Emerging Trends in Real Estate® Europe 2006 - Urban Land Institute

are more likely to move up than down.
In our survey, prospects for residential were “modestly
good.” It came just seventh in the sector rankings on total
returns, sixth by capital growth, but second for rent increases
and second for supply/demand balance prospects. Fewer
respondents rate residential as a “sell” this year at 23 percent
compared with 37 percent last year, with the difference now
preferring to “hold” the sector. Notably, residential is the only
sector in our survey where respondents believe yields are
more likely to move up than down.
Residential is also where some longer-term trends are starting
to affect respondents, or at least be at the forefront of their
minds. They were very conscious of the impact of increased
migration into their cities and that volumes and types of
housing would be needed to respond to that. “Immigration is
driving demand for rent or acquisitions of lower segments of
residential property,” says one. “There will be an overall
increase in consumption, but we need to develop an appropriate
housing offer.” The development outlook is thus relatively
bright, and residential ties for third in our survey on this
measure, with modestly good prospects across Europe.
Exhibit 4-14
25% Finland
Spain
20%
15%
10%
5%
0%
IPD Residential Property Total
Returns for Selected Countries
Sweden
Netherlands
France
Germany
United Kingdom
1999 2000 2001 2002 2003 2004
Source: Investment Property Databank (IPD).
Also, this sector expects to see the impact of demographic
changes, with families living in smaller family units. “There is
a changing pattern of residential. The average size of unit is
decreasing, with more one- and two-bedroom units and
[fewer] three-bedroom” units, says one. “The structure of
families is changing, implying a trend of smaller housing and
a transformation of the housing stock.” Many already express
interest in the retirement communities sector as well.
Best Bets
The more opportunity-led money is heading east for 2006.
“The residential market continues to be strong in Poland in
2006, with good prospects for Warsaw and key secondary
cities.” These include Krakow and Wroclaw, but it is “less
positive in cities below 100,000 inhabitants.” A “solid” year
for Poland is predicted, with further growth expected on the
current 7 percent annual growth of transactions. The Czech
Republic has annual sales growth of 5 percent.
Many are already taking up the opportunities in Poland,
prompting some to observe that “the market is overstocked
with large, low-end products. We see potential for development
in smaller and higher-quality projects.” It is very much
a sales-driven market, with few wanting a large portion of
their salary to go towards rent.
However, with all opportunities comes risk. “Future growth
of capital values is uncertain. This is because the rent increase
has to a big extent been fuelled by speculative investment
demand and not the real demand for apartments.” There are
also barriers to entry, including the “high level of bureaucracy
in securing building permits for new developments.”
Rapid population growth and migration into larger cities
are making the Turkish residential market look attractive for
some, although local expertise could be a crucial factor as the
market’s growth will “bring a tougher competitive environment
where investors without sufficient local knowledge will
be at risk.” Bigger cities will support the trend, including
Istanbul, Ankara, Izmir, Bursa, and Adana.
The government is also helping promote ownership with
changes in the mortgage law. Buyers will be able to take up
fixed- or variable-rate mortgages up to 30 years rather than
the five- to ten-year time frame, which has been making
ownership less accessible. But mortgage rates are at around
1.2 percent per month; there needs to be a decline in these
rates before take-up improves.
Avoid
Did someone say bubble? It is a problem that most respondents
deny exists for the rest of the market, but when it
comes to either U.K. or Spanish residential, they are happy
to adopt the term.
“Yes, there is a bubble in Spain. Residential is overvalued
by 20 to 25 percent,” says one interviewee. Another interviewee
estimates that housing starts will fall from current
levels of more than 700,000 to around 400,000.
Pessimists call Spanish housing a “low growth” opportunity
and that the market’s “oversupply will come into focus” in
2006. Any adjustment in pricing, say interviewees, will depend
on possible interest rate rises and the pace of those rises.
Emerging Trends in Real Estate ® Europe 2006 57