Emerging Trends in Real Estate®: Europe 2018

Luxembourg joins Top European Cities as best bets for real estate investment and development in 2018.

Emerging Trends in Real Estate® Europe is a joint survey by PwC and the Urban Land Institute. Now in its fifteenth edition it provides an outlook on real estate throughout Europe for 2018 and beyond.

Luxembourg: an attractive city

For the first time ever, Luxembourg City enters Emerging Trends Europe ranking in ninth spot.

With GDP growth of 4 percent, pro-business officials and a professional and transparent market, more and more international firms are willing to invest in the country. With Brexit in the air, the capital of the Grand-Duchy has turned out to be a very attractive alternative for London as mentioned by respondents of the survey.

Luxembourg is also growing its economy with major investments, among others, in industrial sites, data centres and logistics.

But this country of 590,000 people is expensive to live in and there are possible issues with infrastructure, because there may not be enough residential and schools planned to accommodate a large influx of new businesses. Luxembourg is also hard to place capital into for real estate investors. Yields are low for a small market, but "they are supported by the trend of the economy and the tight market", says a fund manager.

Rethinking real estate

Overall, an optimistic outlook prevails throughout most of Europe’s property industry, with nearly half of this year’s respondents expecting European economic growth to improve over the next five years.

But the geopolitical backdrop is creating a shift in focus, with concerns moving from the regional to the global.

Emerging Trends in Real Estate® Europe 2018 reveals an industry that is becoming more complex, yet more transparent and accessible. Whatever the outcome, it is certain that the industry will need new skill sets, new ways of collaborating outside traditional industry boundaries and new business models to survive and compete in the new real estate ecosystem.

Key findings

80% think investors are taking more risks to achieve target returns

The key concern for Europe's real estate industry - as it has been for several years - revolves around the availability of suitable assets. More than three-quarters of those surveyed believe investors are taking more risks to achieve target returns, but the interviews indicate, if anything, a much more measured approach to risk-taking than last year.

More than half of respondents say they are considering investing in "niche sectors", principally because of demographic drivers

After logistics, niche sectors based around various types of residential again dominate the rankings. Student housing, hotels, retirement/assisted living and then serviced apartments came out on top this year.

"The beginning of this year was all about politics but nothing we were worried about materialised, and now you have a situation where every country in the OECD has a growing economy" - major European insurance company

Political stability, thriving economies, and cities that "work on being a city" are what tick the boxes for Europe's real estate industry. This year, most of its major markets are judged to be doing well, with German cities taking four of the top 10 spots in Emerging Trends Europe’s scorecard of prospects.

80% respondents believe that investment into UK property will decrease as a result of Brexit, but this view is less pessimistic than last year (92%). 

One global investment manager stated: "There's no way London is going to lose its place as the financial capital of Europe. We are undoubtedly beginning to see rents soften, but then we shouldn't be too surprised by that. I think it's a short-term blip, and London will remain strong whatever happens."

67% agree that technology, big data and the rise of 'Space as a service' will disrupt the traditional property valuation model. 

The changes in the complexity of real estate as an industry are ushering in new business models and heightening the complexity and risk of decision making and delivery.

The business outlook for Europe in 2018

Emerging Trends Europe respondents made it clear that the focus is on high-quality assets in the strongest markets, but that investors are taking more risks to achieve target returns.

There is more of a sense that prime assets are overpriced, and that finding value right across the continent in real estate will be a continued challenge in this uncertain and unpredictable environment. But despite this, the market remains strong as evidenced by high levels of investment over the course of 2017.

Unsurprisingly, Brexit continues to be a live issue in Europe’s property industry, and although it will be at least partly responsible for investment values falling in the UK during 2018, few question London’s long-term status.

Space as a service - a new direction for occupiers

Respondents believe that space optimisation will be the key focus of occupiers in the year ahead. Occupiers will continue to demand more flexibility and are becoming more willing to pay for that flexibility. The workplace environment will have the biggest impact on occupiers/investors real estate strategy, with over 80% seeing this as having a significant impact over the next 3-5 years.

While physical space and location are still the foundations around which value is created in real estate, shifts in customer expectations are blurring boundaries between sectors and changing how value is delivered. New skills are needed to meet evolving customer expectations.

Urbanisation and densification to remain a key driver for real estate

Urbanisation has been perhaps the most significant influencer of real estate strategies in recent years with many holding the view that this influence will weaken over the coming years. But perhaps the most notable finding from Emerging Trends Europe 2018 is that, with all the changes in the way we live, work and move around, close to 80% of participants believe the densification of cities will continue. This is a welcome marker in an increasingly uncertain world and reflects lifestyle and employment trends as much as transport or environmental drivers. Aligned to this is the return to mixed-use development - driven by urbanisation and the blurring of boundaries between people’s professional and personal lives in today’s hyper-connected world.

The need for a holistic mix of homes, public spaces, transport and commercial development is now a central tenet of successful urban regeneration. From an investment perspective, the interplay between real estate and infrastructure is opening up a new range of ‘real asset’ investment opportunities. Many innovations in real estate are as much about community as the individual.

Contact us

Kees Hage

Partner, PwC Luxembourg

Tel: +352 49 48 48 2059

Julien Ghata

Partner, PwC Luxembourg

Tel: +352 49 48 48 2217

Amaury Evrard

Real Estate Leader, PwC Luxembourg

Tel: +352 49 48 48 2106

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