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Investors Cool On London But Love … Co-Living?

Co-living at The Collective's Old Oak Common

The prospects for investment and development in London next year are only slightly better than those for Moscow, where the government is subject to sanctions, and Istanbul, where two years ago there was an attempted military coup.

The findings of the 2019 edition of the highly regarded Emerging Trends in Real Estate Europe report, produced by the Urban Land Institute and PwC, show exactly how cool European investors have grown about London’s post-Brexit prospects, with the city ranking 29th out of a possible 31 destinations.

London has seen more investment than any other European city this year, according to Real Capital Analytics, and the Emerging Trends report found that global investors are still keen on London. But a large proportion of the 800 respondents canvassed were from Europe, and they are negative on London. Birmingham, Manchester and Edinburgh also scored poorly.

One private equity player interviewed anonymously said that until Brexit, the U.K. represented 25% of European gross domestic product while attracting a disproportionate 40%-plus of capital flows.

“We’ve just said to our clients, that’s gone now. The U.K. has lost a big piece of its competitive advantage,” he said. 

The survey’s respondents said they were keen to put their money to work in smaller cities that were further behind in the economic cycle than London. These markets are now viewed as offering residents a better quality of life, therefore providing sustainable growth. With that in mind, Lisbon topped the list of investment and development preferences, with Dublin third, Amsterdam sixth and Helsinki eighth.

With the country’s economy remaining strong, German cities also fared well, with Berlin second, Frankfurt fifth, Hamburg seventh and Munich tenth.

In terms of wider sentiment about real estate, respondents on the whole were less confident than last year about the overall prospects for the sector and their business, due to the perception that we are late in the current cycle. The high price of assets and the subsequent difficulty of making good returns was their top concern, followed by geopolitics and trade wars.

There was a decline in sentiment about the availability of debt and equity, with 28% thinking there will be more equity available next year compared to this year. That figure compares to 50% last year, but that was a historic high, and the ULI and PwC report there is little fear that liquidity for real estate will fall substantially next year.

If Lisbon topping the list of investment destinations was a surprise, that was nothing compared to the top tip for sectors which will perform well in 2019: co-living. The ULI and PwC were keen to stress that very few respondents said they were active in co-living, but both investors that are and investors that aren’t active in the space feel it will perform well.


Some respondents felt the sector’s emergence posed a quandary for an industry looking to stress its positive contribution to society.

“People are talking about shared serviced apartments, co-living, but that is only really for young, unmarried people. I think reducing the size of dwellings is a social disaster,” one chief executive said. “If you take a holistic view of the world, what pressure and stress does that then put on individuals, families and communities?” another asked. “As an industry, we talk about building sustainable communities. But moving everybody into living in micro-apartments, is that really sustainable?”

The success of co-living should be put in the context of a wider preference for the various forms of residential real estate: Seven of the top 10 sector preferences were forms of residential, with only sheds in second, flexible offices in fourth and data centres in fifth breaking the hegemony of beds.

The presence of flexible offices and data centres high up also highlighted the trend for alternatives and operational real estate, as a way of boosting returns at the end of the cycle, but also as a reflection of the way real estate will have to mirror the changes in society.

“If you think back 10-12 years and you were in a similar situation of high prices, we bought secondary assets in secondary markets with too much leverage to try and improve returns,” one global pension fund investor said. “We are trying to avoid that this time around. This time we have gone into alternatives where there is more operating risk. Time will tell whether it’s the right decision.

“We have invested a lot in the private rented sector, student accommodation, outlet malls and affordable hospitality. We think some of these sectors will actually be more resilient in a downturn. And once we have access to the operations as well we think it is actually a risk mitigator as you can see changes in performance coming sooner, and you can do something about it rather than it coming as a surprise.”

At the other end of the league table in terms of sectors was retail, with the four retail subsections occupying four of the five bottom slots: out-of-town shopping centres, retail parks, city-centre shopping centres and high street shops.

U.K. retail was particularly out of favour. “People are underestimating how much online and e-commerce is impacting retail,” one opportunity fund manager said. “I think it will be really quite bad. What we’re now looking to do is buy existing retail product, B and C quality shopping centres, and make a return by tearing them down and building new leisure, residential and logistics space on them. Tear them down, people don’t want to go to bad schemes any more. We haven’t found the opportunities where it’s cheap enough yet. What we are doing is buying well-placed land.”

But even in Europe, where there is less retail floorspace per capita and the sector has so far been seen as quite resilient, the prospects are seen as gloomy.

“Even in Germany, where you have big, dominant centres with 90% fashion, they need to be more 50/50 split between retail and food and beverage and leisure, and you won’t necessarily get the return from investing that capital,” one global fund manager said. “The biggest dilemma for everyone in the retail space is, you’ve got to spend to stand still, and that’s not a natural state of mind for a lot of property investors. But if you don’t spend, the outlook is pretty grim.”