OREANDA-NEWS. February 22, 2011. Tougher regulations, Austerity Europe, the sovereign debt crisis, and a still-tight lending market will challenge Europe’s real estate industry in 2011, according to Emerging Trends in Real Estate® 2011, published by PwC and the Urban Land Institute (ULI), reported the press-centre of PwC.

The 8th 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.  The commercial real estate forecast, based on their opinions, predicts that 2011 will not be the turnaround year that the European real estate industry had hoped for, with a “two-speed” market likely to emerge that reflects a widening gap between investment hotspots and second-tier property markets. Respondents expect more industry downsizing across the continent.

John Forbes, partner at PwC and one of the report’s authors, said:
“In future years we may look back on 2011 as a transformational year for the property industry. Real estate professionals face a challenging time. Traditional sources of debt, for refinancing properties with vacancies or in need of refurbishment, will not be available, although new sources of lending are expected in the shape of sovereign wealth funds and insurance companies. A big theme will be the continued downsizing of the industry and the winners will be those who are best able to manage their assets, rather than those who make clever stock selections.”

Patrick L. Phillips, chief executive officer of ULI, adds:
“Some of the trends we saw last year continue, such as a flight to quality and a bifurcated market, with strong interest in the best assets in the global gateway cities and little interest elsewhere.  The real difference in this year’s report appears to be the perceived weakness in the government’s ability to spark demand or ameliorate the pain in the industry.”

Prospects for Moscow real estate market
In the assessments of the prospects for Moscow real estate market development, respondents are more positive than last year.  After the results of 2010, when Moscow was ranked 24th for existing assets and 23rd for acquisition opportunities, 2011 results reflect the improvement of situation. In 2011 Moscow is ranked 12th for both existing assets and acquisition opportunities and 9th for city development prospects.

There were signs of optimism starting to creep into last year’s survey results, at least for the longer term prognosis and this sentiment has continued into the current year, and is reflected in the relative re-bound in the rankings for Moscow.  According to several respondents, “Moscow is improving; tenant demand is getting stronger and looks likely to grow further”. “On the other side, supply is restricted (no money to build), hence the rents should rise”. “With the arrival of the new mayor, there are many improvements expected in 2011. This relates both to the infrastructure and to the expected new `rules of the game`”.

It is interesting to mention that the best acquisition opportunity by sector in Moscow is hotels. According to the respondents, “There is still a lack of three-star product for a few years to come. The demand is huge”… “The falling land prices in Moscow may help alleviate the shortage and open up opportunities for development, but at present nothing going on”.

Richard Gregson, Partner, Real Estate Leader, PwC Russia, remarked:
“I am relatively bullish on the medium to longer term prognosis for the market in Moscow, and this relative optimism would appear to be shared by many of the survey participants. The headline for Chapter 1 to this year’s survey is apt: “Adapt or Die” — it’s true that we need to be looking forward and not back. The market is not without insubstantial challenges, structural and otherwise, but we are seeing the evolution of a new level of sophistication in the investors in the market, particularly in the domestic class. Opportunities are still there for quality assets and there are already real signs of significant transaction activity in this area”.

New challenges and new investor favourites
Last year, the industry was concerned that the large amount of debt maturing across Europe over the next five years would prevent banks from undertaking new lending, but the new questions for 2011 are how much impact Basel III will have on the appetite of banks to lend to property and, when they do, how expensive this debt will be.

Respondents expressed serious concerns about areas outside prime regions, even within the same country. With capital so risk-averse, winning cities like Munich, London and Paris will continue to absorb investment as the only places where tenant demand will be robust. Other investor favourites are likely to be Istanbul, Stockholm, Berlin and Hamburg. Investors are expected to avoid Dublin, Athens, Lisbon and Budapest.

Even within the most favoured markets, investment will be drawn mainly to the prime buildings, the report predicts. The result is that values for secondary properties will remain at distressed levels and decline further in the months ahead.

The good news, the report says, is that improvements in the availability of real estate equity are anticipated this year. This is expected to come from an increasing number of investors from Asia Pacific and institutions such as insurance companies and private equity funds. But the consensus view is that even if new players do emerge, they will take a long while to do so and will only partially relieve congestion.

John Forbes, partner at PwC and one of the report’s authors, said:
“As is the case with so many positive trends today, they do not constitute unqualified good news. Equity, which is now choosier and more risk-averse, will be funnelled towards a smaller slice of the industry, ensuring that the capital-raising environment is set to be tough for a good while yet. It is evident from the report that real estate fund managers face significant challenges in meeting the demands of investors, lenders and regulators. There is a clear sense from interviewees that they expect a smaller real estate industry in the future. The environment is changing and real estate fund managers will need to adapt or die.”

While all property sectors show improved investment prospects in the quantitative part of the survey, central city offices, street retail and shopping centres were most frequently cited as offering the most promising prospects.

Interviewees anticipate that well-established firms with defensive strategies will fare best in the months ahead, while prospects are less bright for niche or new players. As firms prioritise resources in 2011, there will be those in the industry who find their skills in demand. The expected downsizing will reflect the dropping out of those who find themselves totally unequipped for the new climate.