Transcript: Emerging Trends in Real Estate Europe 2022
10:58
Transcript
Ian
We will be exploring and discussing the trends in the industry in the UK, across the Channel Islands and further afield in Europe that have been identified through our recently published Emerging Trends in Real Estate Report in conjunction with the Urban Land Institute and resulting from over 800 interviews of property professionals throughout Europe.
Nadine
Thank you very much Ian for setting the scene. We’ll be talking about 5 key themes today which have come out of the survey results for this year.
Firstly – there is a renewed confidence and optimism in the market.
- As European economies have started 2 recover from the pandemic, we see a clear upturn in confidence among RE industry leaders.
- With the highest levels of confidence since 2014 across a range of areas such as overall business confidence, profitability & headcount.
Ian
Absolutely, even with the ebbs and flows of certainty and confidence in the markets, one constant that remains is the availability of capital and debt ready to be deployed to real estate. For example, recent studies show global investors have set aside up to £46bn to deploy in the London office market alone this year (the highest since 2012). And of course from a CI context that is really good news given the weighting of our real estate structures holding UK assets.
Nadine
Absolutely agree with you Ian. Is this confidence sustainable given all of the uncertainty around the property markets, or is it a “sugar high” from all of the stimulus pumped into the economy?
This leads us on to the second theme - Longer term concerns.
Despite rising optimism, our survey still highlights a number of issues 2 watch
- Biggest RE specific concern relates 2 inflation & the disruption to supply chains, impacting both construction prices & delivery schedules
- ESG remains very high up on the agenda in terms of concern. This is a complex multifaceted concern which will require wider organisational change in the industry, including:
- How do you comply with the future regulation coming down the line - both from financial reporting perspective and wider market perspectives.
- Value definition - how do you actually determine the valuation impact from ESG when it's such a rapidly developing topic and that’s something we’ll explore further in the panel.
- How do you capitalise on the opportunities from ESG - for example if you demonstrate best practice, how can that help you in getting better financial arrangements.
Ian
Yes, and although hugely important, harnessing the opportunities and dealing with challenges of ESG is just 1 of the areas causing longer term concerns.
As we’ve discussed already, the reality is there is more capital interested in investing than there are primary assets available in core locations. So this is leading to investors seeking returns higher up the risk curve, looking at repurpose opportunities, for example from office to resi, or alternative assets.
Also, the reality is that COVID continues to cause disruption and uncertainty to a greater or lesser extent across all markets.
The pace of change and shift in consumer demands for preferential locations, greater flexibility and space is also accentuating the value gap between primary and secondary assets, particularly in the office sector.
So in spite of a current sense of relief, uncertainty continues to be the key word when looking further ahead over the next 3-5 years, not only because of a number of structural Δs, but also concerns over almost all businesses grappling with the significant social & political issues that we face.
Nadine
Next theme, Energy for Change, is focused more broadly on sector preferences for 2022 and beyond
We’ve been talking about alternative subclasses for a very long time. And that interest hasn’t dropped off. Its no real surprise here to see to see the alternative RE sectors included as the most attractive for investors - 3 reasons as to why that is:
- We’ve touch on the huge amount of capital available to invest
- Investors are desperately looking for other asset classes to achieve higher yields.
- Answering a wider macro demand in terms of changes in what consumer needs are which Ian will touch on.
Despite this continued strong interest in alt or niche sectors such as lifesciences, new energy & data centres, won’t attract most capital in 2022, because:
- they are yet 2 offer the liquidity req. of most invs
- or there are just limited investment opportunities available. Office remain the largest sector for European RE, taking 38% of investments in the last year, however this is down 10 percentage points from the prior year with Industrial deals rising in a similar proportion.
- The high ranking signals a direction of travel,
- part of a longer term & fundamental shift to more operational RE that the industry is navigating.
Ian
The facts are people’s priorities have shifted, particularly in terms of both how and where they see themselves living and interacting with real estate.
Over the last 12 to 18 months by default or design we have seen huge numbers displaced from our major cities. Of course that hasn’t put an end to our cities, such a phenomenon would take multiples of that time. But what it has done is create even greater opportunity and demand in alternative asset classes in arguably alternative locations.
I often use Ireland as an example of this because having spent the last 2 years living and working in Dublin I saw the effect first hand. For generations people migrated to the city for work and opportunity. When COVID struck scores of people moved back down the country for space, for safety, for wellbeing and now many people have decided they want to stay outside of the city. But there is no less demand for the convenience of the city. So investors are also exploring and seeing real opportunity in bringing these alternative assets to locations that they might not have thought about before.
Nadine
Thanks Ian, that’s a really interesting example of changes in the Irish market, but, when looking at our 4th theme, City Stability, and this year’s city rankings for investment and development prospects in the upcoming year, this year’s list shows us that, no matter changes in consumer demand and interesting alternative investment opportunities elsewhere, for now, cities are still where most significant opportunities are seen given scale and the sheer amount of capital available to invest.
Obviously this is a European report and covers professionals throughout Europe, but inventors are still favouring london. Since the Brexit decision London had appeared to fall out of favour but it has rapidly risen up to 1 again, taking over the top spot from Berlin in terms of overall investment and development prospects. People still want to live and work in London.
The prominence of those two capitals as well as the other German cities & Paris inds that invs remain selective about where they deploy cap & there’s understandable focus on cities that offer liquidity, at least 4 the short term.
Ian
Yes, and whilst there is significant growth potential outside of cities, there is still no less demand for the convenience of the city from an investors perspective. In relative terms we have seen a correction of value of traditional assets caused by the recent COVID displacements but that by no means has taken away from the appeal of those cities.
Nadine
The final theme that’s come through strongly this year is the need for organisational change in the RE industry.
This actually is probably the most interesting part of the debate. It feeds off of all the previous 4 topics of discussion and reinforces that the industry is being forced to continue becoming a far more consumer driven business model.
To really extract that value growth, gone are the days where you sat on the assets and collected income, now you really have to actively manage, with much more intensive asset management than ever before.
Ian
All of these factors have been on the agenda for some time but the impact of the pandemic, consumers' wider awareness and interest in the issues has accelerated the need for organisational change.
Whilst many of the survey respondents feel comfortable talking about these points at a high level and almost all see them as a driver of future success, the granular detail of what is required and what those measures of success looks like are still being worked through.
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