Dublin third in Europe for real estate investment

05 December, 2018

Dublin has ranked third out of 31 European cities for real estate investment and development according to the 2019 PwC/ULI Emerging Trends in Real Estate Europe report.

The Irish capital has risen from seventh position last year, and 26th position in 2012. The report is based on the opinions of nearly 900 real estate professionals including investors, developers, lenders and advisors in Europe. 

Lisbon takes the top spot for 2019, up from joint 11th place in 2018, followed by Berlin, Dublin, Madrid and Frankfurt.

Dublin

According to the report, the world’s leading tech companies are expanding at pace in Dublin, and explains why the city is so high in the rankings.  Dublin is several years into its recovery, but still has potential despite some questions over supply.

Dublin’s success is not just down to international demand, domestic occupiers have also been very active acquiring space in the last 12 months.  Sites around Dublin airport and Dublin Port are also tipped for strong growth in logistics.

Brexit is a factor also with Ireland’s exporters and retailers preparing to reconfigure supply chains.  The report notes two cities as potentially benefiting from Brexit: Amsterdam and Dublin as potential back-office locations.  These capitals are also seen as offering better value than such European gateways as Paris and Berlin. Nearly half (44%) of all respondents say Brexit will increase real estate investment in the rest of the EU, while 78% of all respondents say Brexit will decrease real estate investment in the UK.  

Ilona McElroy, PwC Ireland Real Estate Tax leader, commented: “The report highlights that office yields have compressed to four percent for prime assets, with strong investment from Asia, Europe and the US. Office rents have reached €700 per square metre per annum, although those surveyed feel they may now have stabilised with sufficient development to meet demand.  

"Demand in Dublin is also increasing for mixed-use expansion.  A National Children’s Hospital and a Digital Hub for start-ups is planned next to Diageo’s St James' Gate site, for example.  The LUAS line extension north west to Grangegorman, represents an opportunity for developers to provide more student accommodation.”

Europe

Cautious European real estate investors look for a mix of healthy occupier markets and new asset classes as the sector edges towards end of the cycle - ULI/ PwC’s Emerging Trends in Real Estate Europe 2019.

The hunt for secure long-term income is driving European real estate investment as the industry hedges against potential interest rate rises and an uncertain geopolitical backdrop, according to Emerging Trends in Real Estate® Europe 2019.

John Bruder, Chairman, ULI Ireland, said: “Investors are becoming more cautious, and investment and development preferences are more and more driven by real estate fundamentals such as the economic growth prospects and health of the local occupier markets. Sentiment is more negative on cities and countries facing higher (geo) political risks, which creates uncertainty that investors don’t like. Brexit is a clear example in this respect, where a number of respondents feel the UK will lose some of its competitive advantage, which impacts investment and development prospects”

This caution is also reflected in the expectations related to the availability of equity and debt, with around 28% of survey respondents believing that the amount of equity available for refinancing or new investment will increase, compared with 50% last year. However, last year’s confidence was particularly high, and there are few current concerns about liquidity, other than for challenging sectors such as retail, as demonstrated by the majority (54%) who believe the availability of equity will be about the same.

One of the main barriers to investment continues to be the availability of suitable assets as capital continues to flow into Europe, with strong increases expected from Asia. This is putting pressure on the core end of the market with 70% of survey respondents either agreeing or strongly agreeing that prime assets are over-priced.

Top 5 European cities (Overall prospects) 2019 2018
Lisbon 1 11 (joint)
Berlin 2 1
Dublin 3 7
Madrid 4 5
Frankfurt 5 2 (joint)

Interest in alternative asset classes continues to rise in face of tough capital markets environment

One response to this more challenging capital markets environment is that investors are turning to asset classes that are experiencing structural tailwinds and which are less likely to be affected by the current cycle. But Emerging Trends in Real Estate® Europe suggests that this is only part of the story.

Alternative real estate and residential – in all its forms – dominate the sector preferences of survey respondents, marking a remarkable shift in industry sentiment over the past few years.  In 2015, just 28% of survey respondents said they would even consider investing in alternatives. This year, almost 60% of respondents are already investing in alternatives in some way, and 66% wish to increase their holdings.

Joanne Kelly, Real Estate Leader, PwC Ireland, said:  “The last five or so years has seen a remarkable shift by investors towards alternative real estate, or ‘niche’ sectors. In part this is clearly driven by where we are in the cycle and the search for income. But it is also a response to the innovation that is disrupting the more traditional sectors and a number of long term trends such as demographics and urbanisation.”

Residential stands out in this respect, with seven out of the top ten sectors preferred for investment and development, based on some form of residential, ranging from co-living, student housing, retirement living to social housing and regular residential housing.

Kelly added: “Investors are seeking greater exposure to sectors that are supported by strong, more predictable demographic and infrastructure drivers, such as residential related sectors - and this requires them to focus more on the operational management of the assets.”

In addition to residential, logistics and niche sectors such as data centres and flexible offices are making up the top ten. Logistics clearly continues to benefit the growth of e-commerce.

Sector prospects in 2019 - top ten

Overall ranking Sector Investment ranking Development ranking

1

Co-living*

1

1

2

Logistics facilities

3

2

3

Retirement/ assisted living

4

3

4

Flexible/serviced offices

5

4

5

Data centres*

2

5

6

Student housing

6

6

7

Private rented residential

8

7

8

Serviced apartments

7

8

9

Housebuilding for sale

13

9

10

Social housing

10

10

*a significantly lower number of respondents scored this sector

European cities ranked for investment and development prospects

The annual city rankings included in Emerging Trends in Real Estate® Europe reflect the industry’s appetite for smaller, “late-cycle play” newcomers combined with some of the larger, established markets, while at the same time considering geopolitical risks. Lisbon jumped ten places to take the number one spot in a late-cycle play, with interviewees also praising the city’s quality of life and political leadership.

The more established German cities still dominate the top ten with Berlin taking second place followed by Frankfurt, Hamburg and Munich ranked five, seven and ten respectively. However, for some, the year-on-year popularity of these cities is beginning to take its toll with many respondents citing overpriced investments in these locations.

The rest of the top ten is largely made up of cities, such as Madrid, Amsterdam, Vienna and Dublin that score positively on real estate fundamentals and rental growth prospects, but in many cases also on quality of life, connectivity, innovation potential and attractiveness to talent.

European cities - overall prospects 2019

Overall ranking Sector Investment ranking Development ranking

1

Lisbon

1

1

2

Berlin

3

2

3

Dublin

2

5

4

Madrid

6

4

5

Frankfurt

5

3

6

Amsterdam

7

8

7

Hamburg

9

6

8

Helsinki

4

13

9

Vienna

8

11

10

Munich

14

7

Despite investment volumes and occupier demand for offices in London holding up well, Brexit continued to overshadow London’s short-term prospects, with 70% of Europe’s senior professionals believing that the UK’s ability to attract international talent will fall following the March 2019 deadline whatever the final deal. However, London has attracted by far the most investment (€20 bn) between Q4 2017 and Q3 2018 compared to other EU cities (Dublin: €4 bn).

Joanne Kelly commented: “London and the UK continues to attract more capital than any other European city, which is at odds with the increasing volume of concern expressed by many relating to the uncertainty around Brexit. A notable feature of the interviews was the rather more sanguine view that some non-European long-term investors took on the impact of Brexit compared with long- term European or domestic investors.”

Social value of real estate continues to grow in importance

The report also examined the growing influence of social value alongside the financial returns from investments. Nearly 60% of survey respondents believe the industry is moving towards using a wider range of non-financial measures to assess the value of real estate and real estate businesses. Similarly, 59% agree that non-financial metrics are increasingly important in measuring returns.

The current outcome of this trend is a greater focus on combining uses such as co-working facilities, retail and last-mile logistics, with non-commercial uses and placemaking elements, such as affordable housing, community centres, public spaces and childcare facilities.

However, it is expected to flow through into all aspects of investment. “The survey shows that the ability to balance societal and financial gains will be the next big differentiator for industry players, with investors favouring those that can demonstrate this through all their processes,” said John Bruder.

Other key findings from the survey include:

  • 76% of all respondents said that Brexit will increase business relocations to the rest of Europe.
  • 68% expect short-term interest rates to increase; 81% expect long-term interest rates to increase.
  • 21% say they are targeting higher returns in 2019 compared to 2018; 32% say they are targeting lower returns in 2019.
  • Just 10% say that European economic growth will improve in the next 3-5 years.
  • Shorter and more flexible leases (57%); technology readiness (55%) and promoting health and wellbeing (43%) were cited as the top three factors having a significant impact on influencing real estate strategies in the next 3-5 years.
  • Asian investment into European real estate will continue to grow.  For example, 69% think investment from Asia into Europe will increase in 2019, and is the highest proportion from any region.

ENDS

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