• 71% of real estate leaders believe Europe will move into recession before the end of 2022 according to new data from the ULI and PwC UK.
• A fall in values is inevitable, according to survey respondents, with pricing between prime and secondary real estate expected to widen.
• Expectations around the availability of equity and debt sink to their lowest level since the global financial crisis.

Real estate business confidence and expectations of profitability have dropped to a low level, reflecting widespread industry concerns across an array of indicators for the business, political and real estate environments.

Emerging Trends in Real Estate^® Europe 2023 is the 20^th annual survey by the Urban Land Institute (ULI) and PwC UK of European real estate sector leaders’ expectations for the year ahead.

Based on the views of around 900 real estate leaders from across Europe, the report found 91% concerned about inflation, closely followed by interest rate movements (89%) and European economic growth (88%). Political uncertainty at the global, regional and national levels are of high concern as well.

In five years’ time, only 13% see inflation being a problem, while interest rates (73%) and growth (76%) remain medium term concerns. From a real estate business perspective, construction costs and availability of resources top the list, with 92% concerned about costs and 84% about resources in 2023. These issues are expected to remain for the longer term with 76% and 73% seeing respective cost and resource problems for the next three to five years.

On the back of this uncertainty, 71% of real estate leaders believed Europe would move into recession before the end of 2022, negatively affecting development activity, availability of finance and investment volumes followed by occupancy, rents and values.

Germany, the UK and the Netherlands look unlikely to escape recession, while France seems more insulated, largely due to how it sources energy. Recession is likely before 2023 for 83% of respondents in Germany, 82% in the UK, 79% in the Netherlands and 68% in Spain. French (45%) respondents are more sanguine.

Confidence in the availability of debt and equity has not been this low since 2012 and 2009 respectively. Respondents believe capital coming into Europe from every part of the world is more likely to decrease than increase. Respondents are most negative about the prospects for debt (70% expect decrease) and equity (63% expect decrease) for development and debt for refinancing or new investment (64% expect decrease).

Interviewee responses point to values dropping in 2023. The coming year could be a great buying opportunity for core and all-equity investors that are still under-allocated to real estate. The consensus is that distress is unlikely to reach anything like the proportions of the global financial crisis, but the rise in interest rates will nonetheless create stress, for example related to the need to repair banking covenant breaches if values decline, significantly higher refinancing costs and the potential requirement to sell assets in response to redemption requests for listed open-end funds.

The fact that distress is not quite as acute as during the global financial crisis might prompt banks to push for sales more quickly, encouraged by the Bank of England’s slotting regulation and Basel III European banking rules. Such sales could crystallise price falls.

From the development perspective, interviews indicate that projects slated for 2023 might be pushed back into 2024 or shelved entirely. This lack of new development is seen by some as a positive for existing assets and their owners.

According to Lisette van Doorn, ULI Europe CEO the market has shifted rapidly over the last few months with the outlook becoming more negative: “Since we conducted the survey and interviews over the summer, which already showed highlighted deep concerns, the industry has become even more worried. But there is still a lot of capital available to invest and mostly not in a hurry, waiting for the right opportunities to arise. For the industry to weather the storm, stock selection is key, in addition to a strong ESG focus, operational skillset and customer focus.”

Gareth Lewis, ETRE Leader, Director at PwC, said: “Though the same cities remain in the top three, the overall investment and development prospects for all 30 cities have declined. London is first for the second successive year, followed by Paris and then Berlin, swapping places from last year. Cities that have risen in the rankings most significantly this year are Madrid, Lisbon and Copenhagen.

“New energy infrastructure tops the sector rankings for the second year, reflecting historically high energy prices and a longer-term trend in which investors rebalance holdings towards alternative assets. The life sciences sector comes second and data centres are third.

“Various forms of housing dominate the top 10, varying from retirement/senior living to social and affordable housing. Interestingly, there is also more concern about housing, with the increasing political uncertainty around policy.”

ENDS

About the Urban Land Institute

• The Urban Land Institute is a non-profit education and research institute supported by its members. Its mission is to shape the future of the built environment for transformative impact in communities worldwide. Established in 1936, the institute has over 46,000 members worldwide representing all aspects of land use and development disciplines.
• ULI’s mission priorities that the organisation will be focusing on over the next three years include:
  • decarbonising the real estate sector and targeting net zero;
  • educating the next generation of diverse real estate leaders; and,
  • increasing housing attainability in communities around the world.
• ULI has almost 5,000 members in Europe across 15 National Council country networks. For more information, please visit uli.org, or follow us on Twitter, LinkedIn or Instagram.

About PwC

At PwC, our purpose is to build trust in society and solve important problems. We’re a network of firms in 157 countries with over 276,000 people who are committed to delivering quality in assurance, advisory and tax services. Find out more and tell us what matters to you by visiting us at www.pwc.com. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see www.pwc.com/structure for further details.