Interest rates, housing affordability, the supply-demand balance and politics all feature heavily as issues to affect the housing market in the coming year.
The latest Emerging Trends in Real Estate: Europe 2020 report has been released by PricewaterhouseCoopers (PwC) in partnership with the Urban Land Institute, and it has revealed a number of interesting views from across the sector.
Overall, property investment is still seen as a positive area in which to place capital, even with ongoing political and economic uncertainty not just in the UK but across Europe. In 2020, investors are positive about the effects of the ongoing low interest rates, with banks revealing they are likely to stay at this level or be cut even further. With bond yields also “in negative territory”, the report states that real estate income will “retain its broad appeal to investors”.
Short-term interest rates steady in 2020
According to PwC, almost three quarters of survey respondents “expect short-term interest rates to stay the same or reduce in 2020”, while the majority believe inflation will hold steady.
“In the eyes of most interviewees this monetary environment has reinforced real estate’s attraction relative to bonds and equities.”
Many respondents stated this was the most significant intervention since 2019’s report. The long-term low interest rate environment has resulted in higher confidence for many investors.
“The insurance companies, the open-end funds and high-net-worth individuals will continue to seek yield in the real estate sector,” says one of the more bullish pan-European fund managers.
“That low interest rate – that force – will drive continued high allocations to real estate. There’s a lot of business to be done, still, just allocating money into core real estate.”
Mobility a key issue
One key emerging trend highlighted by the report is around mobility. It encourages property investors to “think smartly” about issues surrounding connectivity and places, with assets providing good outcomes for the community providing the most value. Decisions on transport in development areas will become even more important in 2020.
“These mobility trends have the potential to change which buildings and districts are seen as most valuable by real estate investors and developers,” states the report. “It is also likely to reinforce the attraction of mixed-use development, while challenging established principles around urban planning models.”
The report notes that our reliance on private cars, particularly in cities, is likely to change – and drastically reduce – in the coming years. Issues with worsening congestion as well as air pollution are leading cities to increasingly look for other ways of getting around, promoting healthier modes of transport such as cycling. In some historic areas across Europe, there is a ban on cars, while other areas only allow low emission vehicles.
As a result, property investors and developers can focus their attentions on public transport areas, as such areas are likely to see their values increase. One architect in the report argues that city centres will become much more pleasant and desirable places to live and work because of the reduction in cars, the lower emissions, and the extra public space that could result from less car-designated spaces.
Environmental impact and green living
Over the next 30 years, climate change will have the biggest impact on real estate according to the PwC report. Most of those involved in the industry have already begun to recognise this and make changes, but with it now being discussed as a mainstream issue to a higher degree than ever, this is likely to ramp up the action.
Almost half of respondents said that climate change risks had increased in their portfolio, while almost three quarters expected the risk to grow over the next five years.
One UK REIT director commented in the report: “People are waking up to the world’s environmental issues. Shareholders enquiring about the environmental impact of our buildings has gone up five-fold.”
Where are the top investment locations for 2020?
Cities are ranked by PwC and the Urban Land Institute based on their overall investment and development prospects in the year ahead. This year, London makes it into the top 10, which shows a significant boost for the city.
Commenting on London’s prospects, a global investment banker said: “London has staying power. London has culture, it has arts and education, it has a rule of law. Even if London’s mispriced, London will always be the gateway to Europe.
While Brexit uncertainty has had an impact on the UK capital, the dynamics of the market and the best strategic approach to take to investment in London remain relatively unchanged, says the report.
For those looking for alternatives, there are numerous areas across the UK with more solid investment prospects. Top performers in recent years – and for the years ahead – include areas like Birmingham, Manchester, Liverpool and other key as well as regional areas across the north and the Midlands. These areas attract overseas and local investors due to their high yield and capital appreciation prospects which can be more favourable than London.