A number of records were broken this week by what is collectively known as the ‘alternative’ real estate sector.
A total of €30.1 bn of hotels, student residences, retirement and care homes, healthcare facilities and data centres exchanged hands in Europe during the first 11 months of 2016, according to Real Capital Analytics (RCA). This represents 15% of all the transactions of income-producing commercial real estate that completed in the period and is 2% more than the alternative sector’s market share for all of 2015.
'For the past two years specialist operators and investors have been building platforms of scale in niche markets that offer growth opportunities, attractive returns and exposure to different macro-trends,’ commented Tom Leahy, RCA’s director of EMEA Analytics. He expects this momentum to continue in 2017 and for the hotel sector in particular to establish itself as a regular feature in the real estate portfolios of institutional investors.
In the same week, Cushman & Wakefield released a report revealing that the outlet centre sector is also on course for a record year after two concurrent pan-European sales by the IRUS European Retail Property Fund were sealed in November for a reported €1.28 bn. Interestingly on the same day, VIA Outlets - a joint venture of Hammerson, APG, Meyer Bergman and Value Retail - agreed to buy four European outlet centres, located close to major cities in Germany, Portugal, Spain and Poland, for a total gross asset value of €587 mln.
Together these transactions eclipsed the entire outlet centre transaction volume for 2015 in a single day, according to Cushman & Wakefield.
Student housing is firing on all engines
The student housing sector is likewise firing on all engines, with a number of countries in mainland Europe, particularly Germany and the Netherlands, now becoming serious contenders. The UK continues to lead, even if investment is slowing slightly; a new research report from Cushman & Wakefield revealed this week that the UK student accommodation sector is set to reach £3.1 bn (€3.7 bn) in 2016, making it the second highest year on record.
One of the key attractions of these so-called alternative segments is the higher yields compared to mainstream asset classes. RCA’s analysis of transaction pricing shows that alternative property assets exchanged hands at a median yield of 6.5% compared with 5.9% for offices, the most actively traded real estate sector in Europe.
Annerie Vreugdenhil, global head of real estate finance at ING Bank, put it this way in a recent interview with PropertyEU. The chance that an investor can make money in mainstream segments by getting a better exit yield than entry yield is not good. 'But,' she said, 'there’s still a bit of yield compression to be had in some niches like student housing and other specialisations.’
Scarcity of product is a key bottleneck
While there is still plenty of interest for all asset classes, whether mainstream or alternative, one of the key bottlenecks investors are facing is lack of product. Indeed, Vreugdenhil claims scarcity of product will be one of the key challenges facing investors in European real estate in 2017.
In a market where yields are so low and product is scarce, investors have to offer added value through differentiation or specialisation in niche segments, she added. ‘Those investors capable of differentiating by repositioning a property, changing the tenant mix and creating new facilities to increase the rent, can make money in different areas than they’re used to. I don’t have a crystal ball, but I think we will see this trend strengthening in the next 12 months.’
Vreugdenhil also thinks we will see the current low-interest rate environment persist for some time to come, possibly for another 18 months or even longer.
As we make up the balance for 2016, it's clear that some of the froth that was apparent in the market at the beginning of the year has dissipated in the course of the past 12 months. But it is not running out of steam yet thanks to the huge amounts of capital targeting the sector and the current low-interest rate environment which Vreugdenhil sees persisting for some time to come.
And while specialisation and differentiation are key across the board, there’s still some room to play the yield game beyond the mainstream asset classes.
Judi Seebus
Editor in Chief
