According to the latest Emerging Property Trends Europe report from PwC and the Urban Land Institute (ULI), 75% of real estate leaders believe that current valuations fail to accurately represent all the challenges and opportunities in the real estate sector. This perception is exacerbated by a widening gap between market price expectations and accounting valuations. Amidst these concerns, a significant number of the over 1,000 industry executives surveyed express fears of continued declines, fueled by pervasive market uncertainty, ultimately contributing to historically low investment volumes. MSCI, for instance, reports a decline of -42% from the pre-COVID average (2015-2019).
Nonetheless, despite this apprehension, one-third of respondents remain optimistic about profitability increases in 2024, indicating a slight improvement in business confidence compared to the previous year. However, this optimism is moderated by sluggish economic growth in Europe and realistic concerns regarding a looming recession.
Looking ahead to 2024, there is a sense of complexity in addressing the challenges facing the European real estate sector, with varying opinions on the factors necessary for a resurgence in market activity. Suggestions include stabilization of interest rates, a soft economic landing, and a decline in interest rates to rebalance yields. However, achieving these goals may prove challenging given increased refinancing levels, higher funding costs, and the capital expenditure required to adapt assets to an uncertain environment.
Gareth Lewis, director at PwC, suggests that while sentiment indicates a “wait and see” approach, the current market environment presents significant rewards for those willing to make bold investments. He highlights the potential alignment of factors such as clarity on inflation, interest rates, and valuations, which could facilitate increased transaction activity in 2024, albeit unlikely to follow a uniform timeline across European markets.
Jean-Baptiste Deschryver, head of real estate at PwC for EMEA, underscores the mixed expectations for debt and equity availability in the coming years. Despite the challenges, he emphasizes the need for capital to address refinancing requirements and align the real estate sector with evolving demands. However, the denominator effect on institutional allocations to real estate remains problematic.
Against this backdrop of uncertainty, real estate investors are exercising caution in their investment decisions, focusing on cities that offer liquidity and economic stability. Consequently, cities such as London, Paris, and Madrid continue to dominate the rankings due to their attractiveness to investors seeking resilience amid heightened risk. Madrid, in particular, emerges as one of the fastest-growing European real estate markets, buoyed by investments in infrastructure, favorable climate, and quality of life.
Despite challenges, the report also points to optimism in the Spanish real estate sector, especially in Madrid. Investors and developers view Spain as an attractive opportunity, particularly in sectors such as affordable housing, student housing, and hotels. Factors contributing to this optimism include high tourism rates, the imbalance between supply and demand, and the profitability of student accommodation in urban centers. Despite financing costs and a decline in transactions, Spain remains a key player in the European real estate market, demonstrating resilience amidst regional challenges.