Investment in real estate upgrades stalls in face of economic and business challenges

An image of some offices to illustrate the challenges facing real estate investors Research by ULI and PwC claims that nearly half of Europe’s real estate leaders are concerned about buildings becoming obsolete in the next five years in the face of long-term upheavals in demographics, climate change, technology and lifestyles. Most of the 900 or so industry leaders that participated are making long-term resources available to address the fit-for-purpose agenda. However, the challenging business environment has reshuffled priorities to financing and high construction costs, and scarcity of resources has made real estate renewal more expensive to achieve, consequently delaying much needed investment.

The report – Emerging Trends in Real Estate Europe 2023 – concludes that Europe’s real estate faces a major challenge to be fit for purpose. The report is the 20th annual survey by the Urban Land Institute (ULI) and PwC of European real estate sector leaders’ expectations for the year ahead

The industry is uncertain about when obsolescence will start to show in values. Interviewees acknowledge the failure of valuations to reflect sustainability-related capex requirements, even though 81 percent of survey respondents believe ESG credentials will have a material effect on asset valuations over the next 12-18 months.

Industry leaders identified the ESG agenda (54 percent) and climate change (42 percent) as the two top factors driving change in real estate over the next 20 years. Fifth at 29 percent was the related factor of decarbonisation. Changing customer demands (35 percent) and technological innovation (34 percent) were also significant factors.

Repurposing existing stock from one sector to another is on an upward trend. More than three-quarters of respondents expect to be repurposing still more assets in five years’ time. Office to residential is expected to be the most common repurposing in the next 5 years, followed by retail to mixed use (45 percent) and office to mixed use (38 percent).

ULI Europe CEO, Lisette van Doorn, said, “The industry is in a tough position with high inflation and construction costs, and occupiers facing rising occupancy costs from high energy prices. This heavily impacts rent affordability. At the time of rent renewal, many will critically review the options to reduce occupancy costs by moving to a sustainable building, which also helps them attract and retain talent. We expect environmental sustainability to become a ‘must have’ for sound operational performance.”

“In addition, the 20-year view suggests a big shift away from single-use real estate and a blurring of the boundaries between sectors. Keeping our buildings ‘fit-for-purpose’ is vital if we want resilience and the flexibility to meet rapidly changing occupier demands and use our spaces and cities more efficiently.”