%
pre-pandemic that still needs to be
deployed. Residential and logistics A net seller of real estate assets 15%
find favour with many of them but
0
also core offices – as long as they are Source: Emerging Trends Europe survey 2021
convinced that the income is assured.
Yet only the boldest are considering
retail and hospitality. “The hunt for
income is absolutely huge,” one
investment manager observes. “You
Figure 1-8 Issues impacting business in 2021
could argue long-dated assets are not
going to rerate, and you’ll even see
yield compression. Whereas I think for
most other asset classes, particularly Real estate business issues
retail and hotel, you’re going to see Availability of suitable assets/land for acquisition and development 25
significant yield widening.” 16 34 20 25 5 %
Availabilty of (re)finance
In this hunt for yield, it is little surprise
15 41 16 22 6 %
that half the respondents are concerned
about availability of suitable assets to Sustainability/net zero
buy, but even more – 56 percent – are 15 34 27 19 5 %
worried about sourcing finance, sharply
Construction costs
up on last year.
10 38 20 27 5 %
General business difficulties have Covenant and loan servicing issues for existing loans
prompted a wider call on banks’ capital 10 34 24 23 9 %
than just real estate, and as a result
Asset obsolescence
they have been even more selective
than their equity investor counterparts. 10 31 27 25 7 %
That situation is expected to continue 0 10 20 30 40 50 60 70 80 90 100
Very concerned Somewhat concerned Neither/nor
in 2021. “Banks will be tightening
Not very concerned Not at all concerned
their lending, going to very low LTVs
[loan-to-value ratios], not refinancing, Source: Emerging Trends Europe survey 2021
and debt will be difficult to obtain, but I
think that new debt funds will emerge,”
says a European pension fund manager.
We’re going to see more suffering in secondary and
tertiary stock and much less on prime. But obviously
we cannot expect rental growth when the economy
will be suffering.
Emerging Trends in Real Estate® Europe 2021 13Chapter 1: Business environment
Lasting change Figure 1-9 European business environment in next 3-5 years
for real estate
Many of Europe’s real estate leaders
acknowledge that COVID-19 will bring
Asset obsolescence
lasting change to the way the built
environment is used and managed, 47 40 13 %
which needs to be addressed now. Availability of suitable assets/land for acquisition and development
36 41 23 %
According to one adviser, the shift
Availabilty of (re)finance
to online shopping, for instance, is
accelerating to the extent that a decade 37 46 17 %
of change may well be condensed to Covenant and loan servicing issues for existing loans
a couple of years. “That requires a 36 52 12 %
significant refocus for many owners
Construction costs
in terms of their business plans and
what assets they want to hold long 35 36 26 %
term, where they want to spend their Sustainability/net zero
capital, where they want to invest in 11 35 54 %
certain things versus just monitoring 0 10 20 30 40 50 60 70 80 90 100
their assets, as they may have Get worse Stay the same Improve
done otherwise.” Source: Emerging Trends Europe survey 2021
Indeed, 41 percent of survey
respondents – up from a third last
year – are concerned about asset
obsolescence for 2021, and nearly half
Figure 1-10 Most common building types to be repurposed
believe this problem will worsen over the
next five years.
“Our conviction now is not around what
2021
to buy, but what to sell. We plan to sell
any offices in our portfolio which we 51% 37% 4% 4% 3% 2%
do not think are future-proof, whether
because of their location, or design,
or ESG quality,” says an investment
manager. “But we strongly believe in
the well-connected office, designed in a
Office Retail Logistics Residential Mixed use Leisure
way that is sufficiently flexible so that it
allows for a world in which the office is
used more for collaboration rather than 2020
production . . . those are the offices of 72% 64% 24% 34% 33% 25%
the future.”
The debate around how offices could, or
should, be used has been rumbling for
years, but it has ratcheted up because of
Office Retail Logistics Residential Mixed use Leisure
COVID-19, which we analyse in chapter
3. As the survey shows, the office has
been the most common building type to Source: Emerging Trends Europe survey 2021
be repurposed during 2020. Note: This question format changed between 2020 and 2021. In 2020, respondents could
select more than one option.
14 Emerging Trends in Real Estate® Europe 2021Image: Bringing colour to local shops in London, UK
(Buster Manston – Bad Batch Productions/The London Mural Company)
The survey indicates a slowdown in the Property owners are, in effect,
Figure 1-11 Change in the number of
volume of assets actually repurposed taking on more operational risk. No
assets repurposed
during 2020, which can be attributed to one is claiming this transition to a
the financial and practical constraints more operational business model
during lockdown. Over the coming five will be easy, but a growing number
6% 1% 6%
years, however, the repurposing of of industry leaders believe it is
assets from one sector to another is on nonetheless inevitable.
the agenda for nearly three-quarters of 28%
respondents. Says one pan-European 2020 “The additional dimension that
player: “I think the game going forward COVID-19 has brought into very clear
will be to make sure that whatever 60% light is that where an investor once
you invest in can be repositioned and thought it just owned a lease with a
repurposed. That will be a key factor.” certain income – very comparable to
bond income – it now actually owns
4% 1%
Other industry leaders suggest the 19% a relationship with the underlying
challenges facing real estate go much market,” the manager adds. “It’s a
further than repurposing obsolete 25% different relationship that will be created
assets or conventional supply/demand In next between the tenant and the landlord,
dynamics. COVID-19 has underlined the 5 years and I think ultimately a positive one.”
growing importance of property as a
service, which has long been flagged in More than 70 percent of survey
Emerging Trends Europe; but again, it’s 52% respondents believe that landlords and
gathering pace. Increase substantially Increase somewhat tenants will consider new models for
Stay the same Decrease somewhat leases. However, some respondents
More than 80 percent of survey Decrease substantially are uneasy about such change: though
respondents believe the COVID-19 37 percent think that the COVID-19
crisis will accelerate the use of Source: Emerging Trends Europe survey 2021 crisis will lead to a better alignment of
technology by real estate owners for interest between landlords and tenants,
the management of buildings and to a significant 28 percent disagree.
secure the health and safety of users.
Three-quarters of respondents reckon “That whole perception of the usage
COVID-19 will hasten the need for new of real estate is going to change,” says
operational skills. one pan-European adviser. “And that
It’s a different relationship has an effect on planning. That has an
“The nature of real estate is completely that will be created effect on values, that has an effect on
different, and it’s transpired by between the tenant and rent, that has an effect on the layout,
COVID-19 that the risk the landlords design, and also the branding function
have taken is completely different
the landlord, and I think of a particular office.”
than what they thought it was,” an ultimately a positive one.
investment manager says.
Emerging Trends in Real Estate® Europe 2021 15Chapter 1: Business environment
Top trends
Environmental priorities And when it comes to impact investing, For others, the ESG agenda is evidently
cutting the carbon footprint of real important enough without COVID-19.
Just like last year, industry leaders estate is regarded as by far the most “Prioritising energy efficiency in our
believe climate change and the effective measure with which the buildings and being sensitive to climate
environment will have the biggest industry can make a difference. change is part of our job and nothing
impact on real estate over the next we would consider novel,” says one
three decades. The difference this time Far from obscuring the industry’s pension fund manager. “It makes
is that there seems to be a greater sustainability objectives, many commercial sense, and it is the right
urgency in mitigating such risk as part interviewees believe the coronavirus thing to do. I suspect that for most
of the overall ESG agenda. pandemic has provided renewed sophisticated institutional investors,
impetus. “Carbon neutrality, the benefits this has been part of their approach for
Nearly eight out of 10 survey to the environment from reduced quite some time. The issue is how much
respondents think energy efficiency, travel, to me this is just a massive ESG and how fast it trickles down to the rest
carbon emissions, and climate adaption accelerator,” says one private equity of the industry.”
will increase in importance in their player. “COVID-19 accelerates ESG, the
portfolios in 2021, and the number is ESG focus accelerates repurposing. It’s
higher still over a five-year horizon. going to trigger a whole tenant debate
about what needs to change with
respect to existing space.”
Image: Public realm in the city centre
16 Emerging Trends in Real Estate® Europe 2021 Earlsfort Terrace, Dublin, Ireland (IPUT Real Estate Dublin)Image: Working from home during lockdown (Getty Images)
Fast-track technology The industry is also energised by
the possibilities for proptech – now
fast-tracked because of COVID-19.
In the era of the Zoom meeting, it is A remarkable 91 percent of survey Technology will make
no surprise that increasing use of
technology, or digitalisation, runs a very
respondents believe the crisis will
certain jobs and
accelerate the use of technology in
close second to environmental risk as their organisations’ broader operations. industries redundant,
the trend the industry believes will have
the most significant, long-term impact
but it will create lots
On a cautionary note, one global
on real estate. player observes: “Technology means
of new roles which
a lot of different things, but it is a we don’t know yet.
“Technology will make certain jobs and trend that is not going away, and in
industries redundant, but it will create the real estate industry we need to
lots of new roles which we don’t know be a lot smarter about how we use
yet,” enthuses one investment manager. technology for information gathering
and information analysis.”
As universally acknowledged, the
continuing dependence on technology “COVID-19 has already accelerated
for remote working will have lasting a lot of proptech initiatives,” adds a
influence on the future of the office but pan-European investment manager.
also implications for how and where “I think over the course of the next 30
people choose to live. The shift from years how proptech will influence us as
physical to online retail has escalated a business, from investing all the way
beyond all expectation in 2020. Data through to occupancy, management,
centres top the sector prospect and the consumer interface of
rankings for 2021, followed closely technology. It will have a huge impact
by logistics. One way or another, the and we’re only really at the tip of
transformative effects of technology are the iceberg.”
there for all to see across real estate.
Emerging Trends in Real Estate® Europe 2021 17Chapter 1: Business environment
Diversity matters Many interviewees acknowledge that
greater diversity in the workplace –
Three-quarters of survey respondents different points of view – leads to better
say their organisations are proactively results in business, especially at a time I believe that the more
addressing gender in relation to of economic uncertainty. As the (female)
diverse the team, the
diversity and inclusion in the real CEO of a Central Eastern European
estate workplace. developer says, “I believe that the better the protection
more diverse the team, the better the against risks, the greater
protection against risks, the greater the
For those companies focusing on
effectiveness of dealing with change or
the effectiveness of
gender, equal pay policies and clear
processes for reporting discrimination the need to adapt.” dealing with change or
are among the more common initiatives. the need to adapt.
According to the survey, most real
As a result, some interviewees report estate firms have put in place policies to
a good gender balance at all levels of improve diversity and inclusion, but the
their organisations. But the majority outcome so far is some way short of a
converge along the lines of “senior workplace revolution. According to one
management looks a bit grey, white, investment manager: “Evolution would
and male” despite the encouraging shift be a better way to put it.”
in corporate policy.
“If you just approach the market and
say, ‘Find me the best candidate,’
I’m sure that role will end up being a
man in most cases, but that doesn’t
mean there is not a woman out there Which of the following diversity and inclusion categories is your company
who could do a better job,” says one proactively addressing?
pension fund manager. “You have
to wilfully want to do it. Diversity
doesn’t just happen.”
Nor is it simply about gender. Some 73% 45% 39% 39% 10%
interviewees believe the Black Lives
Matter movement will be a positive LGBTQ+
Gender Socioeconomic BAME (Black, Neuro
influence on real estate, and over a third Asian and
of survey respondents are proactively minority ethnic)
addressing BAME (Black, Asian, Source: Emerging Trends Europe survey 2021
and minority ethnic) diversity in their
organisations. The same proportion is
addressing LGBTQ+, and nearly half is
dealing with socio-economic diversity.
18 Emerging Trends in Real Estate® Europe 2021Facing up to COVID-19
Like all industries, real estate has
Figure 1-12
been subject to huge upheaval as a
result of the global pandemic and its %
economic repercussions.
The COVID-19 crisis will accelerate the use of
2 7 48 43
technology in a company’s broader operations
The uncertainty over the future of office
working has been one of the more COVID-19 will hasten the need for
obvious issues, but as this chart shows, 1 11 54 33
increased focus on supply chain resilience
the impact of COVID-19 on European
real estate is wide-ranging. Health and wellbeing will become a more
53 33
important factor across all sectors of real estate 3 10
If there is a common theme, it is
of the crisis as an accelerator of
The COVID-19 crisis will accelerate the
existing trends in the way the industry use of technology by real estate owners 3 10 45 38
conducts its business and approaches for the management of buildings and
the investment and management of secure health and safety of users
real estate.
Quality of cashflow/income will predominantly
drive valuations in the next 12 months 1 7 10 55 27
There will be more forced sales of
7 16 51 26
retail assets in the next 12 months
COVID-19 will hasten the need
for new operational skills 4 19 52 24
There will be more consolida-
tion in the real estate sector 1 8 21 58 13
Landlords and tenants will
consider new models for leases 2 8 20 55 16
A city leadership’s response to
COVID-19 will be incorporated
2 17 32 40 10
into future investment
decision-making
The COVID-19 crisis will lead to
better alignment of interest 4 24 35 29 8
between tenants and landlords
There will be a trend away
from high urban density 5 33 25 30 7
Disagree strongly Disagree Neither/nor
Agree Agree strongly
Source: Emerging Trends Europe survey 2021
Emerging Trends in Real Estate® Europe 2021 19Chapter 2 Real estate capital markets “The quest for income, globally, is good for real estate, so investors continue to like it as an asset class. They’re just clearly focused on those areas of the market where they can get that income return – and where it’s protected.” European real estate head, global investment manager 20 Emerging Trends in Real Estate® Europe 2021 Image: Scooting through a city in Austria (Getty Images)
COVID-19 has shaken up Those canvassed by Emerging Trends
Figure 2-1 Availability of equity
Europe’s real estate capital Europe believe that equity for real estate
and debt for refinancing/new
markets, and though the full is unlikely to recede dramatically – a
investment in 2021
stark contrast to the GFC.
impact of this dislocation is
not yet clear-cut, it is shaping The proportion of those surveyed who
5% 3%
up to be quite different from expect equity for new investments
the aftermath of the global and refinancing to fall is much greater 26%
Equity for
financial crisis (GFC). than last year – 31 percent against 17 refinancing 33%
percent. But at the same time, two- or new
Industry leaders expect equity and debt thirds believe that equity will increase or investment
to become less plentiful – but from a stay the same.
very high base. Though still early days, 33%
capital is available for real estate, and “The fundamental difference between
enough of it targeting logistics and the crisis we’re going through now and 6% 3%
residential that these highly favoured the GFC is the speed with which the
sectors might even see yields compress. central banks and governments reacted 25%
Debt for
to this crisis has meant that there’s not refinancing
While capital remains plentiful and been any real crisis in terms of liquidity or new
ultralow interest rates support asset or within the banking markets,” one 38% investment
values and fuel investors’ demand for investment manager says.
28%
core assets, the stability of real estate
income and current owners’ ability The gap between bond and real estate
to manage what is an increasingly yields that has seen allocations to real Increase substantially Increase somewhat
operational asset class remain estate consistently increase for the Stay the same Decrease somewhat
open questions. past decade remains. While certain Decrease substantially
sectors face serious challenges
As one global financier puts it: “What to income security because of the Source: Emerging Trends Europe survey 2021
we had in the GFC was predominantly a pandemic, real estate generally is seen
situation of overleverage. What we have as one of the few asset classes to
today is predominantly going to be a lack generate acceptable returns at a time
of income or change in income levels of negative interest rates.
and a rerating of rental levels.”
The current market is akin to “a I think we’re talking about
phoney war,” according to a value-add the beginning of the new
investment manager. “We know that
something’s changed in a significant
cycle, but we’re not at the
way. But there’s a ton of capital floating bottom of the market yet.
around out there,” he says. And that is a 2021 topic,
Another veteran investment manager
not a 2020 topic.
adds: “I think we’re talking about the
beginning of the new cycle, but we’re not
at the bottom of the market yet. And that
is a 2021 topic, not a 2020 topic.”
Emerging Trends in Real Estate® Europe 2021 21Chapter 2: Real estate capital markets
Domestic investors A big issue is the inability of overseas For North America’s more opportunistic
investors to visit a property in Europe capital, the issue may be more about
to the fore before buying it. Without “boots on the the value to be found in its domestic
ground,” it is a big call to deploy millions market, which suddenly looks more
With regard to where that equity is of euros on an uninspected building. attractive than Europe.
coming from, the physical limitations
that COVID-19 imposes on business “Our figures and how much we expect
are influencing investor expectations. to invest are very much based on
our mobility because it’s not just
There is a strong likelihood that us inspecting those assets,” one
domestic and European investors will institutional investment manager
play a much greater role in Europe says. “It’s also, from a distribution Our figures and how
in 2021. European capital is the only perspective, us being able to get in much we expect to invest
source where more survey participants front of investors – whether Australian,
say there will be an increase compared US, or European – to make the case.” are very much based on
with last year. our mobility.
For Asian investors, many of whom are
Capital flows from Asia are expected newer to investment in Europe and do
to increase by more than half of not have local teams, this is a particular
those surveyed, but fewer believe problem. But interviewees argue that
this than last year. And for North this is a short-term impact rather than a
American and Middle Eastern capital, long-term trend.
the opposite is true: more foresee a
drop than an increase.
Figure 2-2 Country transaction volumes Q4 2019–Q3 2020 (€bn)
Finland 5
Norway 5 Sweden 17
4 Russia
Denmark 6
UK 53 Netherlands Czech
Republic 7 Poland
Ireland 7
20
82
3
Belgium 4 1 Romania
Germany Austria 44
France
43 2 Luxembourg
Switzerland 6
Spain
10 Italy
13
Portugal 4
Source: Real Capital Analytics
Note: Countries with transactions over €1 billion.
22 Emerging Trends in Real Estate® Europe 2021Disrupting the way we work A pan-European fund manager adds: “We oblige ourselves
to inspect buildings. It’s virtually impossible if you’ve got
to quarantine for 14 days. My fear is that there will be
“We will go back to travelling,” says one global asset restrictions on travel whether going to countries or coming
manager. “Our business is about physical property, and that back from countries, and it’s going to be off and on.”
doesn’t come to you. You have to understand the dynamics
of walking the market. How this building that’s located The travel challenge is partly reflected in the survey, which
on this block is different from the one that’s two blocks indicates diminished capital flows into European real estate
away? Why is that different? You just have to do it.” But from Asia and North America during 2021 compared with
right now, the challenge lies in the travelling. As important previous years. By contrast, domestic and European
as technology has been as a support to investment activity investors – already dominant players here – are expected to
during lockdown in 2020, there is nonetheless concern play an even greater role.
across the industry over its ability to source deals in the
coming months. With continuing work restrictions and the As interviewees point out, investment managers and
threat of a second wave of COVID-19, travel cannot be consultants with a strong on-the-ground presence may
taken for granted. And technology – though changing some be at an advantage, especially now when the pace of
business practices forever – is not the entire answer. recovery is different across Europe: market knowledge is
more important than ever. “The difficulties with travelling
To an extent, the industry has been working through a will become more of a challenge once we begin doing new
pipeline of deals originated pre-pandemic and therefore investments and how we manage that if we can’t go out and
subject to conventional due diligence. But as one private see the properties,” says a global pension fund manager.
equity player observes: “Now that people are thinking “We have been doing new investments actually, but we’ve
they are going to be locked down or unable to travel relied on our partners or we’ve relied on advisers to visit
for a lot longer there is a nervousness around sourcing the properties, and to be honest, in all the cases we were
going forward.” already familiar with that asset or that location.”
Figure 2-3 Cross-border capital into European real estate in 2021
13% 4% 3% 6% 5% 7% 12%
11%
15%
25% 29% 22%
31%
Americas Europe Middle East Asia Pacific
28% & Africa
38%
41%
46%
20% 19%
Increase significantly Increase somewhat Stay the same Decrease somewhat Decrease significantly
Source: Emerging Trends Europe survey 2021
“What happens with these sorts of
Figure 2-4 Capital raised by Europe-
crises, the US guys have decided they
focused private equity funds
just want to be as opportunistic as Q4 2019–Q3 2020
they can, so it’s a blood-in-the-water, If you want US capital,
high-returning strategy. If you want US
Fund of funds 0.3 you have to be able to
capital, you have to be able to offer
them that extra incremental return,” Debt 3.4 Core 2 offer them that extra
Core-plus 1.8
one investment manager says. “Europe incremental return.
will be fighting with [the] US where
COVID-19, I think, has had a bigger
economic impact and a bigger real
€bn
estate impact because their cycle was Value-
Opportunistic added 8.2
further along. I think it might be actually 11.8
quite tough to raise money in the US
right now for Europe because everybody Source: Preqin
will be more focused on the US.”
Emerging Trends in Real Estate® Europe 2021 23Chapter 2: Real estate capital markets
Lending constraints Figure 2-5 Sources of debt in 2021
Real estate lenders are seen as being
in a far better position to weather any
Alternative lending platforms
economic storm that arrives than they
13 43 22 17 5 %
were in the GFC.
Other non-bank lenders
“Banks are generally much better 11 45 25 16 3 %
capitalised in this crisis than they
Non-bank institutions
were in the GFC, a lot of which is due
7 40 25 25 3 %
to the post-GFC regulations around
capital buffers and so on,” one debt Issuance of commercial mortgage-backed securities
specialist says. For the time being, 3 27 40 25 5 %
distressed investment opportunities are
Banks
seen as few and far between although
many interviewees acknowledge that 1 12 22 50 15 %
it is probably too soon to draw firm
Increase significantly Increase somewhat Stay the same
conclusions here.
Decrease somewhat Decrease significantly
0 10 20 30 40 50 60 70 80 90 100
“There’s a lot of pressure being put on Source: Emerging Trends Europe survey 2021
people [lenders] all across Europe to
exercise forbearance,” one opportunity
fund manager says. “So, what we don’t
Because of the difficulties of But these numbers hide a lot of
really see is a huge amount of distress
underwriting income and forming nuance about the appetite of various
out there at this point.”
new business relationships digitally, types of lenders. For many of the
interviewees believe that lenders debt funds without big exposure to
However, just because lenders are in a
will favour existing borrowers and legacy portfolios or loans to struggling
better place does not mean that all is
that it might be easier to refinance restaurants or retailers, the retreat of
rosy. Debt is expected to be available,
existing deals than to find debt for banks is a big opportunity. “I have to go
but it will be more selective.
new purchases. way back to a long time ago in my time
in banking to find a year where we’re as
Nearly half the survey respondents think
“I tell people to go hug your lender busy as we’ve been since lockdown,”
that debt available for new investments
today because they’re your best friend,” one debt fund manager says.
and refinancing will fall this year,
one property company executive says.
compared with a fifth who foresaw a
“Lenders don’t want to take any real Yet even some of the alternative lenders
decrease last year. And that is much
risk. They don’t want to go out on the may be unable to capitalise on new
more than the 28 percent who expect it
spectrum. They also want to do things opportunities. Typically, debt funds
to increase.
for good, loyal clients that they made have been financing higher-leverage
some good loans with.” deals, development, or unfavoured
As one debt broker points out, lenders
sectors such as retail, which could
are already constrained because “there
While nearly two-thirds of survey leave them solely focused on problems
is a lot of stuff that needs to get worked
respondents expect banks to reduce in their own portfolios.
out” – a difficult situation that is likely
their lending to real estate, just over
to persist for the next 12 to 18 months.
half expect alternative lenders like debt
“I’m not talking just real estate, but
funds to increase their exposure.
across the board: aviation, shipping,
consumer and corporate credit. And
these are all massive areas in terms of
balance and exposures.”
Banks are generally much better capitalised in this
crisis than they were in the GFC, a lot of which is due
to the post-GFC regulations around capital buffers.
24 Emerging Trends in Real Estate® Europe 2021Time to pick and choose Figure 2-6 Access to senior debt in 2021
At this time of great uncertainty, survey
respondents and interviewees clearly
Niche sectors* 25
believe that core real estate, above all
10 24 34 23 7 %
else, will find favour with both equity
and debt providers. Core real estate
8 27 43 20 2 %
“Most people have decided to allocate
Value-added real estate
to core,” says one investment manager
6 24 33 30 7 %
who runs both core-plus and value-add
funds. “If they’ve backed away from New investment
risky assets but need the allocation, 5 20 38 32 5 %
then what do you do? You buy some Development finance
form of core income.”
2 14 31 39 14 %
When it comes to mainstream real Refinancing
estate, the “investible universe has 2 15 49 30 4 %
shrunk down to three sectors”, one 0 10 20 30 40 50 60 70 80 90 100
global investment manager says. What Increase significantly Increase somewhat Stay the same
is more, the favoured three – logistics, Decrease somewhat Decrease significantly
rented residential, and “uberprime”
Source: Emerging Trends Europe survey 2021
offices – could see prices increase due * For example, student housing, co-working, data centres, retirement/assisted living.
to the weight of money targeting them.
Image: Demand keeps rising for logistics (Getty Images) Emerging Trends in Real Estate® Europe 2021 25Chapter 2: Real estate capital markets
“We’re seeing office in Milan trade at
Figure 2-7 Returns targeted in 2021 Figure 2-8 Returns targeted in 2021
cap rates below 3 percent, and Milan
compared to previous years
is not a huge city,” the global manager
continues. “Paris, Munich, and Berlin 10% 4% 5%
are almost at sub–2 percent yields.” 12% 21%
21%
Return expectations have been scaled
down over successive Emerging Trends
36% 21%
Europe surveys, and this time 46
percent of respondents are targeting
lower returns compared with a year ago. 29% 41%
Nearly two-thirds anticipate up to 10
percent risk-adjusted returns in 2021.
Significantly higher 0–5%
Somewhat higher 5–10%
Though best-in-class offices with
Same 10–15%
long leases remain in demand, a lot of Somewhat lower 15–20%
office stock has a less certain future. Significantly lower 20%+
The problems with retail, particularly
shopping centres, are long-established Source: Emerging Trends Europe survey 2021 Source: Emerging Trends Europe survey 2021
but, again, have taken a turn for the
worse as a result of the pandemic.
“It would be hard for anybody to predict
vailability of equity Figure 2-9 Availability of equity and
what office or retail rents will look like
d debt for refinancing/new debt for development in 2021
a year from now,” says one institutional
vestment in 2021
investor. “The challenge when it comes It would be hard for
5% 3%
to returns is: if we were in a low interest
9% 3% anybody to predict what
rate environment before, we are even
more so now. You have to believe office or retail rents will
that basically returns will become
Equity for
29% look like a year from now.
more compressed
refinancing 33% going forward, just Equity for
or newreflecting the cost of capital coming development
investment
down, even though arguably the risk 33%
has gone up. I think that’s a challenge
27%
% for all investment committees when the
world feels a lot riskier.”
6% 3% 3%
16% 20%
This fear of the unknown has also put
the brakes
25%on development for most
Debt for
of
refinancing
the industry, and little change is Debt for
or new expected in 2021. Survey respondents development
believe that both equity and debt for
investment
new construction will be significantly 38% 23%
28%
reduced – by 42 percent and 54
percent, respectively.
bstantially Increase somewhat Increase substantially Increase somewhat
me Decrease somewhat Stay the same Decrease somewhat
bstantially Decrease substantially
ng Trends Europe survey 2021 Source: Emerging Trends Europe survey 2021
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