Continued caution and optimism for real estate investment were sentiments that resonated from the recent Emerging Trends in Real Estate (ETRE) event in Edinburgh. Highlights of the report as shared by Liz Waller, ULI UK (view presentation here) and subsequent panel discussion indicated that Edinburgh could be much higher within the city index (18^th for 2016). A lack of prime assets, political uncertainty both from devolution, emerging policy and a possible UK EU exit were raised as likely influences for investor caution.

An in-depth panel discussion with Alison Fyfe, Urbicus Limited; George Finnie, Strathclyde Pension Fund; Chris Stuart, Chris Stuart Group and David Paine, Standard Life Investments, and led by John Forbes took a deeper dive into the outcomes of ETRE 2016 and Scotland’s position. A clear message from the panel was that there is no lack of capital but cities such as Edinburgh are missing out on investment as a result of political uncertainty and more attractive conditions in other EU cities. A lack of available high prime assets and wider infrastructure investment are limiting Scotland to meet current opportunities. Birmingham (9^th in city index) was cited as a proven case where city level investment across housing and infrastructure are driving the cities attractiveness for capital.

Devolution is still seen as an opportunity but without clear leadership Scotland’s cities risk losing to Manchester or other regions where agreed strategic policies provide certainty for investors. City deals were also seen to be having a positive sentiment as highlighted for Glasgow, yet real estate capital is moving fast and Scotland’s cities need to respond before they miss this opportunity.

Download a copy of the report here.  An interview with Simon Hampton, PwC UK Real Estate Deals Leader, sharing his thoughts on the survey findings, explore the report data and download the key findings and city rankings can also be found online.

Key Trends in 2016

Optimistically cautious. Generally respondents to the survey were optimistic about 2016 however with a stronger undercurrent of concern than previous years. With abundant equity in most markets, and debt flowing relatively freely there is still an incredibly positive view on capital flows for 2016. Equally the majority felt interest rates would remain low meaning many pension funds, sovereign wealth funds and private equity investors will still find the difference between European real estate and bond yields compelling. Cross-border capital flows are expected to increase, but at a more measured rate than 2015.

Changing landscapes. The real estate landscape however is changing with the effects of urbanisation driving investors to think more and more about cities or even specific districts. The 5 leading cities for investment prospects in 2016 are Berlin at Number 1, followed by Hamburg, Dublin, Madrid and Copenhagen. Many interviewees back the German capital to continue its positive momentum and thrive well beyond 2016, based on its young population, and its growing reputation as a technology centre. Yet London and Paris attracted by far the most capital in 2015 (these two gateway cites saw €57 billion of deals in the year to Q3 2015) and it’s likely to be the same story in 2016. So their relatively low rankings at no. 15 and 22, essentially reflect the strengthening recovery and improving prospects of Europe’s other real estate markets that are perceived to be not so far through the cycle.

Shifts to regional centres. There is a continued shift to smaller capital cities or regional cities like Birmingham here in the UK (with a very strong showing at number 6). Birmingham’s ranking reflects the positive view expressed during the interviews on UK regional cities and Manchester in particular. This is very much a theme reflected in our sister Emerging Trends report in the US which identified a strong trend towards investing in smaller, regional cities referred to as “18hr cities”.

Alternatives become mainstream. The increased liquidity of European markets goes hand in hand with a continuing shortage of assets to buy. The availability of prime assets is expected to get worse, with 63% of respondents thinking prime assets are overpriced. That’s why nearly 80% of respondents see development as an attractive route to acquiring prime assets.

Healthcare, hotels, student accommodation and data centres are all expected to outperform as sectors benefitting from urbanisation and long-term demographic trends – with 66% of those who are considering going into alternatives citing this the main attraction. Whilst it is the alternative sectors that take top spots in the ranking of investment prospects for 2016, it is high street retail that comes out top – further highlighting the industry’s view that urbanisation is a megatrend to follow.

There was a stampede of capital into the Logistics sector during 2015 – a sector clearly benefitting from the impact of e-commerce – and the signs are that there will be more of the same in 2016.

Industry in transition. It was clear from the many interviews that participants in the industry are acutely aware of the changing world of real estate, beyond simply the influence of global capital flows. A combination of the disruptive forces in the occupier market, and a long-term, low yield, low growth environment look set to create a much more global competitive market – in which particular skill sets will be needed to access value. And some predict, that the more intense, sophisticated property management used by residential operators and serviced offices, will trickle across to other real estate classes.

But those canvassed by Emerging Trends Europe held polarised views on many areas related to these market disruptions. Optimal lease lengths, the credibility of the flexible, shared/serviced office model, changing operational skill requirements for property managers, and how they should alter traditional property valuation methodologies. The survey also highlighted concerns over a lack of alignment between how owners, managers and occupiers see a well-performing building and the need for new language around this.

The clear challenge to the industry, highlighted by Emerging Trends Europe, is to be less about bricks and mortar and more about service. As one interviewee concludes: “20 years ago we had tenants, now we have customers, in 20 years’ time we’ll have guests.”

Special thank you to our hosts and partners PwC Scotland for their support.