Real estate leaders doubt accuracy of valuations in a ‘complex’ market

Three-quarters of European real estate leaders believe that current valuations “do not accurately reflect” all the challenges and opportunities impacting real estate, such as climate change, social impact and occupier demand fundamentals. Their concern is among the key findings in the latest Emerging Trends in Real Estate Europe report, published by PwC and the Urban Land Institute today (8 November). It highlights the wedge that continues to be driven between market price expectations and book valuations. “Valuations have not settled. They are not yet representative of what the real price would be of some of the assets we see in the market, or that we have in our portfolios. I think in some geographies this will never really come close to market pricing,” said the European head of asset management at one global investor. Fears over “catching a falling knife” were expressed by many of the more than 1,000 industry professionals canvassed for the annual report. The issue has become a catch-22 for valuers, one real estate chief said. “The longer landlords sit on their assets, the longer we remain in the dark about where values are heading.” As the industry grapples with a market burdened by inflationary pressures and high interest rates, almost 80% of those surveyed believed that ESG credentials will have a material effect on asset valuations in the next 12-18 months, roughly in line with last year’s views. However, this too is fraught with complexities. “The obvious one is how do you value stranded offices? I don’t think valuers have had sufficient guidance as to how to actually value the energy transition,” said a senior executive at a global investment manager. The concern is that while investors want prices that reflect how much they have spent on ESG compliance, the markets might not deliver. The research, which canvassed investors, fund managers, developers, property companies, lenders, brokers and consultants, found that only 29% of respondents expected to be net buyers of real estate assets by the end of 2024. Concerns about recession One-third of those who took part said they felt optimistic about increased profitability in 2024, an increase of 8% compared with the previous year. But this was from a low base and well below long-term averages, reflecting Europe’s sluggish economic growth and the “realistic concern” of a looming recession. Lisette van Doorn, chief executive of ULI Europe, said: “Our report this year highlights the complex challenges confronting Europe’s real estate sector, and there is a sense that the industry stands on the brink of a serious downturn in demand across key occupier markets.” Gareth Lewis, director at PwC, said the research pointed to an industry in “wait and see” mode. “There is some hope that the stars are aligning – namely clarity on inflation, interest rates and valuations – to facilitate greater transaction activity in 2024. However, there is unlikely to be a single timeline for this across Europe’s diverse markets,” he said. Jean-Baptiste Deschryver, EMEA real estate leader at PwC, said: “Our understanding is that expectations for debt and equity availability are mixed in the coming years, when capital will be required for refinancings and generally making real estate fit for purpose. The denominator effect on institutional allocations to real estate – a major impediment coming into 2023 – remains problematic one year on.” City rankings London and Paris held on to the top two places in the report’s city rankings, as investors favoured cities that offer liquidity in riskier times. The two cities accounted for around 15% of total real estate transaction volumes in Europe in the first nine months of 2023. The premium on liquidity allied to economic performance is also evident in cities that moved up the rankings in this year’s survey: Madrid (3), Milan (6) and Lisbon (8). The German cities of Berlin (4), Munich (7), Frankfurt (9) and Hamburg (11) slipped in the rankings in terms of investment and development prospects amid concerns over stagnant economic growth prospects and a slower adjustment in pricing than across most of Europe. Global mega-trends Global mega-trends such as climate change, digitalisation and demographics are seen to be driving investor appetite for niche sectors. The report ranked new energy infrastructure (1), data centres (2) and healthcare (3) as the sectors in which investors are most likely to increase their exposure. These trends, combined with a push for ESG compliance, will pave the way for new development and investment opportunities in areas such as battery storage for renewable energy, solar farms and electric vehicle infrastructure, the research suggested. Van Doorn said huge opportunities lay ahead, with the medium-term outlook for real estate looking “significantly more positive, assuming that rates will have stabilised by then and the economic uncertainty will have been largely resolved”. “Considering ongoing urbanisation and technological and demographic mega-trends, in addition to an ever-growing focus on health, wellbeing and sustainability by users and investors, there lies a huge opportunity for real estate ahead of us,” she said. “The more we can collaborate to address the issues, such as valuations and climate change, the more and sooner we can tap into the opportunity.” Views on the UK The research offers valuable insights into views on the UK real estate market. “It’s worth always separating the UK from the  rest of Europe,” noted one corporate development chief at a private real estate investor. “The UK has continued to see quite a lot of flows from US and Asian investors, because it is a market that has repriced faster than any other market in Europe. Whereas now I think there will be better opportunities somewhere else if you are able to capture that repricing.” Yet there are fears of further price falls in the UK owing to ongoing issues around sentiment and the economy. “The UK felt like the market that had most found its level but is now moving towards a double dip of capital value decline,” suggested an institutional investor. “In the UK, valuations seem to react more quickly than European valuations, which seem a bit more pedestrian,” said a senior executive at a global investment manager. Yet the chief financial officer of a British property firm identified ongoing reticence in the UK: “Direct investors say we are still unclear on the political environment and the economic environment, and we would rather miss the first 10% after you hit the bottom than invest now and lose another 30%.” To send feedback, e-mail julia.cahill@eg.co.uk or tweet @EGJuliaC or @EGPropertyNews Photo by Lydie Gigerichova/imageBROKER/Shutterstock