This year marks the beginning of the “new normal”, an era that will be defined more by negatives than by positives, according to Emerging Trends Real Estate Europe 2012, the annual industry forecast published by PwC and the Urban Land Institute.
Property financing will become a major casualty of the measures banks take to tackle regulatory and macroeconomic pressures. Deleveraging will not free up capital for fresh property lending, debt will become more short term and expensive and the need to find alternative sources of funding will become imperative.
The report, which collates the opinions and predictions of more than 600 commercial property professionals across Europe, predicts that in 2012 the property market will sit between depressed banks and a depressed economy in a state of inertia.
Unmanageable situation
“Even the economists admit that they don’t know what is going on,” says the report. “We have realised that political leaders are not smarter or more aware of our problems than we are. We are in a situation that has become completely unmanageable. The amounts are staggering,” the report quotes one of its respondents.
Doing nothing – “sitting on hands” – is considered to be the smartest thing to do in this situation, whether by financiers , fund managers, occupiers, investors and developers, which makes 2012 likely to be a lost year in terms of investment. Although there is equity in the market, it will not be deployed at current prices and yields.
“Assets are only going to get cheaper, so why rush,” was one comment.
Deteriorating sentiment is even affecting global cities such as London, previously regarded as “the gold bar of real estate”.
However, even against this backdrop the report says that doing nothing is not a long-term survival strategy. “Strategies must be created despite there being little faith in the outside world.” This lack of faith in the economy, banks, occupiers, capital values and capital-raising capabilities meant that asking interviewees about their favoured sectors, cities or countries in 2012 yielded not very much.
“Very little can be depended upon or viewed as a wholesale must buy,” the report says. Interviewees preferred to offer “eclectic” investment strategies and to reserve judgements for specific properties rather than whole asset classes. “Real estate has become a very granular business – there are so many different possible outcomes,” said one.
Usual metrics are outdated
One reason is that the usual measures for evaluating real estate assets, such as the quality of the tenant and the yield, can no longer be trusted and could easily deteriorate.
An alternative approach being adopted by investors is to apply a fixed-income style analysis to real estate, assessing the riskiness of the income stream for the full term of the lease. One description was: “It is like seeing property as a corporate bond with a roof. Real estate is not a growth asset but an income stream with a bit of growth. We are buying cash flow – sustainable and growable cash flow.”
Government austerity measures will reduce public sector employment and demand for offices and retail is likely to be affected in the long term. “There’s a big segment of property in Europe where the value of that property is really only the land it is on,” was one response.
Not everybody is so wary, the report points out. In particular, those with asset management capabilities see a wealth of opportunity in offbeat places and sectors this year and with “core” assets in London and Paris “so overpriced”, are moving back up the risk curve. One view is that those who invested recently in core assets in safer cities such as London, Paris and Frankfurt can expect reliable returns but little or no capital appreciation. Overseas investors who bought London assets at keen prices to get a foothold in the market could be about to learn that the UK capital is a volatile market.
As to the alternatives, secondary investment is most likely to succeed where investors have the skill to manage intensively, but a range of non-core longer-term investment targets are emerging, including solar energy parks and wind farms, gas storage, health care and hospitals, data centres and, where investors can take a 10-year view, Turkish retail. In fact, Istanbul is top of the report’s ranking for new investment prospects, but the report says this is symbolic rather than real and a comment on exciting growth potential rather than the property market. It is followed by Munich and Warsaw.
Differing levels of optimism
Of course, views of property market prospects were not uniform in terms of levels of optimism. Emerging Trends found that respondents from France, the Czech Republic and Portugal showed the least optimism, while the most optimistic were Ireland, where respondents felt it had been through the worst, and Turkey.
Overall though, it seems that 2012 will be about staying safe and not straying too far from what you know.
