Emerging Trends in Real Estate®: Europe 2021 - An uncertain impact

Investors are turning towards domestic markets

Globalisation has been a constant backdrop to the market for the last decade or so, bringing with it an expectation of high and rising levels of cross-border investment. The Emerging Trends in Real EstateⓇ Europe survey reveals that in 2020, this is changing.

Investors are increasingly turning to domestic markets rather than looking overseas. North American capital is finding its domestic market more attractive than Europe, and the survey revealed a strong expectation that European investors will play a greater role in their domestic markets than in previous years.

One reason is the difficulty of doing adequate due diligence on properties overseas. Cross-border investment has traditionally relied on international travel to view assets and manage investment logistics. As one respondent puts it, "without ‘boots on the ground,’ deploying millions of euros on an uninspected building can feel risky."

Many Asian investors are newer to Europe and lack local teams and so investment flows from Asia have been particularly hard-hit by the reductions in travel. The survey showed 40% of respondents are concerned about deglobalisation.

Shifting fundamentals

One of the more challenging trends to emerge from this year’s survey is the recognition that fundamental market shifts are still playing out. Fear of the unknown has put the brakes on development for most of the industry and plenty of respondents say it is too early to assess what office or retail rents are likely to look like even a year from now.

The pandemic is also highlighting the role of real estate in the health and wellbeing of societies, and this is expected to drive further change. A number of key reasons emerge for this. Many more people are working, shopping, and socialising from or nearer to home. If this becomes a permanent shift, it would strike at the heart of how the industry serves its customers and conducts its business.

Some respondents this year highlight how radical this development has been, with one saying that "the shift from physical to online retail has condensed a decade’s worth of change into a couple of years." Whereas some respondents expect working from home to reduce demand for office space, others expect it to increase in certain areas even long-term, as companies increase the space they allow per employee to allow for permanent social distancing.

The policy response to the pandemic is another variable which may alter market fundamentals. While nobody expects measures such as rent or insolvency deferrals to be permanent, these government interventions have upended the perception that real estate provides secure returns. In the UK, for example, a government-approved moratorium on rent payments has, in the words of one institutional player, “threatened the sanctity of income.” This perception threatens the stability of real estate as an asset class. One respondent comments that the sense that offices and retail property were safe investment ‘seems old fashioned now.’

Uncertainty surrounding the future policy landscape has raised further questions. One private equity player quoted in the survey argues that "as long as the government keeps intervening, allowing tenants not to pay rent, and encouraging banks not to enforce terms, the market standstill could last for a long time."

Changing priorities

Repurposing assets is high on the agenda: nearly three quarters of respondents say that repurposing assets from one sector to another is on their agenda for the next five years. One European respondent explained that “the game going forward will be to make sure that whatever you invest in can be repositioned and repurposed.”

Another explained this shift as a natural response to the current uncertainty, saying, “I think occupiers are going to figure out that the way we use space is going to change and it’s easier to change something that hasn’t been built yet than something that’s actually up there.”

This year also sees a significant rise in concern about assets becoming obsolete, for example due to perceptions that the fall in demand for office space is permanent. Indeed, 41 percent of survey respondents – up from a third last year – are concerned about asset obsolescence for 2021. Nearly half believe the problem will worsen over the next five years.

In response, the sector must consider how it can deliver or repurpose assets quickly, and improve their operational resilience and flexibility. The need to embrace new skills and technology and the levels of automation and artificial intelligence seen in other sectors will enhance operations and make them future-fit.

Net Zero

The built environment has always played an outsized role in society: it is after all part of the physical world in which our lives play out. This year’s survey revealed a growing perception that as societies rebuild after the pandemic, they must do so in ways that minimise harm to the planet. Many governments have already set targets to reach net zero emissions of carbon, and many respondents reflect a growing awareness that the real estate sector must make a contribution to those goals. Climate change and the environment are named by industry leaders as the factor likely to have the biggest impact on real estate over the next three decades.

Nearly 80% of respondents think that energy efficiency, carbon emissions and climate adaption will increase in importance in their portfolios in 2021. Over a five-year time horizon, that number increases, with many believing that the pandemic has provided renewed impetus to the push for sustainability. Some within the sector are turning their attention to what can be done to make retail and office assets more sustainable when they are repurposed.

The shift towards net zero is also driving the attractiveness of buildings which are as self-sufficient as possible, for example generating their own power or processing their own wastewater. This is likely to be a growing area of interest in the coming years.