For the fourth year in a row Berlin has taken the top spot in the city rankings of the annual Emerging Trends report produced by ULI and PwC. Frankfurt rises to second place, tied with Copenhagen, also higher. Munich is fourth while Madrid jumps to fifth place.
The Emerging Trends in Real Estate Europe 2018 report, published jointly by the Urban Land Institute and financial adviser PwC, is based on the views of over 800 real estate professionals in Europe. Overall, the industry is cautiously optimistic about European business prospects in 2018. Around half of respondents predict that profits and headcounts will rise, and 42% expect an increase in business confidence – a 10pt jump from last year.
Berlin further established its dominance as an investment destination among European property professionals, the report noted. Frankfurt moved up after a year of solid growth, much of which came from the financial sector in the aftermath of Brexit – while Copenhagen’s booming residential sector has captured the attention of the international real estate industry. Munich, where prices have risen and yields plummeted the most of any German city, still remains attractive for investors and developers however. Spanish capital Madrid is benefiting from positive office rental growth prospects.
In sectors, logistics has firmly established itself as the most desirable for investors next year, while niche residential segments such as student housing, senior living, and healthcare are also seen as good bets. Investors seem to be shying away from retail and office, the two traditionally dominant sectors; the already-declining perception of retail has been negatively affected by trends in the US, while suburban offices and business parks are expected to be left behind by increasing urbanisation. Shared and serviced offices however are attracting increased interest.
But the report points out the increasing complexity of how the real estate industry conducts business, brought on by new customer demands and the concept of ‘space as a service’. Real estate companies will require new skillsets to harness big data and new technology to improve decision making, management, and valuation processes. “Technology is increasingly being viewed as one of the key trends affecting real estate,” said Lisette van Doorn, Chief Executive of ULI Europe. “We are seeing a growing emphasis on the impact technology has on all aspects of real estate, ranging from the changing behaviour of users to the real estate management and valuation process, and the new skills needed to successfully adapt to this new reality.”
Gareth Lewis, PwC real estate director, said: “Our interviews with industry leaders reveal a sector looking more closely at disruption and beyond the traditional timeframe of the property cycle. Businesses are being challenged to remain relevant in the face of increasing disruption, to respond to emerging new market entrants and to seize the opportunities presented by forming new partnerships and business models.”
The views on the top five European markets are based on the following assessments:
1. Berlin. The German capital’s population growth and vigorous business expansion, with the technology sector at the forefront, are predicted to sustain the already high real estate values. In addition, an educated workforce and a reputation for creativity are major selling points.
2. Copenhagen. The surge of four positions is due in part to a strong residential sector, where investment has rebounded as low interest rates and continuing urbanisation have driven prices above pre-crash levels. In addition, its popularity with tourists, consumers, co-working companies, plus retail and food and beverage brands, make it all the more appealing for investors. Copenhagen has also become more open for international investors.
2. Frankfurt. Up one position, Frankfurt has been one of the biggest beneficiaries of Brexit. The Association of Foreign Banks in Germany predicts 3,000 to 5,000 new jobs will be created in the wake of the UK’s decision to leave the European Union, and four major banks have already selected the city for their EU headquarters. Frankfurt saw a surge of investment activity in 2017, a trend that is expected to continue in 2018.
4. Munich. Though one of Europe’s most expensive markets, Munich still ranks highly among investors. Halfway through 2017, office vacancy hit a rock-bottom 4%, which has encouraged further development. With high tenant demand and limited supply in the city centre, some investors are counting on strong rental increases.
5. Madrid. After a cycle of yield compression, office rental growth is finally starting to come through, helping the city jump four places in rankings. On the back of a very positive economic outlook, with Spain’s GDP growth at 3% over the last year and expected to stay the same for the next two years, rents are rising and there are opportunities for development.
The next most popular cities in the ULI/PWC Top 10 are: Hamburg, Dublin, Stockholm, Luxembourg and Amsterdam.