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www.pwc.com/lu
European Real Estate
Trends 2012
22 March 2012
Luxembourg
The ninth annual report
A joint project of the Urban Land Institute (ULI) and PwC
USA, Asia and Europe
• An outlook on European real estate Investment and development
trends, real estate finance and capital markets, property sector
metropolitan areas (city rankings) and other real estate issues;
• More than 600 participants: surveys (386) and interviews (310);
• Investors, developers, property companies, lenders, brokers and consultants;
• Representation from European (1 country or Pan-European) and global
players and well represented over countries;
• Including interviews with local players,
… annual trends/graphs, ratings and numerous quotes.
European Real Estate Trends 2012
PwC
March 2012
2
2007
“If 12 o’clock is the top of the cycle, we are at five or ten
minutes to 12”
2008 “Fear is back”
2009 “The going gets tough”
2010 “Expect a long, slow haul.”
2011 “Adapt or die”
2012 US: “long grind to
recovery”
Asia: “From a glass half
full to a glass half empty”
Europe: …
European Real Estate Trends 2012
PwC
March 2012
3
• Depressed appetites:
- The Economy;
- The Banks.
• An economic crisis and uncertainty about the future of the euro
have left the European Real Estate industry in limbo: Paralysed by Economic
Uncertainty;
• 2012 marks the beginning of the “new normal”;
• “How long will this take?”
European Real Estate Trends 2012
PwC
March 2012
4
“Uncertainty and challenges”
Key challenges facing Europe’s real estate industry in 2012:
• How will regulatory measures affect banks’ willingness to
make commercial loans?
• Will sovereign debt issues trigger a release of assets by banks?
• Sustainability is becoming essential to occupiers that are making moves
in 2012.
European Real Estate Trends 2012
PwC
March 2012
5
Debt will be less available in 2012.
“The banks have just been kicking the can along
the street.”
Lending will be only to existing customers with
strong relationships, primarily to refinance or
extend existing positions.
Some borrowers may be with the “wrong” banks
if those announce their withdrawal from
commercial real estate lending.
European Real Estate Trends 2012
PwC
March 2012
6
• Deleveraging will not free
up capital for fresh property
lending;
• Debt
will become more
short term and expensive;
• Costs of regulation will be
passed on to borrowers.
European Real Estate Trends 2012
PwC
March 2012
7
Equity: Views are much more positive
• Institutional investors: 65% believe
that equity will be moderately more
available;
• Germany and France rated highly;
• Comingled, blind pool funds are out of
favour;
• SWFs and pension funds pair up with
leading RE fund managers and REITs;
• Investors go with fund managers who
are either very big or niche players.
European Real Estate Trends 2012
PwC
March 2012
8
• Investors continue
more demanding;
to
become
• Investors want real hurt money
from the manager;
• Big institutional investors want to
invest through new types of
segregated
accounts,
club
deals and joint ventures;
• Good prospects for listed sector,
but trading at discounts restricts
new capital raises;
• The people who are still investing
are the long-term buyers of
income;
• Both the fund model and the
expertise of the managers is under
scrutiny.
European Real Estate Trends 2012
PwC
March 2012
9
Distress: Will they or won´t they?
• “Banks were waiting for a better day. There isn‘t going to be a better
day. The extend-and-pretend era is coming to an end”;
• Whether the anticipated “flood” of assets will occur is another
question;
• “Convergence on pricing will happen, but it will be the banks coming
down on price rather than investors paying more.”
European Real Estate Trends 2012
PwC
March 2012
10
European Real Estate Trends 2012
PwC
March 2012
11
Markets to Watch
European Real Estate Trends 2012
PwC
March 2012
12
Existing property performance
•
“Core is so overpriced”;
•
There’s a big segment of property
in Europe where the value of that
property is really only the land it is
on;
•
Keep buildings occupied;
•
“We
are
seeing
landlords
increasing the rent-free periods for
up to 2 years on a 5 year lease.”
European Real Estate Trends 2012
PwC
March 2012
13
Investment Prospects
• Istanbul holds firm in the top spot
for
new
investment
development prospects;
and
• London suffered declines in all three
categories;
• Moscow has jumped in the ranking;
• Over half the cities ranked recorded
a lower investment score than last
year.
European Real Estate Trends 2012
PwC
March 2012
14
The top cities tend to be either
in western or northern Europe
or in growing regions to the
East.
European Real Estate Trends 2012
PwC
March 2012
15
• Although Istanbul tops the ranking for new investment prospects, its
attractiveness to investors is perhaps more symbolic than real;
• More a comment on its exciting economic growth prospects than a
sign that capital is about to flood to that corner of the continent;
• Turkey is “the Brazil of Europe”.
European Real Estate Trends 2012
PwC
March 2012
16
The German market
Munich is one of Europe’s safe havens:
a “deep and liquid market” and “more stable” than Frankfurt.
European Real Estate Trends 2012
PwC
March 2012
17
London and Paris
• London suffered declines in all three
categories this year, dropping 8 places for
new property acquisitions, 7 places for
existing performance and 6 places for
development;
• “Today London is the safest of havens that
there is. But once the world is again stable
and everyone pulls their money back home,
that’s when we will see, how oversold it
is”;
• “I like London, but I don’t see a lot I like”;
• UK and French capital cities could have
reached a pricing peak.
European Real Estate Trends 2012
PwC
March 2012
18
The Southern League
“Athens is probably best avoided”
Italy’s borrowing costs are creeping up to
unsustainable levels.
Cities at the bottom of rankings, in light of
concerns over the financial health of their
countries, does not mean capital will totally
avoid these markets.
European Real Estate Trends 2012
PwC
March 2012
19
Investors will favor asset-led, deal-by-deal approaches rather
than a focus on whole countries, cities or sectors
European Real Estate Trends 2012
PwC
March 2012
20
Best sectors for property acquisitions
European Real Estate Trends 2012
PwC
March 2012
21
2012 is about finding new opportunities
Longer term, non-core:
• Healthcare, hospital and data centres (stable);
• Solar energy parks and wind parks (growth);
• Gas storage facilities.
Short term, non-core:
• Buildings in need of refurbishment on the edges of prime districts in
major cities;
• Budget hotels (buy secondary offices and convert);
• Mezzanine financing for residential developers;
• Homes in London to be resold to wealthy individuals from Greece
and Italy.
European Real Estate Trends 2012
PwC
March 2012
22
www.pwc.com
Unlisted funds – Lessons
from the crisis
Report for the Association of
Real Estate Funds
Lessons of the crisis
for real estate funds
• PwC study, for UK Association of Real estate Funds (AREF); released
January 2012;
• Open-end and closed-end real estate fund models have largely weathered the
storm, but full consequences of the crisis have yet to play out;
• How fund managers dealt with the fundamental problem of providing
liquidity in an illiquid asset class will affect their futures;
• Rapid fall in RE values following summer 2007 exposed fund models to
unique degree of stress --> governance and communication challenges;
• Inherent inertia in movement of capital due to the cost of moving out of open
or closed-end funds;
• Investors have withdrawn money from underperforming open-end funds and
used secondary market to sell interests in funds, but to limited extent.
European Real Estate Trends 2012
PwC
March 2012
24
Closed-end fund tensions
• Model is by definition relatively inflexible;
• Investors make a commitment for a fixed period, after which the
assets will be realised and capital returned;
• Gearing increases volatility: boosting returns if things go well, but
also increasing risk;
• Model's timing limitations was concern during downturn 2007:
- Loan-to-value covenant breaches could not be repaired by
drawing additional capital as funds were outside the
investment/commitment period, and reluctance by fund managers
to sell assets when at bottom of the market.
European Real Estate Trends 2012
PwC
March 2012
25
Liquidity issues for open-end funds
• Providing investors with theoretically liquid investment in a
fundamentally illiquid underlying asset class carries risk;
• Significant requests for redemptions from investors as the market
declined, posed liquidity problems: varied timing and process of
suspension;
• Reluctance by fund managers to sell at bottom of the market (and
interest to retain assets to maintain fees), and diverging interests by
investors.
European Real Estate Trends 2012
PwC
March 2012
26
Judging trade-offs
• Creating/managing an RE fund = making compromises and picking
good assets;
• To balance liquidity, volatility, performance and risk:
- Investors' objectives vary and change over time;
- Changes due to: increased cross-border investing, more
multi-managers, development of fund of funds, growing
importance of defined contribution pension schemes;
- Paradox: easiest time to raise funds is at the top of the cycle, but
also most difficult to spend it wisely; equity-raising teams are
regarded for raising additional equity, whereas investment teams
are rewarded for performance.
European Real Estate Trends 2012
PwC
March 2012
27
Transparency and representation
• Transparency between fund managers and investors is key;
• Steps have been made, but investors feel quality could still improve;
• General perception that closed-end funds are less transparent than
open-end funds: managers need to address this;
• Question: should investors be independently represented? the voice
of smaller investors should be heard.
European Real Estate Trends 2012
PwC
March 2012
28
Final remarks
A big Freeze?
… uncertainty how long the recovery will take
… the key is the banks
… 2012 could be the year that investors have been waiting for, and asset
and loan sales will come.
European Real Estate Trends 2012
PwC
March 2012
29
To view full report visit: www.pwc.com/emergingtrends
Any further questions, please contact:
Kees Hage
Email:
[email protected]
Telephone: +352 49 48 48 2059
http://www.pwc.co.uk/real-estate/publications/unlisted-funds-lessons-fromthe-crisis.jhtml
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