Owners exchange offices for student housing when the pandemic erupts

The largest commercial property owner in the world installs its $ 378 billion real estate platform.

Two Blackstone moves – the sale of BNY Mellon’s London office in St Paul to Italian insurer General for £ 465 million, sealed this week according to people familiar with the deal, and an approach to buying the student housing operator GCP Student Living – are a sign of how homeowners are repositioning their portfolios as the pandemic accelerates structural trends.

Covid-19 has accelerated the decline of two key commercial property sectors – retail and office – and has encouraged owners to shop around for alternatives they believe will work best.

At the top of their shopping list are: stores, supported by the e-commerce boom; apartments for rent and student accommodation, made attractive by the lack of houses and the growing student population throughout Europe; and life sciences campuses, stimulated by huge investments in research and development.

“These are megatrends that have… Been accelerated by the pandemic,” said James Seppala, head of real estate in Europe at Blackstone.

A decade ago, offices and shops accounted for about 70 percent of the total European business volume, according to Real Capital Analytics. This year they account for 35 percent, with the residential and logistics sectors gaining ground.

Mike Prew, a Jefferies analyst, said the pandemic has accelerated the “transfer of value” from retail to “beds, medicines and sheds” – residential housing, healthcare and life sciences properties and warehouses.

Life sciences hit the record

The one most likely to excite fund managers is the life sciences – a niche where price records have been broken while investors are looking to buy or develop high-tech campuses near education centers in Europe.

In May, Magdalen College, Oxford University put up a 40 per cent stake in Oxford Science Park. on the market, priced at around £ 100 million – more than five times what the college paid for 50 per cent of the park in 2016.

“You have a growing demand, an insufficient supply and a growing rent. Is this the fastest growing industry bar? Absolutely, ”said Simon Hope, head of global capital markets for real estate agent Savills.

Properties range from conventional offices to complex laboratories. The key driver of value is the situation. “He’s‘ genius loci ’: they’re great schools, he’s talented,” Hope said. The hottest place in the UK and Europe is in the so-called “golden triangle” between Oxford, Cambridge and London.

“The world’s financial focus power, particularly from the United States, is shaping up in the UK because we have four of the top 10 universities: Oxford, Cambridge, Imperial and University College London,” Hope said.

A record £ 2.4 billion has been invested in life sciences properties in the area by 2020 and investors are still looking to deploy more than twice that amount, according to Bidwells advice.

“We spend a lot of time in the life sciences space … It’s underdeveloped in Europe widely and in the UK specifically. With the number of research institutions in the UK there is a great opportunity,” said Brad Hyler. , which manages a $ 38 billion portfolio as head of real estate in Europe in Brookfield.

Brookfield owns half of Harwell’s life sciences campus south of Oxford, and last month the Canadian investment group paid £ 714 million to TPG Real Estate Partners for Arlington, a science property group and technology with well in the golden triangle.

But according to Hyler, the real opportunity is to build labs and campuses from scratch. Brookfield seeks to develop around European cities in “Germany, Switzerland and elsewhere.”

Warehouse boom

Another emerging point for real estate investors is logistics, where the growing popularity of online shopping has given a big boost to the demand for warehouse space.

Through its subsidiary Mileway, Blackstone has amassed a large network of stores near European cities, while Brookfield has spent more than $ 1 billion over the past year building a portfolio in France, Spain, Germany and Poland.

Rents from warehouse occupants were maintained relatively well during the pandemic, and demand for space was an advantage for companies in the sector.

While shares in the largest owners of British offices, such as British Land and Land Securities, fell between 20 and 30 per cent from pre-Covid levels, and the owner of the Hammerson shopping center lost three-quarters, the Segro store developer has increased by 16 percent.

Residential opportunities

Investors are also betting on the residential sector, favoring rental properties and student housing.

“Look at these big European cities: they are big job centers with a great lack of housing and a historically stable economy.” It’s a good opportunity, ”said Mark Allnutt, senior general manager of Greystar, an American real estate investor that has raised 725 million euros to invest in European residential properties.

“People want to live in Amsterdam and London and there are not enough houses in those cities,” adds Seppala.

Helser said the undersupply is also a feature of the student housing market, which should help pull the sector through the disruption caused by the pandemic. Brookfield, which owns student housing operator Student Roost, plans to increase investment on the continent.

According to Real Capital Analytics, offices and businesses still make up more than half of the total investment property sector in Europe. When money flows into particular asset classes, investors admit that there are risks of overpayment.

Graph showing the proportion of investable shares in Europe by asset class

Unlike the financial crisis in 2008, the pandemic did not trigger a wave of afflicted goods hitting the market. But if banks lose patience with hard-hit landlords, there may appear opportunities to scramble on the rhombus business, said Guillaume Cassou, head of the European real estate team of the private company KKR, which has just closed a fund of $ 2.2 billion to invest in Western Europe.

“The important part is to play offense and defense at the same time,” he said.

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