As European economies continue their recovery from the pandemic, the main narrative around real estate is one of confidence restored although the industry is still coming to terms with the profound changes to the business of real estate brought about or accelerated by COVID-19.
Business sentiment across the industry is back to pre-COVID levels, there is a plentiful supply of equity and debt, and real estate’s position as a favoured asset class looks assured for at least another year.
Delegates to PwC’s EMEA Real Estate Conference on November 18, learned of a post-pandemic “sugar rush” of pent-up demand for core – and increasingly, alternative – assets.
Yet according to the keynote speakers and panellists, uncertainty remains the watchword for 2022 and beyond. It is also a recurring theme in Emerging Trends in Real Estate® Europe 2022, the annual survey of senior professionals by PwC and the Urban Land Institute, which was unveiled to conference delegates. In short, there is widespread acknowledgement that the full impact of changing consumer demands, digitalisation and an increasingly important ESG agenda is still to play out in Europe’s real estate markets.
The short-term risks of above-average inflation and rising interest rates are also back on the industry watch-list of concerns, according to Dr Alexis Crow, who leads the Geopolitical Investing practice at PwC US.
Though Dr Crow told delegates that a lower-for-longer monetary policy should prevail, there is nonetheless uncertainty over the duration and consequences of such issues as supply chain disruptions, surging energy costs and labour shortages. At the very least, these issues will likely affect construction prices and delivery schedules – and profit margins – just at a time when the industry wants to resume delayed developments or advance repurposing initiatives.
The political backdrop to investment for 2022 is similarly uncertain. “I do believe that 2022 is going to be an important year politically,” said Dr Crow, “potentially featuring social unrest in economies where citizens have not only disagreed with politicians’ handling of the pandemic, but also where you’ve had a significant increase in inflation with regard to food prices, which is really hurting the bottom parts of the income distribution.”
But as she also pointed out – and as the bullish post-pandemic confidence ratings suggest – the industry can draw comfort from the fact that real estate, compared with other asset classes, is well placed to overcome market volatility for the foreseeable future.
At the same time, Emerging Trends Europe indicates a flight to safety when it comes to the main city destinations for capital in 2022. London regains the top spot from Berlin for overall investment and development prospects in the city rankings. Paris is next, followed by the other major German cities.
The big cities all offer highly prized liquidity to investors, and it is worth noting that capital flows into the office sector in these markets have been remarkably strong over the past year. Looking further out, however, that liquidity factor, and city prospects generally, will be heavily dependent on the post-lockdown shape of office demand and working patterns – still to be determined and, right now, issues that polarise opinion in the industry.
As the conference highlighted, there is a parallel debate about what constitutes attractive, sustainable real estate investment and the changing definition of secure income in the post-pandemic world. It links to a recurring conference theme around, as Angus Johnston, PwC’s EMEA Real Estate Leader, put it: “What has got us so far will not get us where we need to be.” This relates principally to how the industry conducts its business going forward, but also to how and where capital should be deployed.
Demand for core assets continues to increase and yet COVID has only reinforced the appeal of those sectors that benefit from compelling supply/demand dynamics and strong demographics, notably logistics, living and life sciences.
Alternative sectors as diverse as data centres and new energy infrastructure offer many of the same qualities. Such sectors offer less income risk than traditional real estate, albeit with much more managerial complexity. For the time being they lack the liquidity required of most institutional investors, and it is clear these sectors will not attract the most capital in 2022. But their growing prominence signals a direction of travel, part of a longer-term, fundamental shift by the industry to more operational real estate. At the same time, this shift points to some in the industry acknowledging that if they are to succeed going forward, they need to adopt a more granular approach to investment, drilling down into the specifics of sub sectors when making asset allocation decisions.
Real estate investors may still disagree on the merits and definitions of alternatives versus core. By contrast, the conference reinforced the universal view that a major part of the recovery will be driven by the industry establishing a path to net zero. With the recent Cop26 very much in the minds of delegates and speakers alike, there was a clear sense throughout the conference that the ESG agenda is raising the stakes with real estate – not least, offices – by rightly upping the ante on environmental standards and therefore increasing the investment risk associated with “stranded assets” or obsolescence. Or as it was described to conference delegates, “brown blight” – an expression that will surely catch on.
That’s the downside risk of ESG. As Johnston concluded, there is considerable upside: “The opportunity is here for the industry to play a major role in finding new and sustainable ways for how we live and work.”
"I do believe that 2022 is going to be an important year politically... potentially featuring social unrest in economies..."
“The opportunity is here for the industry to play a major role in finding new and sustainable ways for how we live and work.”