London has the worst prospects for rental growth in 2018 among major European cities, according to PwC and Urban Land Institute’s Emerging Trends in Real Estate 2018 report.
Overall prospects for development and investment in the UK capital next year were only marginally better, landing in 27th place among 31 cities in a survey of more than 800 real estate professionals across Europe.
Ongoing concerns around Brexit meant that respondents from Barcelona, Milan, Warsaw and Helsinki all expected to benefit from investment moving away from the UK. Although there was no consensus on a clear winner in all this, the expectation was that the UK could be affected by the Brexit process for decades, not years.
Despite those concerns, London continues to dominate the investment market, attracting €31bn (£27.2bn) of investment between Q4 2016 and Q3 2017 – more than three times as much as Berlin, the second most popular European city, at €9bn.
Gareth Lewis, real estate director at PwC, said: “The city rankings ask a specific question: where do you see the best returns coming from? That is a slightly different question to where you’re going to be putting your money. The low ranking of London doesn’t mean that it’s not going to dominate the inward investment market.”
The report revealed pressure among investors across Europe to continue targeting real estate despite fears that the cycle is coming to an end. Interviewees said that although prime real estate is overpriced and low yields are unsustainable, there is still relative value compared to other asset classes.
As a result, half of respondents expected equity for refinancing or new investment to increase next year while another 38% expected it to remain at current levels. Only 12% expected debt availability for new investments and refinancing to decrease, and 17% expected debt availability for development to decrease.
This was part of a broader improvement in prospects, where 42% of respondents expected business confidence to increase in the coming year – up from a third 12 months ago.
However, falling yields have meant that 36% of investors expect lower returns next year and there is a greater push toward alternative assets and development to make up the difference.
Lewis said: “There are plenty of things to keep people cautious and thinking hard about how they’re going to make returns going forward. It suggests a lot of hard work for the industry in the year ahead, but there is still a lot of capital coming through.”
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