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Maturing Euro RE cycle leads investors into 'structural tailwind' assets - RCA

Tom Leahy © RCA

The maturity of the real estate cycle in Europe is leading more investors into asset classes that benefit from 'structural tailwinds', says global data firm RCA. Some 35% of allocations, up from 20% 10 years ago, now target ageing populations, preferences for urban environments, or other assets with demand drivers distinct from traditional commercial assets.

"The inevitably of the boom and bust that characterises the property market doesn’t make it any easier for investors to predict the arrival of the next crash," says Tom Leahy, Senior Director of EMEA Analytics at the New York-based Real Capital Analytics. "Instead of playing a game of roulette by trying to time the cycle, many European investors are adopting a different approach."

Europe’s senior housing is a prime example: with the median age in the EU up to 42.6 in 2016 from 38.3 in 20011, investors have flocked into the retirement space - investing €5.8bn in the 12 months to 3Q17, from just over €200m in 2007. Similarly, student housing inflows reached €6.9bn, almost 10 times greater than in 2007.

While most of the increase came in the UK, activity has also increased in Germany, France and the Netherlands, and Leahy expects growing numbers of overseas students at Europe’s universities to boost volumes further.

He adds: "The other pillars of the accommodation sector – hotels and apartment/residential assets – have grown to become an important component of the institutional portfolio. This has not been the case in most of Europe until recently. For residential assets, the growth is not in Germany but in the Nordic markets, the UK and Spain. The different opportunities afforded by the hotel sector – bond-like long-term income streams from the budget chains and the chance to increase returns through active management – have helped attract more capital."

Elsewhere, the seemingly rock-solid fundamentals of the logistics sector are supported by drivers including internet retailing as well as the push for cost savings in the supply chain, Leahy says in the note to be included in RCA's 2017 review edition of Europe Capital Trends published Jan. 31. "Investors are also looking at assets such as parking facilities, hospitals, leisure and self storage which offer diversification with separate demand dynamics... The flip side of the coin is that parts of the market facing structural headwinds are falling out of favour."

Leahy concludes: "As 2018 gets under way it is likely that investors will continue to pursue this strategy of looking outside the usual investment realm. Prices for commercial assets in the core markets are up 50-70% on 2007 levels, pushing investors to find other assets. At the same time, an ageing population, preferences for live/work/play urban environments, growing numbers of overseas university students, as well as Amazon’s nonstop drive into all facets of consumer life, will continue to pull investment into the sectors poised to capitalize on such structural changes."

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