Europe’s real estate markets are nearing the peak of their cycle, according to those interviewed for ‘Emerging Trends in Real Estate Europe’. Although capital will still be “coming out of every orifice” in 2007, yields are expected to bottom out. Pricing may be “optimistic,” but it is not “fundamentally ridiculous or irrational”. For 2007, investors are in an upbeat mood: buyers outweigh sellers by two to one. The difficulty will be finding value.
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From the Europe Real Estate Yearbook 2007

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Entering 2007, investors are looking forward to calmer, steadier times, according to the annual forecasting and trends publication from the Urban Land Institute and PricewaterhouseCoopers, Emerging Trends in Real Estate Europe. “No glaring pitfalls or huge opportunities,” is how one of the 250 leading real estate executives surveyed for this report describe the prospects for 2007. Although capital is expected to continue flooding into European real estate, most think yields will finally halt their downward path and either stall at current levels or move out a bit this year. “In some markets, it’s just going to be an income return,” noted one interviewee. Without yield compression to turbo-charged returns, attention is switching back to property market fundamentals. “You have to be prepared to get your hands dirty, find angles, and exploit values,” commented another respondent. Investors are poised to pick their way through this minefield, finding value where they can. Although many are still complaining about the difficulty of finding suitable opportunities, this may be easing. Tightening interest rates have shaken some of the highly leveraged private buyers out of the market, while high prices are tempting more owners to put their stock onto the market.
Those canvassed by Emerging Trends are still quite positive about the outlook for most European cities in 2007, citing less risk, higher returns, better supply/demand balance and a better development prospects.
The perennial favourites, Paris and London, remain the top-ranked cities in risk-adjusted rankings. Even though many consider Paris “expensive,” investors like its stability. London follows Paris closely, topping the league in rental growth prospects. It is also considered to carry the lowest risk of all 27 cities ranked.
But big winners in 2007 are the German cities, which last year languished towards the bottom of the risk-adjusted league. Munich and Hamburg are now in the top 10 cities, leapfrogging to fourth and ninth place respectively, while even Frankfurt’s ratings improved for 2007, in spite of its continued low ranking. This leap confirms that real estate investors worldwide think that Germany’s recovery is finally getting under way. They are expecting some modestly good rental growth to emerge in some of its main cities, particularly in the office sector. Competition for assets in the main centers of western Europe is still intense. “When you’re getting outbid by 20% to 25%, you wonder, ‘What am I missing?’,” states one interviewee. Consequently, investors are looking at secondary cities. “We are looking at B cities in France instead – for example, Lyon – where you can still fi nd good value for money,” said one. Selected cities in Europe’s emerg- ing markets are also attracting more attention. Moscow and Istanbul’s rankings have soared, rising eight and seven places respectively between 2006 and 2007. “Growth rates in Moscow and Istanbul will continue to drive demand through increases in job growth and disposable income,” remarks one respondent. The drive to find value and extra yield is also taking investors into alternative property. Hotels and mixed-use real estate ranked second and third after shopping centers as the property types that will deliver the best returns in 2007. Once the domain of specialist investors, these two are now considered mainstream sectors.