Berlin, Hamburg, Frankfurt, and Munich take top spots in ULI and PwC’s annual city rankings

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FRANKFURT (November 3, 2016) – In the search for safe havens, German cities will be Europe’s most preferred real estate investment and development destinations in 2017, according to Emerging Trends in Real Estate^® Europe 2017. Berlin, Hamburg, Frankfurt, and Munich occupy four of the top five spots for 2017 investment and development prospects in the annual forecast published jointly by the Urban Land Institute (ULI) and PwC. The report is based on the opinions of almost 800 real estate professionals in Europe, including investors, developers, lenders, agents, and consultants.

According to the report, Germany is currently the most popular destination in Europe for real estate investors and developers, with recent data from Real Capital Analytics confirming that Germany has overtaken the UK in post-EU-referendum investment volumes. While remaining Europe’s primary magnet for global capital, attracting €31 billion of capital inflows in the 12 months to end September 2016 (according to Real Capital Analytics), London has fallen from number 11 in 2016 to number 27 in 2017 in the Emerging Trends Europe city rankings for investment and development prospects.

The dominant performance of German cities in the Emerging Trends Europe rankings demonstrates the strong fundamentals of the German market. Berlin has maintained its top position for the second year in a row, cementing its place as a trendy and dynamic global gateway. Hamburg, seen as a solid bet amidst economic uncertainty in Europe, also repeats its number two ranking from last year. Frankfurt, Germany’s business centre, has soared 11 places to number three, pushing Dublin into fourth position, while Munich holds steady at number five.

This positive outlook for German cities comes in the aftermath of the EU referendum outcome, which has left investors and developers uncertain about the UK’s immediate and medium-term future. Ninety percent of industry leaders surveyed in Emerging Trends Europe predict that UK investment and property values will fall over the next 12 months.

However, despite this short-term uncertainty over London, most interviewees have faith in its medium-to-long-term future as a key global city, the report says.

“The fallout from the Brexit vote gives an extra boost to the already-strong German real estate market,” said ULI Europe CEO Lisette van Doorn. “With considerable political and economic uncertainty in Europe, many real estate investors are willing to sacrifice some yield in return for lower risk. In this risk-off environment, the stability of German cities becomes even more attractive.”

Not surprisingly, international political instability is expected to pose significant challenges in the coming year, with 89% of respondents listing it as their top concern for 2017. Forthcoming elections in France, Germany, and the Netherlands, as well as concerns about migration and terrorism, add to this uncertain outlook. Forty-six percent of respondents believe that the migration crisis will get worse in the coming year, and interviewees reported terrorism as a key threat to investor confidence. This international political instability is not expected to dissipate quickly: nearly two-thirds of survey respondents expect political uncertainty in Europe to worsen over the next three to five years.

As well as geopolitical risks and economic growth prospects in both the short and long-term, the report draws attention to a number of potentially more significant influences that are taxing the minds of Europe’s real estate leaders.

“Given the timing of this year’s report, which coincided with a period in which people are coming to terms with the result of  the UKs referendum on the EU, it was inevitable that this would become be a common reference point for the real estate industry’s uncertain view of the future,” said PwC’s Real Estate Director Gareth Lewis. “But after taking the pulse of the real estate industry’s leaders, it’s clear that below the surface, there are complex and significant influences at play beyond today’s geopolitical issues. These are changes which are altering society and our industry’s view of the future role of the built environment. Technological disruption and the growing relevance of the sharing economy is shifting the centre of gravity from financial asset to product, or more broadly ‘real estate as a service’.”

Despite high levels of uncertainty and change in Europe, however, respondents are only slightly less confident about their business prospects than they were last year. Just under half expect no change to confidence, profitability, or headcount in 2017. Furthermore, the report finds that capital flows will remain strong and investors will continue to value European real estate for yield in comparison to the attractive risk/return expectations in other asset classes.

Sector-wise, the report notes that despite the challenges associated with investing in alternative real estate sectors, they are growing in popularity and are predicted to offer some of the best returns. Urbanisation and changing consumer habits have paved the way for alternatives such as hotels, student housing, and assisted living facilities. Eight out of the top ten sectors for investment prospects in 2017 relate to residential real estate —leaving traditional offices and shopping centres to be classed among the riskiest assets.

Top Markets for Real Estate Investment and Development in 2017
According to the report, the top five European markets for real estate investment and development[1] in 2017 are predicted to be:

1. Berlin– The German capital scored the highest on all four survey categories: investment, development, and prospects for rental and capital growth. Berlin has established itself as a large, highly-liquid real estate market with global appeal—evidenced by the €3.9 billion invested in the city in the first six months of 2016, according to Real Capital Analytics. Despite steep pricing, the office and housing markets are still thriving due to their strong growth potential.
2. Hamburg– At number two for the second year running, Hamburg’s success is due in part to the local government’s massive investment in transport and the development of new, high quality urban districts along its waterfront. Hamburg’s liveability and its diverse economy, which encompasses manufacturing, media, life sciences, and information technology, also bolster its high standing. Rental growth of 4% over the past year helps to explain the popularity of Hamburg’s office market, together with yields of 3.75% for prime assets, which although expensive are still cheaper than those achieved in the city’s German rival, Munich.
3. Frankfurt– Investors are largely optimistic about Frankfurt, which has climbed 11 places to number three. Not only is it considered a stable market amid post-Brexit uncertainty, but it is also predicted by many investors to provide an office destination for bankers relocating from the City of London. However, questions remain about the potential consequences of relocating large banking operations to Frankfurt, as Germany is already over-banked.
4. Dublin– While it has slipped one place to number four, Dublin is still seen to be an overall beneficiary of Brexit. One private equity investor predicted that while the city will likely not pick up financial services headquarters from the UK, it will pick up back-office functions, which could still have a big effect on the market. Continued economic growth, foreign direct investment, and strong demand in the housing market also play an important role in Dublin’s prospects for 2017.
5.  Munich– Rounding out Germany’s near-dominance in the top five is Munich. Investors perceive Munich as a perennially solid bet, a quality that is particularly valuable in a risk-off environment. Survey respondents indicated that buying property in cities like Munich allows investors to take on more risk without worrying over the basic security of their investment. While vacancy rates in Munich are at a 14-year low of 4.8%, finding assets to buy is challenging and the city remains one of the priciest markets in Europe.

NOTES TO EDITORS

Top 10 European Cities for Property Investment and Development

Emerging Trends in Real Estate^® Europe
Emerging Trends in Real Estate^® Europe is a joint report published annually since 2003 by the Urban Land Institute (ULI) and PricewaterhouseCoopers (PwC). The report provides an outlook on European real estate investment and development trends, real estate finance and capital markets, as well as trends by property sector and geographical area. It is based on the opinions of almost 800 internationally renowned real estate professionals, including investors, developers, lenders, agents and consultants.

About the Urban Land Institute
The Urban Land Institute is a non-profit education and research institute supported by its members. Its mission is to provide leadership in the responsible use of land and in creating and sustaining thriving communities worldwide. Established in 1936, the institute has almost 40,000 members worldwide representing all aspects of land use and development disciplines. For more information, please visit europe.uli.org, follow us on Twitter, or join our LinkedIn group.

About PwC
At PwC, our purpose is to build trust in society and solve important problems. We’re a network of firms in 157 countries with more than 223,000 people who are committed to delivering quality in assurance, advisory and tax services. Find out more and tell us what matters to you by visiting us at www.pwc.com.

PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see www.pwc.com/structure for further details.

©2016 PwC. All rights reserved.

[1] The way cities are ranked in Emerging Trends Europe has changed. This year, the ranking table is based on the scores awarded for both investment and development prospects. As last year’s rankings were based on investment prospects alone, they have been adjusted to reflect both investment and development potential.