75% of real estate leaders agree that current valuations "do not accurately reflect" all the challenges and opportunities in the real estate sector, as the gap between market price expectations and accounting valuations continues to widen, according to the latest Emerging Property Trends Europe report from PwC and the Urban Land Institute (ULI).
In addition, a large number of the more than 1,000 industry executives surveyed in the report express fears that "they will continue to plummet", as huge uncertainty continues to pervade the market in Europe, contributing to investment volumes at record lows. MSCI is down -42% from the pre-covid average (2015-2019).
Nevertheless, and with one third of respondents "optimistic about an increase in profitability in 2024", the report indicates an improvement in business confidence compared to the previous year (up 8% of respondents), albeit from a low base and well below long-term averages. The outlook is tempered by the context of sluggish economic growth in Europe and "realistic concerns" of an impending recession.
Returns in 2024
Lisette van Doorn, CEO of ULI Europe, said: "Our report this year highlights the complex challenges facing the European real estate sector and the sense that the sector is on the verge of a serious downturn in demand in key user markets. Opinions are mixed as to what are the keys to a resumption of market activity. Stabilisation of interest rates, a soft economic landing and a decline in interest rates to bring yields back into balance would have an impact, as would increased refinancing levels, which would lead to further difficulties due to higher funding costs, as well as the capex required to bring assets into line with a difficult and uncertain environment.
Gareth Lewis, director at PwC, added: "While the sentiment from the research points to a sector in 'wait and see' mode, it also suggests that we are in an environment and at a point in the market cycle where the rewards could be significant for those brave enough to make the big bets. There is some hope that the stars are aligning, i.e. clarity on inflation, interest rates and valuations, to facilitate greater transaction activity in 2024. However, it is unlikely that there will be a single timetable for this across the various European markets".
Finally, Jean-Baptiste Deschryver, head of real estate at PwC for EMEA, said: "We understand that expectations for debt and equity availability will be mixed in the coming years, with capital needed for refinancings and generally to make the real estate sector fit for purpose. The denominator effect on institutional allocations to real estate, a major impediment in 2023, remains problematic one year on.
Madrid, in third place in the ranking
With so much uncertainty at stake, real estate investors are naturally more careful than ever about how and where they invest their capital in Europe. For many, this means focusing on cities that offer liquidity in times of heightened risk, and so it is no surprise that London (1) and Paris (2) take the top two spots in the report's city rankings once again. The two cities accounted for around 15% of the total volume of real estate transactions in Europe in the first nine months of 2023. And the premium on liquidity allied to economic performance is also evident in other rising cities in this year's survey such as Madrid (3), Milan (6) and Lisbon (8).
Madrid comes third in this year's ranking of overall real estate prospects. The capital appears as one of the fastest growing European real estate markets in terms of investment opportunities over the past decade; it has been in the top ten of the best since 2015. The investment the city has made in basic infrastructure needs, a pleasant climate, flexible development standards and quality of life has paid off for the Spanish capital.
Optimism in the Spanish real estate sector
Similarly, this year's 'Emerging Trends in Real Estate' report shows a slightly more optimistic situation for investors, developers and real estate professionals in Spain. One of the main conclusions drawn from the report is the investment opportunity that exists in Spain, especially in Madrid.
Investors and developers see Spain as a particularly attractive opportunity in three main sectors: Living, specifically in the affordable housing, student housing and hotel segments. This is due to a variety of reasons, the most notable being the high rates of tourism and its share of national GDP; the lack of affordable housing in key cities (Madrid and Valencia), combined with internal migration patterns; the imbalance between supply and demand; and the high profitability of student accommodation in urban centres, where demand for university housing is on the rise.
Despite high financing costs and a decline in real estate transactions, hampered by higher interest rates, investor sentiment as a whole remains optimistic. Compared to other European markets, Spain emerges as a key player in the European/global real estate market, shielding itself from some of the negative shocks present in neighbouring countries due to the consistent and historically higher investment volumes experienced in key regional cities such as Madrid.
