Capital flowing into real estate is currently favouring the ‘debt route’, which offers better risk and return prospects compared with equity, a new report from PwC and the Urban Land Institute (ULI) has revealed.

According to the Emerging Real Estate Trends in Europe report, this trend reflects a continued gap between bid and ask prices around core investment returns. Geopolitical and economic uncertainty is influencing capital deployment, with real estate facing “fierce competition” from asset classes such as infrastructure and bonds amid an elevated interest rate environment.

The report shows that as a result, a notable year-on-year shift in that equity flowing into real estate increasingly comes from less traditional, more entrepreneurial sources such as private equity funds, high-net-worth individuals and European and US family offices.

With this shift in capital flows, attention is increasingly turning to real estate debt, which, unlike direct ownership, avoids operational complexity while retaining asset-backed security. Property Week analysis also reveals that European real estate debt continues to hold its appeal amid market uncertainty.

For the report, 1,276 property professionals were surveyed and most respondents said they expected both equity and debt availability to increase for refinancing.

Expectations of debt availability for new investment and core real estate have now overtaken those for refinancing and value-added assets, which PwC said could hint at a positive shift in investor sentiment as the market cycle evolves.

This optimism partly reflects attractive returns if buyer and seller expectations can be aligned, as well as a more positive view among equity investors of real estate’s role within multi-asset portfolios.

One respondent, the chief executive of a global pension fund, said: “If the real estate market becomes the most interesting market because of the opportunities that are there, we could easily increase our allocation.”

The report also cites a “significant increase” in industry concern around the impacts of deglobalisation – up more than double over the past two years to 70%. Broader international political instability, the escalation of global conflicts and Europe’s weak growth prospects are also concerns.

Meanwhile, increased risk and varied growth outlooks across Europe have made country selection a more prominent investment consideration, with investors focusing on mature markets. London, Madrid, Paris and Berlin continue to lead city rankings for European real estate investment and development prospects for the fourth consecutive year, also topping MSCI’s city transaction volumes over the past 12 months.

Niche operational sectors dominate the rankings for investment and development prospects in Europe, despite currently attracting less capital than traditional core sectors such as offices.

Lisette van Doorn, chief executive of ULI Europe, said: “Successful players are those that understand the fundamentals of real estate, proactively operate assets in partnership with occupiers and take a long-term value perspective.”