Panelists at the recent ULI Europe Conference talked about which sectors are the most attractive to investors in the current market dynamic. But with pricing fairly tight, investors are keeping an eye out for disruptive business models such as coworking or drone delivery.
Led by Dennis Lopez, CEO of QuadReal, the session first addressed the logistics market and was inevitably upbeat.
“I’m responsible for capital raising and my job has gotten a lot easier,” said Martina Malone, managing director at Prologis, noting that logistics is currently the go-to sector for many investors. “It’s being driven by e-commerce and urbanization. It’s about structural drivers, and I don’t see that changing. E-commerce will double in Europe over the next five years, but it is also a global trend.”
Returns, Malone added, are currently being driven by rental growth. “We’ve seen that in the U.S. and now it’s happening in Europe,” she said. “What we think might happen is that there may be a pause [in rental growth], but generally speaking I am very positive. It’s similar in Asia. There is just a lot of demand in China in particular—people do everything via their mobile phone.”
Of course, logistics development is land intensive, which means that space is at a premium in well-connected urban areas, particularly when land is also needed to accommodate growing populations. In China and Japan, said Malone, that has led to the rise of the multistory warehouse. “It will come to Europe in places like Paris and London, too, in fact anywhere with high density, wealthy populations, and high land prices.”
Another driver is the fact that the public is rapidly coming to expect same-day delivery to be an option. “It’s all about location,” said Malone. “You need to be very close for same-day deliver. … We’re looking at installing parking garages and the use of things like electric scooters.”
However, Malone was skeptical about the use of drones for deliveries: while they may make for fun news stories, they are impractical in high-density urban areas. “Drones will be deployed in some places, like the outback in Australia,” she said. “But can you see it in London? Just think about the trouble that was caused [by reported drone sightings] in Gatwick before Christmas.”
The session also homed in on the rise of the private rented sector (PRS) or build-to-rent sector as it is often referred to in the United Kingdom. “It’s already huge in Germany—Holland, too,” said Anne Kavanagh, CIO at Patrizia. “It’s a terrific sector and more institutional money is interested. The pricing is tight and it can be hard to get great quality, but we’re trading out of portfolios now and we’re getting spectacular returns.”
However, Kavanagh added that PRS can still be a tricky proposition in the United Kingdom. “The challenge is that for a building to be really successful, it needs to have been built for rental,” she said. “Many of the housebuilders aren’t building for a 30-year maintenance program. That means that there will be issues down the line.”
In terms of the office market, Michael Cochran, managing director at Eastdil Secured, described it as “somewhat frozen.” “In London, pricing is probably at a 10 percent discount compared to 24 months ago,” he added. “In Germany and France, offices are priced to perfection—it’s hard to think that there is much more room, although it is possible that rents will rise.”
According to Cochran, the biggest demand driver in the office market has been the flexible office groups, not least being WeWork—a company that probably received more name-checks than any other throughout the day. “People want to shorten their leases—it’s interesting how that has had an impact on the market.
“It used to be that if you had flexible office groups taking up 5 to 10 percent of a building it was regarded as being good for the buzz, but more than 50 percent was seen negatively. Now, there has been a realization that many of the flexible office groups’ subtenants are in fact more institutional, so attitudes have changed a lot. It’s the way of the future.”
However, Kavanagh warned that there was a danger of making generalizations about the European office market based on a handful of leading cities. “Flexible offices are growing on the continent, but it’s not the same as it is in London,” she said. “We’ve also seen very big rental growth in some places, like Berlin and Barcelona. Some of the occupier markets have only really been recovering in the last 12 months—it’s easy to forget that.”
With major office markets like Paris achieving perfect pricing, as Cochran put it, Lopez suggested that investors have been looking at alternative sectors in the hunt for higher returns. Kavanagh, however, sounded a note of caution. “One of the challenges with alternatives is that the markets are still pretty small,” she said. “We’ve been very cautious about investing in less established markets. If one of the markets has a problem, liquidity dries up very quickly.”
Cochran didn’t disagree, but said that interest in alternatives from clients was increasing all the time—something that meant that some markets were increasingly seen as mainstream. For many, student accommodation should no longer be described as an alternative, for instance. “Most conversations with clients are now about alternatives,” he said. “It’s taken time, but most clients are getting comfortable with it.”