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Overview of EU Property Investment Market in 2022
As EU economies recover from the recent economic and social upheaval, with assistance from the central bank, there is an upbeat optimism amongst business leaders who are predicting a return to pre-pandemic levels of profitability- in the long-term.  And the prediction amongst savvy investors is that real estate continues to be an attractive investment and is expected to start performing much better in 2022. 

There is also an acceptance of the seismic shifts that have taken place within the industry as a result of the pandemic. Whilst some sectors flourished, others have performed poorly and suffered substantial losses, such as the travel and hospitality sectors, representing significant opportunities for real estate investors.

 

Uncertainty and volatility
The main challenge is the uncertainty around kick-starting a global economy. In 2021, the industry was struggling with a disruption to labour and supply chains as a direct effect of Covid-19 and the forecast was for further difficulties and higher costs. Twelve months later, the predications have played out and the industry is dealing with constantly rising building and labour costs. Yet, real estate continues to be a more favourable investment compared to other sectors. 

 

ESG Considerations
Covid-19 has also accelerated the importance of ESG considerations in property matters and investment managers portfolios. It is now one of the most important issues amongst property professionals. In the 19^th edition of the Emerging Trends in Real Estate report, jointly produced by PWC and the Urban Land Institute, the outlook for EU property investment is generally favourable particularly in the short-term. 

A poll of over 800 respondents from 20 European countries found that 76% of investment managers placed a high importance on ESG considerations and environmental issues.  Unsurprisingly, hot on the heels of the pandemic, 92% of respondents placed health and wellbeing as a crucial factor in EU property investment. And despite rising costs, 52% of those polled have confidence that the market will rise throughout 2022.

 

Inflation
In addition to the uncertainty of supply chains, there is the spectre of rising inflation and increasing energy costs, with no way to forecast when the situation will stabilize. Making it clear that there are clearly short-term challenges within the market. High inflation across the EU creates additional pressure on labour costs in the form of higher wage demands and production costs. Inflation is expected to continue to rise and remain about the target of 2% until the first quarter of 2023. An additional threat is the volatility of geopolitics, in particular, Russia’s invasion of Ukraine.

 

Office Sector
Abingdon’s analysts confirm that ESG compliance is now the core consideration for the office sector due to the change in working practices. The sector across the EU is performing well and has almost reached pre-pandemic occupation rates. Predictions for 2022 suggest a bright future for rental growth, but lower returns for value investors.  PWC’s Head of Real Estate, Pan European Asset Manager, noted in the report that there is now a different relationship with tenants and rental contracts must be more flexible.

 

Location
The investment value and rental yields of real estate is heavily influenced by the location and how badly the region was affected by Covid-19.  Capital cities such as London (although no longer technically in the Europe and has recently underperformed due to Brexit uncertainty) Berlin and Paris continue to represent the best investment value in the short-term.  In the medium to long-term, respondents of the PWC survey suggested that their focus will be directed towards regional cities in the EU that have weathered the pandemic successfully with high workplace occupancy rates.

 

Niche sectors
Since the pandemic, there has also been an increase in interest sectors such as logistics, warehousing and data centres. Unsurprisingly due to the current energy crisis, there has also been strong interest in energy infrastructure. However, many respondents suggest that these investments are not yet showing the desired returns and will not be the main focus for investors throughout 2022.

The takeaways are that the global uncertainty is the biggest threat to the long-term growth of the EU property market, due to geopolitical, social and economic factors. The takeaway from the Emerging Trends report, is that although ESG is a central tenet for property investors today, over the next 10 years there needs to be more emphasis on operational assets, customer service and corporate reputation and branding. Going forward, high quality real estate will be differentiated and judged on these values.  

If you would like more information about EU property investments, contact Abingdon Global Investments at [email protected].