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The real estate market in 2018: Top trends

Staying in constant motion is the rule once again for 2018. In times when products are in short supply, investors who would never compromise on their assets’ quality and location face major challenges in finding a strategy. Dr Marcus Cieleback, Group Head of Research at PATRIZIA Immobilien AG, summarises the top trends of 2018 from the viewpoint of the real estate industry.

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1. The economic situation favours urbanisation and the office segment

The global economic picture remains upbeat. Growth continues, even though political uncertainties such as Brexit may have a short-term impact. Unemployment in the eurozone is low. Eurostat, the statistics office of the European Union, reports that in November 2017 unemployment was 8.7% – the lowest level since January 2009. The figure across the EU as a whole was 7.3%, the lowest since October 2008. The top ten countries with the lowest rates included Germany, the Netherlands, the UK and Austria as well as the Czech Republic and Poland.

It is likely therefore that demand for office, retail and logistics properties will remain stable. Institutional investors are tending to focus on city centres and turning away from business parks and outlying urban districts. After all, metropolitan regions offer the opportunity to procure new, attractive assets through rehabilitating or remodelling existing stock and through new, high-quality construction projects in preferred locations.

2. Residential real estate shows new potential

Global population growth continues: Current projections set the figure at roughly 1.1% per year. So it’s inevitable that investment decisions will feel increasing influence from demographic factors. Over the next 13 years, the population is expected to grow by more than a billion people, mainly in urban areas. Demand for all types of residential properties will remain a stability factor for the industry. At the same time, advancing urbanisation poses a problem – more specifically, the omnipresent shortage of product. Metropolitan construction projects are just not keeping up with demand.

Another segment that offers new potential is the growing population of seniors. In 2017, one out of every four Europeans was over 60, and the trend is upward. So appropriate senior housing and nursing properties will be the next big thing as a growth sector, especially in Europe and the US.

3. Unchanging interest rates continue to drive prices

At the end of January, the European Central Bank decided to keep the key lending rate at 0% and the deposit rate for banks at -0.4%. Government bond buy-backs will be cut in half, to 30 billion euros as of January, and will remain at that level until at least September 2018. There’s also no sign of a change in interest rate policies in the US. The new head of the Fed, Jerome Powell, is considered a moderate in terms of interest rate policy and will likely maintain the same strategy as his predecessor, Janet Yellen. What does Cieleback think that means for 2018 and 2019? “The low-interest environment may be the new normal.”

In Europe in particular, that will mean government bonds are still unlikely to pose much competition to real estate investments, and investors will continue to flood into the real estate sector as before. So investment volumes will stand and fall with the supply of product, and the shortage of assets will keep driving prices up.

“The low-interest environment may be the new normal.”

Dr Marcus Cieleback, Group Head of Research, PATRIZIA Immobilien AG

4. The value-added growth segment just keeps growing

Lower-risk core and value-added strategies predominate in Europe and Asia, but the core investments class is under pressure. Assets are becoming less and less available across all types of use classes, and the resulting price increases are also pushing down yields. So core investors are increasingly turning to value-added properties, even though they may be reluctant to accept the associated higher risk. But according to Cieleback, that also creates opportunities: “The markets want core products. So value-added investors, especially in the US and Europe, should take advantage of the opportunity to procure appropriate assets.”

“In terms of manageable risk and higher profits, logistics will remain one of the best investment options in 2018.”

Dr Marcus Cieleback, Group Head of Research, PATRIZIA Immobilien AG

5. The search for alternatives: An opening for niche markets

The shortage of product is intensifying the demand for international expertise and investment alternatives. Investors in Europe in particular are looking for new options. Germany, for example, with less of a trend toward centralisation than countries such as France or the UK, offers a way to sidestep large metropolitan regions in favour of B-level cities. Another market segment that’s been on the rise for some time now is warehousing and logistics, says Cieleback. “In terms of manageable risk and higher profits, logistics will remain one of the best investment options in 2018.”


Photos: Shutterstock

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