Landlords swap offices for student housing as pandemic hastens change


The world’s biggest commercial property landlord is shuffling its $378bn real estate deck.

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

Covid-19 has hastened the decline of two key commercial property sectors — retail and offices — and prompted landlords to pile into alternatives they believe will fare better.

Top of their shopping list are: warehouses, supported by the ecommerce boom; rental flats and student housing, made attractive by home shortages and growing student populations across Europe; and life sciences campuses, buoyed by huge investment in research and development. 

“These are megatrends which 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 per cent of total European property deal volume, according to Real Capital Analytics. This year they account for 35 per cent, with the residential and logistics sectors gaining ground.

Mike Prew, an analyst at Jefferies, said the pandemic had accelerated the “value transfer” from retail to “beds, meds and sheds” — residential housing, healthcare and life science property and warehouses.

Life science hits record

The most likely to excite fund managers is life sciences — a niche where price records are being broken as investors look to buy into or develop high-tech campuses close to education hubs in Europe.

In May, Oxford university’s Magdalen College put a 40 per cent stake in the Oxford Science Park on the market, priced at about £100m — more than five times what the college paid for 50 per cent of the park in 2016.

“You’ve got burgeoning demand, insufficient supply and growing rents. Is this the fastest growing sector bar none? Absolutely,” said Simon Hope, head of global capital markets at property agent Savills. 

Properties range from conventional offices to complex labs. The key driver of value is location. “It’s ‘genius loci’: it’s the great schools, it’s the talent,” said Hope. The hottest location in the UK and Europe is in the so-called “golden triangle” between Oxford, Cambridge and London. 

“The world’s financial firepower, particularly from the US, is trained on the UK because we’ve got four of the top 10 universities: Oxford, Cambridge, Imperial and University College London,” said Hope.

A record £2.4bn was invested in life sciences property in the area in 2020 and investors are still looking to deploy more than twice that amount, according to consultancy Bidwells.

“We’re spending a lot of time in the life science space . . . It’s under-developed in Europe broadly and in the UK specifically. With the amount of research institutions in the UK there’s a huge opportunity,” said Brad Hyler, who manages a $38bn portfolio as head of real estate in Europe at Brookfield.

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

But according to Hyler, the real opportunity is in building labs and campuses from scratch. Brookfield is looking at developing around European cities in “Germany, Switzerland and elsewhere”.

Warehouse boom

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

Through its Mileway subsidiary, Blackstone has accrued a large network of warehouses close to European cities, while Brookfield has spent more than €1bn in the past year building a portfolio across France, Spain, Germany and Poland.

Rents from warehouse occupiers have held up relatively well during the pandemic, and demand for space has been a boon for companies in the sector.

While shares in the biggest UK office landlords, such as British Land and Land Securities, are down between 20 and 30 per cent from pre-Covid levels, and shopping centre owner Hammerson has lost three-quarters, warehouse developer Segro is up 16 per cent.

Residential opportunities

Investors are also betting on the residential sector, favouring properties for rent and student accommodation.

“Look at these big European cities: they are large employment hubs with a huge housing shortage and historically stable economies. It makes a good opportunity,” said Mark Allnutt, senior managing director at Greystar, a US property investor that recently raised €725m to invest in European residential property.

“People want to live in Amsterdam and London and there aren’t enough homes in those cities,” added Seppala.

Undersupply is also a features of the student housing market, which should help pull the sector through the disruption caused by the pandemic, said Hyler. Brookfield, which owns student housing operator Student Roost, is planning to increase investment on the continent.

Offices and shops still make up more than half of the total investible property sector in Europe, according to Real Capital Analytics. As money crowds into particular asset classes, investors admit there are risks of overpaying.

Chart showing proportion of investable stock in Europe by asset class

Unlike the financial crisis in 2008, the pandemic has not triggered a wave of distressed assets hitting the market. But if banks lose patience with hard-hit landlords, opportunities to gamble on knockdown deals may appear, said Guillaume Cassou, head of the European real estate team at private equity firm KKR, which has just closed a $2.2bn fund to invest in western Europe.

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


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Autore dell'articolo: Redazione

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