ULI: Emerging Trends in Real Estate Europe 2021 – highlights

“An uncertain impact”, this is the scenario projected for the real estate industry in Europe in 2021 by the Urban Land Institute‘s Emerging Trends in Real Estate report, the most important independent non-profit real estate organization, a milestone for real estate communities.

Everyone agrees that the Covid-19 will not bring any new developments in the real estate industry, but it will certainly change the way we live and work. It will do so by accelerating trends occurring in recent years which, however, will be influenced by the spectrum of new pandemic waves.

However, real estate remains one of the few asset classes that can still generate acceptable returns in times of low or negative interest rates. For this reason, due to economic instability, institutional investors are expected to take a particular interest in core real estate, similar to what happened after the 2008 crisis.

The pandemic will also pose immediate challenges for the office and retail sectors, accelerating current trends in the long term in a world where “more remote work” and “more online shopping” are to be expected.

The security of returns from real estate will be crucial for investors. In order to contain the onset of arrears, the latter will be increasingly careful in assessing not only the quality of the tenant, but also any risks associated with the activity carried out by the latter inside the property. As a result, although it is still too early to assess the possible impact on prices, there is a tendency to increasingly consider real estate property as a “service” and/or as a real operating asset class.

In this context, for 2021, caution is to be expected in the decisions of real estate investors. Decisions that will also be influenced by the geopolitical circumstances linked to Brexit, the US presidential elections and trade disputes.

While it is true that in Europe the real estate sector is in a cycle of substantial balance between supply and demand, the more or less timely and effective policies launched by national governments regarding the pandemic will also have an impact, in the short or long term, on real estate transactions and values.

Places and sectors to invest

From this perspective, Germany, “back in action” thanks to the effective way it has approached the pandemic, confirms itself as a “safe haven” for brick investors. Berlin, which undermined Paris’ record in 2020, is in the lead. However, the market will continue to have confidence in London and Paris, especially for the liquidity that these cities are able to provide investors with in the long term.

Moreover, the sector is beginning to see favourably, in the post-Covid world and as a result of the foreseeable relocation of many companies, even small and medium-sized cities, but only those that are able to guarantee excellent connections and transport.

Companies will make increasing use of technology in their daily business. For this reason, data centres and logistics are the asset classes that will benefit the most from the effects of the pandemic, mainly due to the rampant and unstoppable digitisation across Europe, which will be reinforced in the final quarter of 2020.

Residential income housing, however, remains an evergreen, thanks to the traditional security of its yields.

Finally, real estate seems to have at last understood its fundamental role within society. Issues such as diversity, inclusion in the workplace and environmental protection are being addressed, to the benefit of strategic investments that are increasingly “systemic” and oriented towards ESG (Environmental, Social and Governance) policies compared to the classic specialist funds and products of the past.

The latest news on the anti-Covid vaccine and a renewed confidence in the future prospects, as also confirmed by the positive performance of the stock markets, could also significantly change the forecasts contained in the ULI report.

Real Estate Capital Markets

Due to the travel restrictions due to the Covid-19, domestic investors are expected to grow in the short term compared to international investors. In the latter case there will be a predominance of Asian capital over North America and Canada.

transactions per country in europe q3 - q4
Credits: Urban Land Institute – Emerging Trends in Real Estate Europe 2021

The cities with the most active markets between the last quarter of 2019 and the third quarter of 2020 are the following, with London in the lead (2 billion €), Paris second (13 billion €), Milan in seventh place with a total of 4 billion €.

most attractive real estate markets 2021
Prospetti immobiliari europei globali
Credits: Urban Land Institute – Emerging Trends in Real Estate Europe 2021

Asset Classes to focus on

Favoured by the growth in global digitisation resulting from Covid-19, data centres, logistics and life sciences are the 3 prospects segments on which to focus, while it is expected that only in the short term there will be a slowdown in some asset classes that have grown considerably in recent years, such as student housing, hotellerie and co-living, which have been strongly affected by the lockdowns due to the pandemic.

Read more: What can we expect from the real estate post Covid-19 market?

The offices, not yet reduced in value, remain an asset class to invest in in the future. However, they will have to be rethought (space, air quality, etc.) to keep pace. In any case, it is common opinion that Headquarters will remain indispensable to cultivate talent and create a corporate culture.

For the retail sector, a reduction in fees and prices is to be expected, especially in shopping centres.

Prospects per sector in 2021 - Emerging Trends Europe
Credits: Urban Land Institute – Emerging Trends in Real Estate Europe 2021

Markets to watch out for

Despite lockdowns due to the pandemic, the collapse of economies and an uncertain future, the ranking of the most dynamic cities on the market has not substantially changed compared to last year.

In the top 10, Berlin takes the lead while the queen of 2020, Paris, drops to third place. The capital of Germany is the city that everyone is looking for, especially in the office segment, where rents are rising. The other three German outposts – Frankfurt (4), Hamburg (6) and Munich (7) – rank among the top ten European cities. They are favoured by optimistic forecasts about Germany’s economy. Silver medal for London which, together with Paris, always maintains a high number of affectionate individuals.

The value of investments in Madrid, which performed much better last year, lost importance. This is no surprise, however, as Spain and Portugal rely heavily on tourism. The lack of migratory flows in 2020 had a major impact on their economy. Not surprisingly, Barcelona and Lisbon (9 and 10 in 2020) fell to 13th and 15th respectively.

Focus on France

In particular, Paris is on every investor’s wish list, especially for logistics, residential and offices. The “Grand Paris” infrastructure project, a 26 billion euro flagship, and the 2024 Olympics are often referred to as a plus of the Ville Lumière. Greater caution on La Défense, at this time characterised by an oversupply.

The outlook for Lyon (21), the second most attractive city in France, similarly to Manchester, Birmingham and Edinburgh has not changed since 2020. This is partly due to the smaller size/liquidity of these cities, which the classification criteria take into due consideration.

ULI Emerging Trends Europe - Cities to invest 2021 - France

Read more: Massimo Cimatti at the Re Mind webinar: The cultural tourism project by Agedi Group

Focus on Italy

Surprisingly, Milan is back in the top 10, in seventh place, recovering 5 positions compared to last year. Rome is still struggling to attract investors’ confidence, placing 23rd. Many, however, believe that Rome is the “new” city in which to invest, currently at the lowest point of the economic and social cycle.

It is curious the different perception of investors towards the two flagship cities of the Italian “Boot”. Milan, which has returns in the office segment as low as those of Germany’s main cities, is seen as a “Nordic” city. Located in Lombardy, one of the richest and most populous regions in Italy, it is a prime target for logistics operators. Unfortunately, the same cannot be said of the capital.

ULI Emerging Trends Europe - Cities to invest 2021 - Italy

Focus on Luxembourg

Luxembourg is in mid-rankings in 17th place, being particularly interesting in the office sector, with prices constantly rising.

ULI Emerging Trends Europe - Cities to invest 2021 - Lussemburgo