Profitability prospects for European real estate rose in 2011 both for existing properties and for new acquisitions. For the first time since 2007, according to “Emerging Trends in Real Estate Europe“, a study co-authored by PwC and the Urban Land Institute, the outlook is brighter for property development and real estate investment. But capital only flows to prime locations, and in less attractive areas prices will continue to sink.
The study is based on interviews with 600 real estate experts in 27 European urban areas.
Zurich gets good marks
Zurich places 11th out of 27 cities for the performance of existing real estate. Munich is at the top of the list, followed by Istanbul and London. Cities in countries facing major economic uncertainty, such as Lisbon, Budapest, Athens or Dublin, bring up the rear.
Zurich also ranks 11th for new acquisitions. Whereas the same cities make up the rear as in the existing real estate ranking, Istanbul now takes the first rank and Munich the 3rd in the new acquisitions ranking. According to the study, this is because good property with first-class occupants is in limited supply and increasingly difficult to find in prime locations.
Office buildings highly sought after
According to the experts, individual property types vary strongly from one country to another. Depending on the city, offices, commercial, industrial or residential property will take preference. In Zurich, office space is the most profitable, followed by retail surfaces and apartment buildings. Industrial property is the least in demand.
Refinancing real estate loans is a concern
The loan-to-value (LTV) ratio, i.e. the refinancing need, is a major concern this year, especially with regard to existing real estate portfolios from the 2005 to 2007 boom years. About one-third of the commercial property debt of 960 billion euros is secured by lower-quality real estate. The problem is aggravated by extremely high borrowing. Banks will therefore be pressuring borrowers to reduce their LTVs. With regard to real estate borrowing, the LTV represents the ratio of all borrowings (including any previously registered mortgage rights) to the lending value of the asset concerned. The LTV thus reflects the overall credit risk compared with the lending value of the asset to be mortgaged. For investors looking to extend their portfolios, this is often a good opportunity to gain a footing.
Basel III fuels uncertainty
In the medium term, investors will invest less in European real estate markets. Interviewees reported holding about 81% of their portfolio in Europe in 2011. They expect that figure to drop to 75% in the next five years. It is also unclear how Basel III will impact bank lending behaviour.