The world’s largest commercial real estate owner is restructuring its US$378 billion in real estate assets.
Two measures of the Blackstone Group-the sale of the London office of the Bank of New York Mellon in Sao Paulo to the Italian insurance company Generali for £465 million, according to people familiar with the matter, have been finalized this week, and the acquisition of student housing operator GCP Student Living’s approach-is an indication of how landlords are repositioning their portfolios as the pandemic accelerates structural trends.
Covid-19 accelerated the decline of the two key commercial real estate industries, retail and office buildings, and prompted landlords to flood in what they thought would be better alternatives.
The most important items in their shopping list are: warehouses supported by the e-commerce boom; rental apartments and student housing, which have become attractive due to housing shortages and growing numbers of students across Europe; and life science campuses, Driven by huge R&D investment.
“These are big trends… the pandemic has accelerated,” said James Sepala, Head of European Real Estate at Blackstone.
According to data from Real Capital Analytics, ten years ago, offices and shops accounted for approximately 70% of the total real estate transactions in Europe. This year, they accounted for 35%, and progress has been made in the residential and logistics sectors.
Jefferies analyst Mike Prew said the pandemic has accelerated the “value transfer” from retail to “beds, medical and sheds”-residential, healthcare and life science properties and warehouses.
Life sciences set a record
What is most likely to excite fund managers is life sciences-as investors seek to buy or develop high-tech parks close to European education centers, price records in this niche market are being broken.
In May, Magdalen College of Oxford University bought a 40% stake in Oxford Science Park in the market, Which sells for approximately £100 million-more than five times the amount the college paid for 50% of the park in 2016.
“Demand is growing rapidly, supply is insufficient, and rents are constantly rising. Is this the fastest growing industry? Absolutely,” said Simon Hope, real estate agent Savills Global Head of Capital Markets.
Properties range from traditional offices to complex laboratories. The key driver of value is location. “This is the’genius’: this is the great school, this is the talent,” Hope said. The most popular location in the UK and Europe is the so-called “Golden Triangle” between Oxford, Cambridge and London.
“The world’s financial firepower, especially those from the United States, are trained in the UK because we have four of the top 10 universities: Oxford University, Cambridge University, Imperial College London and University College London,” Hope said.
According to data from consulting firm Bidwells, by 2020, investment in the life sciences industry in the region will reach a record 2.4 billion pounds, and investors still hope to invest more than twice that amount.
“We have spent a lot of time in the life sciences… It is widely developed in Europe, especially in the United Kingdom. There are a large number of research institutions in the United Kingdom, and the opportunities are huge,” said Brad Hyler, director of European real estate at Brookfield , He manages a $38 billion investment portfolio.
Brookfield owns half of the Harwell Life Science Park in southern Oxford. Last month, the Canadian investment group paid TPG Real Estate Partners £714 million to acquire Arlington, a technology real estate group with assets in the Golden Triangle.
But according to Hyler, the real opportunity is to build laboratories and campuses from scratch. Brookfield is considering development around European cities in “Germany, Switzerland and elsewhere.”
Another emerging hot spot for real estate investors is logistics. The increasing popularity of online shopping has greatly promoted the demand for warehouse space.
Through its Mileway subsidiary, Blackstone has established a huge network of warehouses near European cities, while Brookfield has spent more than 1 billion euros in the past year to build a portfolio in France, Spain, Germany and Poland.
During the pandemic, rents for warehouse occupants remained relatively good, and the demand for space was a boon for companies in the industry.
Although the share prices of the UK’s largest office building owners, such as UK Land and Land Securities, have fallen by 20% to 30% from their pre-pandemic levels, while shopping mall owner Hammerson’s share price has fallen by three-quarters, warehouse developer Segro’s share price has fallen. It has risen by 16%.
Investors are also betting on the residential sector, favoring rental properties and student dormitories.
“Look at these big European cities: they are large job centers, there is a severe housing shortage, and the economic history is stable. This is a great opportunity,” said Mark Allnutt, senior managing director of American real estate investor Greystar, which recently raised 725 million euros were used to invest in European residential properties.
“People want to live in Amsterdam and London, but there are not enough houses in these cities,” Sepala added.
Heller said insufficient supply is also a feature of the student housing market, which should help the industry survive the devastation caused by the pandemic. Brookfield, which owns Student Roost, a student accommodation operator, is planning to increase investment in the African continent.
According to Real Capital Analytics, offices and shops still account for more than half of the investable real estate industry in Europe. With the influx of funds into certain asset classes, investors admit that there is a risk of overpaying.
Unlike the 2008 financial crisis, the epidemic did not cause non-performing assets to hit the market. However, Guillaume Cassou, head of the European real estate team at private equity firm KKR, said that if the bank loses patience with the hard-hit landlord, there may be an opportunity to gamble in the finalized transaction. The company has just closed down. Only 2.2 billion US dollars of funds are used to invest in Western Europe.
“The important part is to attack and defend at the same time,” he said.