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Emerging Trends in Real Estate® Europe is a joint survey by PwC and the Urban Land Institute. Now in its fifteenth edition it provides an outlook on real estate throughout Europe for 2018 and beyond.

Rethinking real estate

Overall, an optimistic outlook prevails throughout most of Europe’s property industry, with nearly half of this year’s respondents expecting European economic growth to improve over the next five years.

But the geopolitical backdrop is creating a shift in focus, with concerns moving from the regional to the global.

Emerging Trends in Real Estate® Europe 2018 reveals an industry that is becoming more complex, yet more transparent and accessible. Whatever the outcome, it is certain that the industry will need new skill sets, new ways of collaborating outside traditional industry boundaries and new business models to survive and compete in the new real estate ecosystem.

Key findings

80% think investors are taking more risks to achieve target returns

The key concern for Europe’s real estate industry – as it has been for several years – revolves around the availability of suitable assets. More than three-quarters of those surveyed believe investors are taking more risks to achieve target returns, but the interviews indicate, if anything, a much more measured approach to risk-taking than last year.

More than half of respondents say they are considering investing in “niche sectors”, principally because of demographic drivers

After logistics, niche sectors based around various types of residential again dominate the rankings. Student housing, hotels, retirement/assisted living and then serviced apartments came out on top this year.

“The beginning of this year was all about politics but nothing we were worried about materialised, and now you have a situation where every country in the OECD has a growing economy” – major European insurance company

Political stability, thriving economies, and cities that “work on being a city” are what tick the boxes for Europe’s real estate industry. This year, most of its major markets are judged to be doing well, with German cities taking four of the top 10 spots in Emerging Trends Europe’s scorecard of prospects.

80% respondents believe that investment into UK property will decrease as a result of Brexit, but this view is less pessimistic than last year (92%).

One global investment manager stated: “There’s no way London is going to lose its place as the financial capital of Europe. We are undoubtedly beginning to see rents soften, but then we shouldn’t be too surprised by that. I think it’s a short-term blip, and London will remain strong whatever happens.”

67% agree that technology, big data and the rise of ‘Space as a service’ will disrupt the traditional property valuation model.

The changes in the complexity of real estate as an industry are ushering in new business models and heightening the complexity and risk of decision making and delivery.

The business outlook for Europe in 2018

Emerging Trends Europe respondents made it clear that the focus is on high-quality assets in the strongest markets, but that investors are taking more risks to achieve target returns.

There is more of a sense that prime assets are overpriced, and that finding value right across the continent in real estate will be a continued challenge in this uncertain and unpredictable environment. But despite this, the market remains strong as evidenced by high levels of investment over the course of 2017.

Unsurprisingly, Brexit continues to be a live issue in Europe’s property industry, and although it will be at least partly responsible for investment values falling in the UK during 2018, few question London’s long-term status.

German cities bag four of the top ten spots

Emerging Trends Europe 2018 ranked the real estate markets in major European cities according to their overall investment and development prospects. Berlin retains its billing as the most desirable city, with Frankfurt joint second alongside Copenhagen; and Munich and Hamburg close behind.

Frankfurt, Germany’s financial centre, is starting to see tangible benefits from the UK’s decision to leave the European Union, although some are more sceptical about the scale of the win.

Copenhagen is a noteworthy city tipped to perform well – a result of residential investment rebounding on the back of strong employment growth. Investors are interested in all types of residential in the city, from senior living to student housing and everything in between. Student housing in particular is tipped as a sector to watch in this city, as it barely exists as an asset class here yet.

Space as a service – a new direction for occupiers

Respondents believe that space optimisation will be the key focus of occupiers in the year ahead. Occupiers will continue to demand more flexibility and are becoming more willing to pay for that flexibility. The workplace environment will have the biggest impact on occupiers/investors real estate strategy, with over 80% seeing this as having a significant impact over the next 3-5 years.

While physical space and location are still the foundations around which value is created in real estate, shifts in customer expectations are blurring boundaries between sectors and changing how value is delivered. New skills are needed to meet evolving customer expectations.

Urbanisation and densification to remain a key driver for real estate

Urbanisation has been perhaps the most significant influencer of real estate strategies in recent years with many holding the view that this influence will weaken over the coming years. But perhaps the most notable finding from Emerging Trends Europe 2018 is that, with all the changes in the way we live, work and move around, close to 80% of participants believe the densification of cities will continue. This is a welcome marker in an increasingly uncertain world and reflects lifestyle and employment trends as much as transport or environmental drivers. Aligned to this is the return to mixed-use development – driven by urbanisation and the blurring of boundaries between people’s professional and personal lives in today’s hyper-connected world.

The need for a holistic mix of homes, public spaces, transport and commercial development is now a central tenet of successful urban regeneration. From an investment perspective, the interplay between real estate and infrastructure is opening up a new range of ‘real asset’ investment opportunities. Many innovations in real estate are as much about community as the individual.

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Emerging Trends in Real Estate: Europe 2018