With every challenge comes an opportunity and real estate players remain positive about development and investments this year, according to the “Emerging Trends in Real Estate® Europe 2017”, a forecast published jointly by the Urban Land Institute (ULI) and PwC. “In the face of so much uncertainty and change, our survey participants are only slightly less confident than they were last year about their own businesses. It’s clear that, while Europe’s real estate industry is pausing for thought and treading very carefully, it doesn’t feel the need for crisis measures ”, says Amaury Evrard, partner and Luxembourg Real Estate and Infrastructure Group Leader at PwC Luxembourg.

Global instability has been a rising concern for the real estate industry and social issues are becoming more important. Populism is questioning traditional economic systems and we are faced with de-globalisation as a consequence of Brexit and the US elections which will result in a change in capital flows. "It can also be expected that there will be a greater emphasis on social infrastructure such as healthcare, affordable housing and assisted living. We’re already seeing this reflected in the top sectors for investment and development in 2017. This means the real estate industry is faced with new risks inherent in these asset classes and operating models need to be adjusted", says Ilse French, partner and Real Estate Advisory Leader at PwC Luxembourg.

In a post-Brexit European market, Germany takes the lion’s share
As the exit of the UK from the European Union grows certain, the spectre of its consequences weigh heavily on the minds of many real estate stakeholders, as a source of gloom for some, and opportunity for others. In the risk-off climate, in which several real estate investors are willing to sacrifice some yield for lower risks, Germany is widely regarded as the new nest for capital. As our report shows, four out of the top five cities for investment and development prospects in 2017 are German. Berlin and Hamburg remain on the top two positions, followed by Frankfurt, Dublin and Munich. 

Although on the third position, Frankfurt is this year’s star, after going up 17 positions from last year. Investors in the city have good reason to be optimistic. Frankfurt has gained a twofold benefit from the Brexit vote in the UK: not only is it perceived as a stable market in unsettled times, but a number of interviewees believe it could also provide an office destination for bankers relocating from London (ranked 25^th).

Luxembourg is also very likely to gain from the potential relocation of London-based business activities on the continent. “Our country can get the icing on the cake, the question is: will we be able to digest it? There’s a lot of infrastructure to improve and the population growth already creates a lot of challenges. Hosting 10,000 - 20,000 people who arrive at once could be very complicated”, explains Kees Hage, partner at PwC Luxembourg. The market’s ace in the sleeve is its historical great position as an investment funds centre and its collection of profiles with financial skills available. The key to success is fast adaptation and flexibility.

Luxembourg: Low vacancy rates to drive up rents
With a steady GDP growth of 3.6%, a low government debt and low inflation, the economic evolution of the Grand Duchy is more than encouraging for investors. Of course, the scarcity of prime assets, the pressure on the office market and the lowering yield remain high on their agenda. “In terms of offices, the vacancy rate is still very low, with an average of 5% in general and going below 3% in the city centre and Kirchberg. The Cloche d’Or area has great potential. With the arrival of new occupiers in the next years, the future looks bright. Prices will surely follow the trend and rise to reach the level of those in Kirchberg. The good news is that the government understands the matter at stake and invests heavily in infrastructure, so we’re all looking forward to the arrival of the tramway in 2021”, thinks Vincent Bechet, board member of ULI BeLux.

The overall market situation has been changing during the past year, with more fund activity in the area of real estate. In terms of alternative sectors, data centres seem to attract very specific investors whose area of activity is around technology and communications, therefore creating a well-defined niche. Satellite offices are still in trend, but this might change with the inauguration of the tramway line.

“When we look at cities and business centres’ evolution in the past year, Luxembourg City is still among the most profitable in terms of return on investments. The office prime yield is at 4.35%, just like Frankfurt and above London or Paris. For the retail and residential sectors, the numbers are even better. We see rents going up, however, which is good news for landlords or developers, but not such good news for tenants”, concludes John Ravoisin, partner at PwC Luxembourg.

The report “Emerging Trends in Real Estate® Europe 2017” is available for download on PwC Luxembourg’s website.