Last week I wrote in this column that student housing has made the grade as a new asset class in institutional investors. But the story is actually much bigger.
Micro living as a whole is getting full marks from the real estate investment community in Europe as one of the fastest growing segments under the alternative assets banner. In 2016, a record volume of €30.1 bn of hotels, student residences, retirement and care homes, healthcare facilities and data centres exchanged hands in Europe, according to Real Capital Analytics (RCA).
This represents 15% of all the transactions of income-producing commercial real estate that completed in the period. It is also 2% more than the alternative sector’s market share for all of 2015.
The definition of alternative assets is still very broad but there are signs that individual segments are becoming asset classes in their own right. Figures from RCA show that the top 10 investors in the student housing segment in Europe accounted for just over €10 bn in the three-year period to 2016. Last year alone, the top 10 accounted for €4.3 bn.
The growth of senior housing has been even more spectacular: in 2016, the top 10 investors accounted for €4.3 bn, equivalent to 75% of the total figure between 2014 and 2016. Data centres are also jumping up the rankings: last year total investment volume in this niche in Europe was five times that the previous year, according to RCA.
Admittedly, micro-living and data centres are still relatively small niches, but a growing number of investors are ploughing funds into alternative property asset classes, RCA claims. ‘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. We expect 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,’ commented Tom Leahy, RCA’s director of EMEA Analytics.
Significant growth in mainland Europe
UK-based agent Savills sees a comparable trend. While the overall share of alternative investments (excluding multifamily apartments) dropped from around 22% to 17% last year, this was mainly to due lower volumes transacted in the UK, claims Eri Mitsostergiou, head of European research. ‘However, if we look more closely, in many countries the share and volume of alternative investments increased significantly last year.’
Norway leads the way in percentage terms with a 144% rise year-on-year to €804 mln, Savills data reveals. In absolute terms, Germany and France stand out with €7.1 bn and €3.7 bn respectively. In percentage terms, perhaps not as spectacular as Norway, Germany and France still chalk up impressive double-digit scores of 18% and 14% respectively. Sweden performed even better with a 31% increase y-o-y to €3.8 bn.
In the US micro living is an established investment class with dedicated REITs such as senior housing specialist NorthStar and Northwest Healthcare Properties. Interestingly, their names have cropped up in RCA’s rankings of leading investors in these segments in Europe.
The number of REITs dedicated to micro living in Europe is still no more than a handful. But a number of local real estate investors that are part of insurance giants are making strides in the sector.
France and Germany lead in Europe
One of Europe’s biggest investors, AXA Investment Management - Real Assets (AXA IMRA), injected €800 mln in alternative real estate, including healthcare, in Europe during 2016, setting a new high for the group. This total includes healthcare and hotels, Hideki Kurata, head of alternatives and special situations at AXA IMRA, told PropertyEU. ‘Overall, we’ve been attracted to the healthcare sector since 2008, so it’s an asset class we know well.’
According to Savills, domestic investors continue to dominate the French market, but AXA IMRA is also beefing up its presence in micro living in Germany. In December last year, the Paris-based investor completed the acquisition of a portfolio of 17 healthcare assets in that country from real estate funds managed by US private equity group Blackstone for around €310 mln.
One of the key motives behind the growing investor focus on micro living and comparable segments such as healthcare is a need for higher yielding, income-producing assets. RCA’s analysis of transaction pricing shows that alternative property assets exchanged hands at a median yield of 6.5% last year compared with 5.9% for offices, the most actively traded real estate sector in Europe.
‘The higher yields generated by alternative property reflect some of the additional tenant risk and relative lack of liquidity in alternative sectors versus the core segments of the market,’ added RCA's Leahy. ‘Another risk is that these properties may be purpose-built, notably in the field of healthcare, and would require significant capital expenditure for conversion into other usage. The quid pro quo to this is that tenants are generally happy to sign long-term leases.’
US is 10 years ahead
One of the key conclusions of a briefing PropertyEU held on micro living earlier this month at the London office of law firm Nabarro is that the market in Europe is very fragmented, but also very promising.
A look at the US and UK markets paints a good idea of what may lie ahead for Europe. ‘The US is 10 years ahead of the UK and the UK is five years ahead of Europe, so you can see the main trends evolving,’ said Daniel Gorzawski, managing director and head of Europe for Harrison Street.
That takes us back to the beginning of my column last week, entitled: Ten years down the track.
Judi Seebus
Editor in Chief
