By Tom Leahy on January 4th, 2018
The inevitably of the boom and bust that characterizes the property market doesn’t make it any easier for investors to predict the arrival of the next crash. Therefore, instead of playing a game of roulette by trying to time the cycle, many European investors are adopting a different approach.
Buyers are acquiring assets that benefit from structural tailwinds – such as Europe’s ageing population and the preference for live/work/play urban environments – or assets that are subject to demand drivers distinct from traditional commercial assets. RCA data shows these sectors now account for almost 35% of total European investment volume, up from the 20% level recorded in 2007.
Europe’s senior housing sector is a prime example of the increased interest. As the population ages – the median age in the European Union countries rose to 42.6 in 2016 from 38.3 in 20011 – investors have flocked into the retirement space in greater numbers. Just over €200 million ($240 million) was invested in 2007, but in the 12 months to the end of Q3’17, the number had grown to €5.8 billion.
Similarly, student housing transaction volume has reached €6.9 billion from €720 million in 2007. While most of that student housing growth has been in the U.K., activity has also increased in Germany, France and the Netherlands, and growing numbers of overseas students at Europe’s universities will likely further boost investment volumes in continental Europe.
The other pillars of the accommodation sector – hotels and apartment/residential assets – have grown to become an important component of the institutional portfolio. This has not been the case in most of Europe until recently. For residential assets the growth is not in Germany, but in the Nordic markets, the U.K. and Spain. The different opportunities afforded by the hotel sector – bond-like long-term income streams from the budget chains and the chance to increase returns through active management – have helped attract more capital to the sector.
Elsewhere, the seemingly rock-solid fundamentals of the logistics market are supported by drivers including internet retailing as well as the push for cost savings in the supply chain. Investors are also looking at assets such as parking facilities, hospitals, leisure and self storage, which offer diversification and are subject to demand drivers distinct from the usual business cycle. Still, assets that require some operational expertise, such as self storage, may not appeal to all institutional investors.
The flip side of the coin is that parts of the market facing structural headwinds are falling out of favor. One only has to look at the terms of the Hammerson/Intu tie-up and the discounts to NAV both firms trade at to see what has happened to the shopping center market in the U.K. An RCA price indicator for U.K. shopping centers shows prices 40% below their 2007 level. A similar story can be told for parts of the out-of-town office market and retail warehousing too, where preferences have shifted from out-of-town to town center locations.
As 2018 gets underway it is likely that investors will continue to pursue this strategy of looking outside the usual investment realm. Prices for commercial assets in the core markets are up 50-70% on 2007 levels, pushing investors to find other assets. At the same time, an ageing population, preferences for live/work/play urban environments, growing numbers of overseas university students, as well as Amazon’s nonstop drive into all facets of consumer life, will continue to pull investment into the sectors poised to capitalize on such structural changes.
The 2017 in Review edition of Europe Capital Trends will be published Jan. 31.