European economies may be facing difficulties but the the real estate industry is looking up from uncertain times with lessons African markets can learn, writes LYDIA LIMBE

For the last few years, Kenyan  real estate industry players have been fighting reports of a possible bubble burst in the industry. Some have even reacted furiously to reports suggesting this.

Many have pointed out that the local market is still developing and far from hitting a plateau. Other markets around the world, however, particularly in Europe and the US came tumbling down, but reports suggest the trend is reversing. Sentiments among European industry leaders about the prospects for their businesses is more positive than at any time since 2008, despite the uncertain macroeconomic outlook.

Optimism

Equity for investment in prime commercial real estate is expected to increase, but bank debt is predicted to contract further.

According to a survey done by Price Waterhouse Coopers, the respondents surveyed recognise that traditional stock selection and micro asset management skills are crucial to generating returns. The environment offers little certainty and definitely no quick wins. Europe’s real estate markets continue to be challenging, but all sectors offer new investment potential too.

However, reasons for optimism vary. The well capitalised are hopeful of a bigger deal flow this year. Those who have asset management expertise believe more value-added opportunities could be coming from banks or others flipping distressed assets.

Lenders are the least optimistic. They are saddled with large amounts of difficult assets that the majority of capital available for real estate is not interested in, as equity remains picky and largely risk averse.

On the other hand, the rehabilitation of the market is being shaped by two major trends — globalisation of capital and specialisation of strategies. Capital seeking European real estate is becoming more global. The market is benefiting from greater interest from new Far Eastern investors, buying cross-border for the first time.

But much of that is flowing to the top of the market — that is: Equity to large fund management houses, debt to large Real Estate Investment Trusts, and sovereign wealth fund money to leading world-class cities.

As attention focuses on green issues, there is a small, yet growing consciousness of the need to reappraise how developers, architects and planners approach the building environment.

Driving this trend is the changing nature of Europe’s occupiers and consumers.

For the first time ever, take up by technology and telecom companies outstripped that of banks and finance companies in the first half of last year, according to Corporate Commercial Real Estate Services.

One trend emerging from globalisation is the impact Asian consumers are having on European cities and the opportunities these consumers may present within themselves.

Asian tourism in Europe is now big business; 8.6 million Chinese tourists will visit by 2020 according to the London School of Oriental and African Studies.

“It’s mathematical. The developing middle classes of China and elsewhere in the world have the financial wherewithal and ambition to travel. There is no constraint in demand. And it’s going to grow even further,” says the report.

Proposed solutions

Concentrate on value-added locations in key cities: Core properties might be out of reach but there are pockets in key cities that appeal to dominant occupiers such as telecommunications, media and technology firms, and creative enterprises.

These firms might switch city centre working for offices in the urban suburbs if they have good transport links and sustainable credentials

Hunt for institutional-quality properties in suspended animation: Banks are pricing good assets with just one or two impairments as secondary because they are worried about values falling further on account of these issues. Investors, however, say they are attractive because all they need is a little brushing to improve prospects.

Saddle up for more deals in Ireland and Spain: Develop relationships, networks and contacts in the right places to ensure that you are in line for distressed opportunities. Ireland may be most accessible through lenders outside of the National Asset Management Agency, which is hamstrung by 2009 prices.

Find quick-flip opportunities from buyers of distress: Buy loans and properties out of larger portfolios acquired by opportunity funds. Use management expertise to increase income and value. Get in with an offer just after they have bought an asset or just before.

Follow the money

Follow the money: Europe is a key destination for tourists from China and other emerging markets. Tailoring retail, hotels, and leisure for their spend can bring rewards. Top markets are Paris, Germany, Belgium, and Turkey.

Consider teaming up with a local player in a local market: Find a company in a secondary city that can provide intelligence about where bargains can be found, which assets for sale should be investigated or avoided, and which properties are about to come to market.

Refurbish buildings to green standards: Seek out good buildings with slight “blemishes” and turn them into good green assets. In the months ahead, the marketplace promises to be busier.

Debt and economies

While some feel optimistic about what the banks will do this year, what is distinct about next year is the greater interest of investors in looking beyond the big-picture concerns about debt and the economies of Europe and hunt for growth — whether that is to be found in major emerging trends like the Internet or sustainability, or in the details of a particular location.

Whatever the activity, it’s a focus on the micro – the economics, the demographics, and the potential of a specific location or asset — that matters.

“It’s important to have a global view, but not so much these days. Being the big wizards of the world is not the aim. We want to be better locally, build teams and expertise in specific places. It is a question of depth as everyone seeks to make the highest margins in a shrinking world,” said the Price Waterhouse Coopers 2013 Euro-zone Report.