The real estate hot spots shift towards second class markets

After 2014`s optimism was messed up by the economic and political events that had occurred in Europe, the real estate investors are changing their perspective for 2015 and are looking to markets and assets that used to be considered secondary. This is one of the conclusions drawn by the real estate market studies published at the beginning of the year. Romania is the best example for searching and enhancing the value of the opportunities provided by the once secondary market. In 2014, Romania had the greatest real estate head start in all Central and Eastern Europe, excluding Bulgaria. The value of real estate deals in the CEE area has dropped with 13% in 2014, but the most recent CBRE report indicated that Romania had a 2.2 times increase, the greatest so far.

A new real estate axis: Madrid, Amsterdam, Birmingham, Athens

“Real estate investors shall have to do some delicate rope walking in 2015”, says Simon Hardwick, partner of PwC Legal, real estate responsible and one of the authors of Emerging Trends in Real Estate® Europe 2015, produced by Urban Land Institute (ULI) and PwC. Nevertheless, this does not mean an investments blow back, but more of a strategy to identify and capitalize new opportunities. “The fierce competition on the main European real estate markets for class A assets determines the investors to shift their attention towards recovering markets and second class assets”, explains the Pwc report. According to this source, there is a growing interest of the real estate investors in some of the cities that were fully injured by the recent recession and are now suddenly climbing the tops. For example, Spain`s capital, Madrid is such a destination, also Athens, Birmingham, Amsterdam or Lisbon are other relevant examples.

While the ULI and PwC experts mark the cities that stir an increasing interest, Colliers` experts picture a slow growth scenario for the real estate market in 2015, following the consequences of 2014 when the divided the markets got divided into several “risk” categories due to the uneven growing pace of the European countries. The analysis carried out by Colliers has confirmed that cities like Madrid, Amsterdam, Barcelona or Dublin become of interest for the real estate investors, mainly because these markets are going through an economic recovery process, therefore the feeling of trust is also coming back. Capitals such as Paris or Berlin maintain their stable level regarding rents, while areas like Southern Europe, Russia or Ukraine are considered “markets under pressure”, mainly due to the economic uncertainties they are facing.

Identifying new opportunities and paying increased attention to second class assets are all consequences of the fact that, despite Europe`s economic doubts, real estate investments continue to be considered profitable business. “This year, 70% of investors are expecting a larger capital inflow in search for the best business opportunities out there. The greatest problem they anticipate is deficit equity, followed by the challenges brought in by regulations and financing costs”, explains the Emerging Trends in Real Estate® Europe 2015 study. The study also states that another consequence is that real estate investors who own Asian and North American capital – from sovereign investment funds to pension funds – are shifting to less competitive environments and are focusing on second class assets and development opportunities.

The Pwc report authors believe that once trust in real estate markets had come back in the recent years, there has also been a progressive increase in the level of risk appetite. Investors have considered that class A assets are expensive and hard to find so they shifted both to new opportunities – recovering cities, second class assets and development opportunities – and also to other classes of real estate assets. “This trend is spreading all over Europe, in cities like Athens, Amsterdam, Birmingham and Lisbon who are currently considered potential hot spots”, said Lisette Van Doom, Executive Director of ULI Europe.

According to the experts, this wave of investments shall bring also new managers, whose job is to discover ways to generate higher incomes with the assets they manage. Another idea that is currently shaping more and more is connected to intelligent investments; Simon Harwick believes that these investments “shall know how to enhance value against population growth, urbanization, the aging process and technological innovations”.

ROMANIA, A 220% INCREASE COMPARED TO 2013

According to the data published by CBRE, Romania has attracted in 2014 the highest volume ever of real estate deals –spaces for office, retail or industry – with a total value of 1.124 billion Euros; that is a 220% increase, compared to 2013 when it had 351 million Euros. So, Romania has climbed up one place in the top of the most attractive locations for real estate investments, reaching number 4, overtaking Slovakia but outrun by Poland, Russia and Czech Republic. The PwC experts believe that in 2015 the real estate sector shall have, again, some significant investments. “We expect to see in 2015 a series of important investments in this area, but also the recommencement of new constructions – more relentless this time – especially in dynamic cities such as Bucharest, Timișoara and Cluj-Napoca”, said Francesca Postolache, Partner, Audit Services, Real Estate Services Team Leader, PwC Romania.

THE FUTURE MEANS INTELLIGENT INVESTMENTS IN PACE WITH TECHNOLOGY

The energetic and environmental friendly buildings might represent another type of intelligent investment that catches the eye of real estate investors. Part of the Top 10 world constructors and Top 500 Fortune, the Swedish giant Skanska is developing ecological office buildings intended to create a favorable environment for economic growth and business incentives. Skanska Group has launched in 2013 a new concept they apply in all their projects: “Workplaces by Skanska”. Present in Romania since 2011, this company had used their new concept to construct in Romania the first completely ecological building, Green Court Bucharest, estimated to be fully rented by 2015`s first half. The building already has tenants – market leaders such as Orange or Schneider Electric.

MAIN REAL ESTATE MARKETS IN 2015 ACCORDING TO ULI AND PWC:

Berlin: a “hot zone” for media and technology, having a young population who has helped increase the attractiveness for residential real estate investments. Berlin went up to number 1, overtaking Munich.

Dublin: had another strong year when investors crammed up to get a hold of the opportunities the city offers. Dublin is stable on the 2nd place, same as 2014.

Madrid: in 2014 has went up in the top of investment opportunities but whether Spain provides solid long-term growth perspectives is very debatable.

Athens: despite still being a fragile European market – as it was most affected by the recession – some “pioneers investors” are looking to get the best value for its opportunities before the expected economic recovery.

SOURCE: PwC and ULI, Emerging Trends in Real Estate® Europe 2015