Real estate professionals forecast a recession in 2022 and a drop in values ​​in 2023

• 71% of professionals of real estate believe that Europe will enter recession before the end of 2022.
• A fall in values ​​is inevitable, the price gap between “prime” real estate and secondary real estate should widen.
• First causes of uncertainty in 2023, the cost of construction and the availability of resources.
• French professionals are many more optimistic than their European neighbours.
• Paris moves up to second place of the most attractive cities ahead of Berlin.

Real estate professional confidence and profitability expectations fell to a low level, reflecting widespread industry concerns over various economic, political and sector indicators.

Construction costs and availability of resources, main sources of concern in 2023

Based on the views of around 900 real estate leaders from across Europe, the 20th edition of the annual Emerging Trends in Real Estate® Europe 2023 survey reveals that 91% of them are concerned about the inflation, followed by changes in interest rates (89%) and European economic growth (88%). Political uncertainty at the global, regional and national levels also contributes to creating a climate of uncertainty garnering 79%, 68% and 54% of the responses respectively.

At 5 years, only 13% of players surveyed consider inflation to be a problem, far behind interest rates (73%) and growth (76%) which remain medium-term concerns. For 2023, the two black spots are construction costs and resource availability which top the list at 92% and 84%. Professionals estimate that these problems should persist in the long term at 76% for construction costs and 73% for resource availability.

Europe will enter recession before the end of 2022

Due to this uncertainty, 71% of real estate executives believe that Europe will enter recession before the end of 2022, which would negatively affect development activity, the availability of finance and investment volumes, followed by occupancy rate, rents and values.

The French are much more optimistic than their European neighbours, Paris second most attractive city

Germany, the UK and the Netherlands seem unlikely to escape recession, while France is more isolated, thanks in large part to its energy supply strategy. A recession is therefore anticipated before 2023 for 83% of respondents in Germany, 82% in the United Kingdom, 79% in the Netherlands and 68% in Spain. The French meanwhile are more optimistic with 45% expecting a recession.

The financial levers are also called into question. Thus, the confidence expressed in the availability of debt and equity has never been so weak since 2012 with regard to debt and 2009 with regard to equity. The professionals surveyed believe that capital invested in Europe from all regions of the world is more likely to decrease than to increase: 70% expect a lower debt outlook and 63% express the same trend for equity.

In this context, the overall prospects for investment and development in the 30 cities studied have diminished. London remains first for the second consecutive year, followed by Paris which passes Berlin, third. The cities that have risen the most in the rankings this year are Madrid, Lisbon and Copenhagen.

Investors favored by falling property values

These trends, which should lead to lower property values, could favor investors, including equity investors who still have too low real estate allocations. There is a consensus that the level of the current crisis is unlikely to reach that of the global financial crisis. Nonetheless, rising interest rates will create tensions, particularly when it comes to dealing with breaches of banking covenants if values ​​fall, requests for refinancing and responses to redemption requests from listed open-ended funds.

The fact that these tensions are not as acute as they were during the global financial crisis could encourage banks to push to sell more quickly. Such sales could crystallize price reductions.

From a development perspective, interviews indicate that projects scheduled for 2023 could be postponed to 2024 or shelved altogether. This lack of new projects is seen by some as a positive for existing assets and their owners.

According to Lisette van Doorn, CEO of ULI Europe, the market has evolved rapidly in recent months as the outlook has become more negative: “Since we conducted the survey and interviews over the summer, which already showed more and greater concerns, the industry has become even more concerned. That said, there is still a lot of capital available to invest and especially on standby, waiting for the right opportunities to arise. Stock picking is key, along with a strong ESG orientation, operational skills and client focus, to weather the storm. »

Geoffroy Schmitt, Real Estate & Hospitality leader at PwC France & Maghreb says: “Paris comes second in the ranking of cities in which to invest according to real estate professionals. The French remain more optimistic than their European neighbors, London comes first for the second consecutive year and Berlin is third, exchanging its second place with our French capital. Although the same cities remain in the top three, the overall prospects for investment and development have diminished due to a more uncertain context. On the asset class side, investors are taking into account future transitions: climate, digital and social. Thus, energy infrastructure tops the sector ranking for the second consecutive year. The life sciences sector is in second place and data centers in third place. In connection with the development of new uses, the top 10 is dominated by different types of housing, ranging from retirement homes, co-living and social housing.

“Innovation and digitization are essential pillars for the sustainability of real estate. Assessing and improving environmental performance is only possible by deploying innovation to capture relevant ESG performance data. AI-based tools for energy management enable real-time decisions that optimize building performance. As with Allianz Real Estate, a digitalization strategy must support the achievement of energy consumption targets in the direction of full decarbonization by 2050.” says Sébastien Chemouny, President ULI France and Head of France Allianz Real Estate