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Savills: limited prime stock, late-cycle sentiment and diversification drive will be 2020 investment themes

Savills says prime investment opportunities in traditional real estate sectors are becoming increasingly rare, while a rising number of investors have pivoted their European investment strategies towards the residential and alternative sector. This trend is supported by structural demand drivers, such as Europe’s demographic trends, urbanisation and technology advances.

Marcus Roberts, Director, Savills European Operational Markets team, explains:

“Thriving urban centres have created increasing demand for housing, especially affordable stock, as well as senior living and student housing.  With such assets offering great opportunities for core investors seeking long term income streams and prospects for year on year rental growth, it is no surprise that 2019 saw the residential sector being recorded as the second most popular for real estate investment globally. In the new year, the launch of multiple funds targeting the ‘living’ and operational sector will intensify the competition for available product in already constrained markets, but we expect that this will lead to more forward funding deals and development initiatives.”

In 2020, investors will have to publish their policies on the integration of sustainability risks in their investment decision-making and, with buildings accounting for more than one third of global energy consumption and 40% of total CO2 emissions, the reality is that establishing the direct correlation between low ESG risk and better returns will remain a challenge. In the long run, however, Savills expects that residential asset classes such as affordable and senior housing, healthcare and education are likely to profit from ESG policies as their intrinsic nature appear to be more ‘ESG–proof’ than others.

The disruption we have seen across all property sectors in recent years has forced real estate investors to ensure their space can adapt to technological change, especially during periods of economic uncertainty. Given the urgent need for more affordable housing in Europe’s cities, the repurposing of obsolete or underperforming assets has become and will continue to be a viable and profitable alternative for investors.

Vacancy rates are at record lows across Europe’s CBDs and Savills has recorded that occupiers have seen prime rents increase by between 4-6% per annum on average since 2014, in turn tightening their operating profit margins. In response corporate occupiers in cities such as Paris are increasingly turning to flexible workspace providers during times of business uncertainty. Despite the more affordable desk space, the additional services provided in the often ‘cool’ workspace all tie in with their strategy to attract talent. 

With online retail forecast to account for 15% of total retail sales in Western Europe by 2023, landlords with high levels of exposure to bricks and mortar retail are being forced to adapt and ‘re-purpose’ their space in order to increase revenue. Dark kitchens, pop-up stores and food halls are all being incorporated into re-purposed schemes, where retailers are becoming more innovative with their space to engage with their customers. Furthermore, in order to accommodate the demand for last mile logistics space in Europe, landlords of retail parks in well-connected locations can be convert less profitable parts into urban logistics hubs to enhance their performance.

Eri Mitsostergiou, Director, Savills European Research, added:

“Strong urbanisation and surging density across European capital cities has had a severe knock-on effect on urban sprawling over the past decade and for these cities to remain successful, connectivity is key. In response, several gateway cities have seen a number of urban infrastructure projects underway and due to see the light in the near future, such as in London (Elizabeth Line), Paris (Grand Paris Express), and Berlin (Extension of U-Bahn and tram). Development activity in these new or expanding tertiary hot spots provides the market with great and competitive opportunities for investors, especially in markets where prime assets are scarce and highly-priced, especially in Paris and London.”

james.wallace@realassetmedia.com