Sustainability, the great challenge for the European real estate market

European real estate market
Photo: Florian Wehde

Investment in assets that demonstrate a lower environmental impact will be key this year in the European real estate market, according to the Europe 2024 Emerging Trends in Real Estate report. The study, prepared by experts from the Urban Land Institute and consulting firm PwC, interviewed 1,089 industry executives and found that, despite the economic uncertainty hovering over the continent, issues related to sustainability and compliance with ESG (environmental social governance) criteria will affect all aspects of the industry, both in the short and long term.

The implementation of decarbonization measures in construction is of concern because of its costs and the lack of skilled labor for its implementation, but there is a consensus among 90% of respondents as to the importance of reaching 2050 with their “homework done” in the face of European regulations. In this regard, the idea of modernizing existing buildings to bring them into line with environmental requirements (62% of respondents) rather than starting new projects (43%) is gaining momentum.

In addition, most managers consider that sustainability lends added value to their real estate business, rather than being a detriment. The data is striking because it is the first time that this study has demonstrated an increase in collective pressure from institutional investors, lenders, buyers and tenants to accelerate the implementation of verfiable and concrete environmental measures.

Slow Moves

The report evidences notable concern over the Israel-Gaza conflict and the prolongation of the war in Ukraine. This geopolitical backdrop adds to the already problematic pressure of inflation and rising interest rates. If 2022 and 2023 were years of caution, 2024 looks like a year of cautious optimism for a possible rebound in profits in the European real estate market, though an eye must be kept on the cost of debt, rising construction costs and the latent risks of major investments.

Recession is a “realistic concern” for most interviewees, who prefer to rely on slow growth. In this context, the large economies of Germany and the UK are the most hesitant about major investments.

The study asks where and how real estate market investments will be distributed and the conclusion is that developers want to bet on capital cities that already offer liquidity even though they may involve high risks, such as London and Paris, but do not rule out investing in cities with important growth rates like Madrid, Milan and Lisbon.

With this global perspective, this report makes it clear that the recovery of activity in the European real estate market will not be as fast as expected, but that firm steps will be taken on issues of high social impact such as sustainability. We shall see how these challenges play out for the property developer searching for new investors.