OREANDA-NEWS. February 27, 2010. With some credit easing and property values stabilising, Europe’s real estate industry will see some improvement in 2010, but still faces a ‘long, slow haul’ to recovery, according to Emerging Trends in Real Estate® Europe 2010, published today by the Urban Land Institute (ULI) and PricewaterhouseCoopers (PwC), reported the press-centre of PwC.

The seventh annual report is based on surveys and interviews with well over 600 of the industry’s leading authorities, including investors, developers, financiers, and property managers.  Overwhelmingly, respondents cite the need to move forward cautiously, as Europe’s economy remains fragile due to high unemployment and low consumer spending.

While the respondents varied in their assessments of the prospects for Moscow real estate market development, most remain positive, with one interviewee last year remarking, “Russia is continuing to do well in terms of economic growth, and will remain number one in Europe over the next five-year period.” Moscow last year was ranked sixth for investment prospects and fourth for development. This year, sentiment for investment properties has fallen and it is ranked 24th for existing assets and 23rd for acquisition opportunities.

Looking to the longer term, there is greater optimism, particularly from local investors, who see a long-term recovery in commodity prices driving economic and occupier recovery. Sentiment regarding development has remained relatively stronger, thus ensuring a fall only to eighth from fourth last year.

Additionally, the report notes the looming problem of massive refinancing of real estate debt totaling hundreds of billions worth of euros. The industry is apprehensive as it is not clear how this will play out, in terms of whether financial institutions will sell real estate assets and loans or “extend and pretend.” This challenge for the real estate sector is compounded by uncertainty over how, and when, European governments might wean their respective economies off the massive injections of state support. An abrupt withdrawal of the stimulus funds could derail the recovery, and even push the economy back into recession, the report notes.

Richard Gregson, Partner, Real Estate Leader, PricewaterhouseCoopers in Russia, remarked:
“This year there is a sense of cautious optimism. Sentiment regarding investment prospects has stabilised and although sentiment regarding development continues to decline, it is a less dramatic fall than that witnessed last year. The key issue is the occupier side of the equation. Investors are nervous and they are concentrating on the deeper, more liquid markets.”

“Europe’s economic recovery is underway, but it will be sluggish and uneven,” said ULI Europe Chairman Alexander Otto. “We are looking at a crawl back up the hill, and how much values recover will depend on where Europe ends up economically against global competition.”

Otto, chief executive officer of ECE Projektmanagement in Hamburg, Germany, noted that in general, Germany is viewed more favourably for investment and development activity than other countries, due primarily to its broad economy. In terms of individual cities, Munich and Hamburg were ranked by the report as the top two prospects in 2010 for existing portfolios, a ranking they also held in 2009.

“The diverse economic base and even balance between supply and demand has kept office markets in both cities healthy, making them an appealing choice for investment,” Otto said.

Paris was ranked third by Emerging Trends in terms of prospects for existing portfolios, edging out London due in part to the general perception that it has a wider economic base and is less dependent than London on the financial services sector. Interviewees pointed to the low level of vacancies in Paris, raising its ratings for investment opportunities and, to a lesser extent, for development.

Investor sentiment regarding London “improved significantly” from 2009, due primarily to a market correction led by an infusion of funds from the Middle East and Asia. The city ranked fourth in 2010 for investment in existing properties and first for new acquisition opportunities. For acquisitions, the main focus is offices, with nearly half the respondents citing that as the preferred asset type. Despite some skepticism over the limited extent of the rebound, some interviewees indicated that they are confident enough about London to make development plans for 2011, if not for this year.

William Kistler, president of ULI EMEAI (Europe, Middle East, Africa and India) noted that in the current environment, there is a tendency among investors to focus on markets they know.

“Transparency and liquidity attract investors who would not consider other markets, and this is holding true for both London and Paris,” Kistler said. “These markets have strong interest from non-European investors. 2010 is all about playing it safe and avoiding risk.”

Additional markets rounding out the “top ten” named by Emerging Trends for existing property performance prospects are Vienna, Milan, Istanbul, Berlin, Rome and Frankfurt.

In terms of property types, the quality of the location, building and tenant is the main consideration, according to the report. Centre city offices, high-end street retail and shopping centres are the top commercial investment choices for 2010. Residential investments are also highly rated. Although mainstream property types are preferred, niche sectors continue to have some limited appeal, including student housing, self storage, retirement homes, social housing, healthcare facilities and infrastructure. Green development of any kind is gaining significance, particularly with the European Union introducing compulsory energy efficiency ratings for buildings. “It should become part of the DNA of our businesses,” said one respondent.