Emerging Trends in Real Estate Europe

Emerging Trends in Real Estate® Europe 2022, launched in Ireland today, is the 19th annual survey by PwC and the Urban Land Institute (ULI) of European real estate sector leaders' expectations for the year ahead. It reveals a significant leap in confidence going into next year, although the longer-term outlook is characterised by uncertainty with many still coming to terms with the radical changes to the business of real estate brought about or accelerated by COVID-19.

The report, based on the views of 844 property professionals, records the highest levels of business confidence since 2014 and a doubling in positive outlooks since the same time last year. This reflects a broad sense of relief and short-term optimism that the industry has remained resilient during the pandemic and that real estate remains a favoured asset class. Around half of respondents think that business confidence (52%), profitability (49%) and headcounts (53%) will rise in 2022.

For many, this means the performance of real estate looks relatively strong for 2022 with higher forecast returns than a year ago. This level of confidence is further supported by continuing strong investor demand with both the availability of debt and equity expected to be plentiful, albeit with significant differences between sectors, depending on which performed well during the pandemic and those that suffered significantly.

However, there is also a sense that the short-term relief around getting back to a more normal business environment is masking uncertainty and volatility in the mid-term.

Kevin Nowlan Chairman of ULI Ireland and CEO of Hibernia REIT commented: "There is positivity in the real estate market with good investment opportunities in many capitals including Dublin. While headwinds exist such as economic uncertainty, labour and supply chain challenges, surging energy costs and adapting for a sustainable environment, nevertheless, the real estate industry is learning to live with COVID-19. Demand for a variety of real estate sectors remains strong with investment returns overall looking up."

In the short-term, the greatest wider business uncertainties relate to cybersecurity at 67% of respondents and a mix of inflation (59%) and interest rates (55%). The most concerning real estate business issues for 2022 are construction costs and resource availability (88%), availability of suitable land and assets (66%), sustainability and decarbonisation requirements (61%). Many of these concerns will impact construction prices and delivery schedules, just at a time when the industry wants to resume delayed developments or advance repurposing initiatives.

Against this mix of uncertainty and relief, 59% of survey participants expect to be net buyers of real estate assets. This is up on last year (55%), partly reflecting the confidence factor and partly the inherent attraction of real estate versus other asset classes.

Dublin

Dublin is the joint 5^th (with Paris) most active real-estate market in Europe for capital invested—with €3 billion of capital inflows—after London, Frankfurt, Berlin and Munich. Dublin also moved to 13^th position for overall real estate prospects, from 11^th position last year and 26^th position in 2012 out of the 31 European cities ranked. Opportunities for real estate in Dublin and Ireland continue, particularly as we see continued below-zero interest rates.

Joanne Kelly Real Estate Leader at PwC Ireland said: "Dublin may have slipped two places to number 13, from 11 last year, but it maintains its 'lustre' for real estate investment.

The slippage may reflect that the gains from Brexit have now largely been realised. A number of companies have relocated and opened new EU head offices in Dublin. Dublin and Ireland remain a very favourable location for real estate investment. We have a highly skilled English speaking workforce, a pro-business economy and we are part of the EU with access to over 300 million consumers".

"Despite the pandemic, real-estate businesses in Dublin and Europe are looking forward with confidence. A major part of the recovery and future shape of the industry in Dublin and Europe will be driven by the response to net zero and the ESG agenda more broadly. With 61% of European survey participants indicating concerns about the sustainability and decarbonisation challenge, up from 49% last year, the challenges here in Ireland are every bit as large, or larger, than those associated with finding the post pandemic new normal. There is a great opportunity for the industry to play a major role in finding new sustainable ways for how we live and work".

European cities overall prospects 2022 – top 10

London comes top overall for investment and development prospects in European city rankings, ahead of second place Berlin and reversing last year's top two positions. Paris remains in third place.

The UK capital benefits from the depth of its market and undoubted gateway status, but this year a widely perceived yield gap of around 1% between London offices and their continental equivalent gives it an advantage in value for money. Individual comments suggest confidence in London's ability to reinvent itself as a base for technology and life sciences.

Berlin, in second place, shares the robust economy and transparency of the other German cities in the top 10, while having its own distinct appeal, particularly for international investors. Like last year, Paris ranks third, reflecting its gateway status.

Sector prospects in 2022 – top 10

The niche sectors have dominated the top end of the 'top 10' list even though they are currently a small part of the market. New energy infrastructure topped the sector rankings followed by life sciences with data centres also garnering enthusiasm among investors.

At the same time, there is no consensus yet on the future of offices, with some respondents enthusiastic about the future of flexible, prime assets, while others envisage an inevitable contraction in overall demand. There will be a lasting increase in time worked remotely, according to 85% of survey respondents, while 82% see a continuing role for HQ buildings in conveying culture and attracting talent and 74% see a growing valuation gap between primary and secondary offices.

Organisational change key priority for majority industry leaders

This year's survey shows that organisational transformation is a key five-year priority for 68% of respondents, driven by evolving relationships between landlords and tenants in every sector. The strongest influences are real estate as a service and changing customer demands, both cited by 89% of respondents. The third-ranked influence with 81% is the ESG agenda.

Expansion of the skills base is seen as fundamental to a meaningful and lasting organisational change by 73%. Interviewees said that talent is needed from outside the real-estate industry to integrate technology, ESG and service culture.

Technology is seen as critical to transformation by 92% of respondents.