Madrid and Barcelona score well in the latest annual ranking of European cities by investment potential prepared by PwC and the Urban Land Institute (ULI), though some of the commentary in the report on Barcelona suggests the authors need to do more homework.

PwC ULI European City Ranking (id 153)

“We are on the cusp of quite a significant slowdown, both in the real economy and in the underlying real estate markets,” says a pan-European investment manager quoted in the executive summary of the latest PwC / ULI ‘Emerging Trends in Real Estate’ 2023, subtitled ‘In the eye of the storm’.

“The outbreak of war in Ukraine has cast a long shadow over Europe, and real estate, like every other industry, will have to deal with the economic and political fallout for the foreseeable future,” continues the executive summary.

The annual report, based on an extensive survey of ‘industry leaders’ in the real estate space, finds that “seven out of 10 survey respondents believe Europe will move into recession” at the end of 2022 and going into 2023. More than 1,000 property professionals were surveyed for the report.

Undertaken jointly by PwC and the Urban Land Institute (ULI), the report provides an outlook on real estate investment and development trends, real estate finance and capital markets, cities, property sectors and other real estate issues throughout Europe.

European cities

In the section on European cities and how they stack up as investment and development opportunities this year (looking at all different types of real estate investment such as offices, logistics. retail, hospitality, and residential), the report explains that “with economic uncertainty afflicting the whole of Europe, overall investment and development prospects for all 30 cities covered by Emerging Trends Europe have deteriorated since last year’s report.”

London and Paris top

London was voted the best European city for its investment outlook for the second year running. “London remains the most favoured city in Europe for its overall prospects, especially for offices and logistics. Retail and hospitality are also well supported by the revival in tourism. Sentiment is buoyed by the perennial attractions of a wide and deep market.”

Paris was in second place, up one from last year, in part because of an anticipated boost from the 2024 Paris Olympics and because “France is seen as having a relatively resilient energy supply, mainly due to its nuclear generation.” 

Madrid

The Spanish capital was in 4th place behind Berlin, up two places from last year, with bullish commentary from survey respondents reflecting this strong performance.

“As one of the fastest growing cities in Europe, Madrid rises from sixth to fourth place. Urbanisation is continuing apace, seemingly unhindered by the pandemic, due to inward migration from elsewhere in Spain and from overseas.

“Spain is also set to benefit from strong growth in wind and solar power over the next few years, potentially insulating the economy from energy disruption and helping move real estate towards net-zero.

“Residential investment in particular is viewed as promising given a perceived shortage of supply. As one developer notes, prices are rising as a result of the scarcity of ready-to-build or fully permitted land: “The pricing dynamics for those that have land and can build are good and will remain good.” Similar supply-demand dynamics are reinforcing the office and logistics sectors here.”

Barcelona

Barcelona was in 9th place, unchanged from last year. The report explains that “Barcelona shares many of Madrid’s positive attributes, including similarly rapid population growth,” and that offices and logistics are performing extremely well. 

On the residential front the report points out that “builders face a challenging target of 30 percent subsidised housing,” referring to the 30% social housing quota that Barcelona has imposed on all new residential developments above a size of 600 sqm. Challenging is not the word – it’s a ruinous target. One respondent is quoted as saying “in certain locations that makes sense, but in others that aren’t in the city centre, it doesn’t.” This is misleading. The quota makes all projects above a certain size economically unworkable in Barcelona, especially in the city centre.

Barcelona’s 30% social housing quota was introduced by Mayoress Ada Colau and her hard-left Barcelona en Comú party in December 2018 explicitly to make developers, whom they see as nothing more than speculators, “pay for all the harm they have caused,” to quote Colau. 

The policy is economically illiterate, and makes all new developments in the centre of Barcelona above 600 sqm financially unviable. Unsurprisingly, there has been a collapse in Barcelona new developments above 600 sqm, especially in the city centre where land values are most expensive. The only place it might be possible to build new homes with a 30% social housing quota and get an adequate risk-adjusted return is outside the city centre. So the PwC / ULI report has it back to front.

Even smaller projects are on the decline. This morning I spoke to a builder who has spent his professional life working for developers in Barcelona, both big and small. He reports that small renovation projects have also slumped. He’s changing his focus to Madrid.

City leadership matters

When it comes to residential development, Barcelona should be at the very bottom of the 30-city ranking in 2023. So how is it that a city like Barcelona gets such a high ranking in the PwC / ULI survey? Perhaps because, when you look the criteria for the “importance when selecting a city for investment or development” the ‘overall city leadership’ is in second-last place, with an overall importance of just 66%, ten places behind the most important factor ‘Transport connectivity (international, national and local)’ with an overall importance of 95%.

It seems that the respondents of the PwC / ULI report don’t give much weight to city leadership when deciding where to invest (see figure below). They should. Barcelona is a textbook example of how bad city leadership can turn residential-development considerations on their head, send investors fleeing, choke-off development in a short space of time, and make a housing problem worse.