The world’s largest commercial property owner is overhauling its $ 378 billion building stock.
Two Blackstone moves – the sale of BNY Mellon’s London office in St Paul to Italian insurer Generali for £ 465million, sealed this week according to people familiar with the deal, and an approach to buy out the operator of student housing 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 sectors of commercial real estate – retail and offices – and has prompted homeowners to stack up on alternatives that they believe will fare better.
Topping their shopping list are: warehouses, supported by the boom in e-commerce; rental apartments and student accommodation, made attractive by the housing shortage and the growth of the student population across Europe; and life science campuses, supported by huge investments in research and development.
“These are megatrends that have. . . accelerated by the pandemic, ”said James Seppala, European real estate manager at Blackstone.
Ten years ago, offices and stores accounted for around 70% of the total volume of real estate transactions in Europe, according to Real Capital Analytics. This year, they represent 35%, the residential and logistics sectors are gaining ground.
Mike Prew, analyst at Jefferies, said the pandemic had accelerated the “transfer of value” from retail to “beds, drugs and sheds” – residential housing, health goods and life sciences and warehouses.
Life sciences break record
Most likely to excite fund managers is in life sciences – a niche where price records are broken as investors seek to buy or develop high-tech campuses near educational centers in Canada. Europe.
In May, Magdalen College at the University of Oxford marketed a 40% stake in Oxford Science Park, priced at around £ 100million, more than five times what the college paid for 50% of the park in 2016.
“You have booming demand, insufficient supply and increasing rents. Is this the fastest growing sector without exception? Absolutely, ”said Simon Hope, head of global financial markets at real estate agent Savills.
Properties range from conventional offices to complex laboratories. The main factor of value is the location. “It’s the ‘genius loci’: it’s the grandes écoles, it’s the talent,” Hope said. The hottest place in the UK and Europe is in the “golden triangle” between Oxford, Cambridge and London.
“Global financial firepower, especially the United States, is formed 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 was invested in life sciences real estate in the region in 2020 and investors are still looking to deploy more than double that amount, according to consultancy firm Bidwells.
“We spend a lot of time in the life sciences space. . . It is underdeveloped in Europe in general and the UK in particular. With the number of research institutes in the UK there is a huge opportunity, ”said Brad Hyler, who manages a $ 38 billion portfolio as head of European real estate at Brookfield.
Brookfield owns half of Harwell’s life sciences campus south of Oxford, and last month the Canadian investment group paid £ 714million to TPG Real Estate Partners for Arlington, a scientific real estate group and technology with assets in the golden triangle.
But according to Hyler, the real opportunity lies in building labs and campuses from scratch. Brookfield plans to develop around European cities in “Germany, Switzerland and elsewhere”.
Logistics is another emerging hot spot for real estate investors, where the growing popularity of online shopping has significantly boosted the demand for warehouse space.
Through its subsidiary Mileway, Blackstone has amassed an extensive network of warehouses near European cities, while Brookfield spent more than a billion euros last year to build a portfolio in France, Spain, Germany and in Poland.
Rents for warehouse occupants have held up relatively well during the pandemic, and demand for space has been a boon to businesses in the sector.
While shares of the largest UK office owners, such as British Land and Land Securities, are down 20-30% from pre-Covid levels, and mall owner Hammerson has lost three-quarters , warehouse developer Segro is up 16%. .
Investors are also focusing on the residential sector, favoring rental properties and student accommodation.
“Look at these big European cities: they are great employment poles with a huge housing shortage and historically stable economies. It’s a good opportunity, ”said Mark Allnutt, Senior Managing Director of Greystar, a US real estate investor who recently raised € 725 million to invest in European residential real estate.
“People want to live in Amsterdam and London and there is not enough housing in these cities,” Seppala added.
The under-supply is also a hallmark of the student housing market, which is expected to help the sector weather the disruption caused by the pandemic, Hyler said. Brookfield, which owns student housing operator Student Roost, plans to increase investment on the continent.
Offices and stores still account for more than half of the total investment property sector in Europe, according to Real Capital Analytics. As money flows into particular asset classes, investors admit there are risks of overpaying.
Unlike the 2008 financial crisis, the pandemic did not trigger a wave of distressed assets hitting the market. But if banks lose patience with hard-hit homeowners, opportunities to bet on reduction deals may arise, said Guillaume Cassou, head of the European real estate team at private equity firm KKR, which has just closed a $ 2.2 billion fund to invest in Western Europe. .
“The important thing is to play on offense and defense at the same time,” he said.