Behind its façade of growth, the real estate sector faces uncertainties: unstable political outlook, risks of macroeconomic chaos, emergence of price bubbles depending on the location's attractiveness, a possible rise in interest rates, technological changes... All of this has given us plenty of food for thought this year in Cannes at the MIPIM real estate conference. At least it's sunny down here!
These uncertainties, however, have not discouraged investors, who are still searching for the risk diversification and stable cash flows offered by real estate investments. These benefits come alongside the well-established rule of prudence in real estate as an asset class, i.e. investing in brick and mortar. Heavy attendance at this year's MIPIM conference seems to confirm this appetite... unless this is a final bounce before the much-dreaded market downturn?
Real estate in real time
Recently it has been difficult to distinguish clear trends in real estate due to many contradictory signals, and 2017 should continue in the same way. On the international scene, after a turbulent 2016 (Brexit, the US election, ongoing shifts in international relations), more elections are on the agenda and diplomatic tensions continue to pop up.
One such turbulent area that has already caused heated discussion is what's happening with our British neighbours: on the day after the Brexit vote, not many people were still betting on the UK's real estate horse. As of today, however, despite a decrease in volumes, investors are interested in the London market. What's more, the collapse of the pound has created opportunities for foreign investors wishing to get their hands on assets located in the UK (especially London), given that these assets had been extremely expensive previously. Thus, there's been no slump for the United Kingdom as of today, even if nobody knows whether the worst is yet to come as the final trigger of Article 50 is now imminent. A few renowned London asset managers have taken the temperature on this situation and have decided to create "on-shore" structures on the European continent as a result, so as to maintain easy access to their real estate funds for EU investors (thanks to the AIFMD rules). Some of them have recently announced that they will develop a presence in Luxembourg.
On the ground
In this context, the German market has surfaced as an attractively safe investment destination with money flowing to its biggest cities, especially to housing stock (Berlin first, but also Hamburg, Frankfurt and Munich). On a more general basis, investors seem to have understood that real estate rhymes with risk-on-your-plate: risk and expertise are key in maximising returns on investment in the current environment. This confirms the tendency of recent years, i.e. that more and more investors are turning to "added value" or even "opportunistic" strategies, requiring not only the philosophy of a capital risk-taker, but also on-the-ground knowledge.
Some niches still raise a lot of interest: real estate debt attracts more and more, especially when it can be acquired at a low price; the success of specific real estate asset classes such as logistic properties is set to continue; and real estate assets offered with side services, such as medical residences, are in full swing. Residential real estate is also increasingly sought after by investors, as demographic shifts create opportunities. Smart cities are set to emerge with their combined offer of efficient infrastructures, housing, offices and smart services.
The real estate industry seems to have learned from the past decade and is keeping its nerves steady vis-à-vis the current situation, as we can conclude from its rather "business as usual" behaviour. However, varying degrees of success in individual real estate markets, whether by type of asset (residential or commercial) or by geographical area, notably for less attractive products, outline the beginning of a deceleration in spite of 2016 having maintained the success of previous years. Will this be confirmed in the coming months? Let's rendezvous at MIPIM 2018 to see!
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