Author: Nicol Dynes

Student housing is the new kid on the block in CEE but it’s already in great demand, delegates heard at Real Asset Media’s CEE Student Housing and Co-Living Investment Briefing, which was held last week at the London headquarters of CMS.

Student housing is ‘getting all the attention’, said Luke Dawson, Managing Director & Head of Capital Markets CEE, Colliers International. ‘We are seeing tremendous amounts of activity. Some projects have come to completion, some are in the pipeline. Developers, operators, traditional equity investors are all stepping in and looking for opportunities across the spectrum’.

Investors are attracted by the counter-cyclical nature of student housing, especially now that the cycle is coming to an end and European economies are slowing down. ‘Even if the markets drop, interest in student housing is likely to rise. Students need accommodation regardless of the economic cycle, so it provides a much steadier income than other asset classes’, he said.

A steady income flow and liquidity on exit are another two advantages of investing in the sector. 

‘There is no fear of lack of liquidity,’ said Dawson. ‘People who are deploying capital in CEE have already invested in the sector in Germany and other places and they believe very strongly that the sector will grow in scale and importance’.

Strong demand for student accommodation translates into high occupancy rates and a guaranteed income. 

Despite the difference in per capita income in, say, Germany and CEE countries, ‘there is really not a huge gap between what local, inter-regional and foreign students are prepared to pay,’ said Samuel Vetrak, CEO, Bonard. ‘We have seen that when a UK-level new project is completed, people are prepared to pay significantly more for the accommodation’.

He gave the example of a new project in the relatively small Czech city of Brno, which offered rooms at €420 a month, ‘which is very high for the region, but it was 100% occupied within a few weeks’. 

Extremely light-touch regulation is yet another reason why the sector is so attractive to investors. ‘The good news is that there is hardly any regulation covering the sector,’ said Wojciech Koczara, Partner, Head of CEE Real Estate, CMS. ‘It takes time to get a planning permit, but it is no different from developing offices or hotels’.

The best thing about the lack of specific rules is the flexibility it gives investors, he said: ‘It allows for the construction of multi-purpose buildings that can serve as student accommodation, micro-living or budget hotels in the summer months’.

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As institutional investors pour more and more money in student housing, attracted by higher yields and a steady revenue stream, the sector will see a wave of consolidation in the months ahead, delegates heard at Real Asset Media’s Student Housing & Micro Living Investment Briefing, which took place at MIPIM.

‘Consolidation in the student housing sector is at the very beginning,’ said Samuel Vetrak, CEO, Bonard, in his keynote presentation. ‘This year and in 2020 we can expect more portfolio deals and acquisitions, especially in conjunction with institutional money coming in. There will be a lot more liquidity in the market’.

The student housing sector now has 600 companies globally and accounts for transactions worth $10 bn a year, 2% of the total. In the next 2.5 years, 350 projects will be coming to market, taking the volume up to $15 bn.

The consolidation trend will reorganise the market into fewer bigger and branded players. At present the sector is fast-growing but still very fragmented. 

The definition of a portfolio is at least 500 beds and more than two buildings. According to Bonard research, in Europe including the UK there are 107 portfolios which meet the criteria but most of them are small: 44 go up to 1,500 beds, 38 up reach 5,000 beds and only 25 of them are larger than 5,000 beds.

According to a recent CBRE survey, 52% of investors plan to put money into alternative asset classes and out of all of these student housing is by far the most popular choice in Europe. 

‘Investors see it as a revenue-delivering asset class, even at the end of the cycle, with occupancy rates between 90 and 100% and totally recession-proof,’ Vetrak said. ‘Yields are higher than in mainstream asset classes by between 100 and 250 bps.’

Investors who were focused on the UK are now looking to other countries in Europe, said Vetrak: ‘After the boom in the UK, Germany and the Netherlands, the most activity we see now is in Spain, Italy and Central and Eastern Europe, the most under-supplied countries that deliver the best returns’.

Supply is increasing steadily, but not enough to meet growing demand. Berlin is a typical case study: the student population is forecast to be 200,000 in 2020 and the pipeline is 20,000 beds. ‘This increases the total provision rate projection from 9.5% to 10%, which is really not that much’, he said.

European universities are being increasingly proactive, organising roadshows and marketing trips to persuade international students to choose them. In less than 10 years, they have increased the number of courses taught in English from 55 to 5,000. 

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Innovation is critical to create a smart city but technology must work hand in hand with human capital, experts agreed at Real Asset Media’s ‘Innovation – driving urban development’ Investment Briefing, which was held at MIPIM recently.

‘Innovation is bred by partnerships between stakeholders, companies, employees and local government,’ said Harry Hoodless, Regional Board Director, Broadway Malyan. ‘It is crucial to look at different models and examples from around the world and then make a city unique’. 

The challenge for many European cities is to preserve the historical centres and traditional ways of life while promoting innovation, attracting tech companies and young people and at the same time preserving the environment.

Italy has two good examples of how to go about it. Bologna, capital of the Emilia-Romagna region, is creating a Technopole, a 120,000 m2 data and artificial intelligence centre in an old industrial area 

‘The Technopole will have the highest supercomputing capacity in Europe ,’ said Ruben Sacerdoti, Director of the Regional Department for Business Internationalisation and FDI Attraction, Emilia Romagna Regional Government. ‘We know that everything that happens in the next 5-10 years will be based on data’.

The Technopole is a 20 minutes’ walk from the centre of Bologna and dedicated cycle lanes will lead to it, to encourage people to leave their cars behind. The airport is 6 kms away and the fast train links Bologna to Milan in 1 hour and to Rome in less than two hours.

‘Investments in infrastructure are difficult, so it is better to rely on the existing transport system or, even better, cycle or walk whenever possible,’ said Sacerdoti. ‘We believe that in 10 years’ time, Technopole will have completely transformed and modernised our city’.

In Genoa, the biggest science park in Italy is being created in a former industrial space 10 minutes from the airport and 15 mins from the city centre. It will include offices, labs, co-working spaces and a big hospital, but 50% of the land is devoted to green spaces.  

‘We are planning to attract high-tech companies,’ said Maria Francesca Silva, Chief of Real Estate Development, Genova High Tech. ‘But for us innovation is not just technology but also a new approach to community and services. We have introduced car-pooling, for example. We believe that to have a smart city you need smart people’.  

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Reaching unprecedented heights doesn’t mean that you cannot climb even further: such seems to be the confident mood in the Logistics sector. After years of record growth there is more growth ahead, experts agreed at Real Asset Media’s Logistics Investment Briefing, which was held at MIPIM.

‘We are at historical highs and it looks like this year will be even better than last year,’ said Robert Dobrzycki, Chief Executive Officer Europe, Panattoni. ‘We have never had these volumes in Europe before. We continue to expand and our market is performing better than the economies of the Continent. It is a tight market, but the performance is phenomenal’.

In another record-breaking year, vacancy rates have gone down across the Continent, demand has gone up and there are no signs of a slowdown.

‘All the big names have had record years, but actually we believe this is going to continue for some time yet in Europe, because we have only seen the tip of the iceberg,’ said Kevin Mofid, Director Research, Savills.

‘We see the momentum really continuing,’ agreed Joseph Ghazal, Managing Director, Chief Investment Officer, Prologis Europe. ‘Our investors are actually increasing their allocations to logistics real estate and the challenge for them is finding the right product in the right market. The markets are tight, but the demand is extremely healthy everywhere in Europe, even in the UK’.

The UK has the most developed e-commerce market in Europe, while other countries are just discovering the joys of online shopping. Online sales are a big driver of logistics but not the only one, said Ghazal: ‘We shouldn’t forget the typical big-box customers. Even now 60-70% of our leasing is done for non-online customers’.

Whether it is traditional industrial demand or e-commerce needs, companies in the logistics sector are seeking to grow and looking to buy or develop across the Continent. ‘We are the most active players on the development side in Europe and our plan is to continue expanding into Western Europe as well’, said Dobrzycki.

Looking ahead, Prologis is also in expansion mode, said Ghazal: ‘We’re actively buying in all the 12 countries that we are in, snapping up anything from core to value-add, obviously with different return expectations. But we keep looking for any opportunity, including last mile’.

Growth rates have been such that veterans of the sector sometimes still have to pinch themselves. ‘I consider myself a kind of digital and e-commerce native, as I have been in this sector for 20 years, first at Amazon and then Zalando,’ said Raimund Paetzmann, Vice President Corporate Real Estate, Zalando. ‘But now is a really exciting time to be in logistics’.

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Cities’ Central Business Districts (CBD) have long been the first and main destination for investors but that is all changing now, delegates heard at Real Asset Media’s ‘Innovation – driving urban development’ Investment Briefing, which was held at MIPIM.

‘The next step in the evolution of modern cities is the end of the CBD,’ said Thomas Beyerle, Managing Director, Catella Property Valuation. ‘The implementation of a mixed-use strategy will lead to the creation of many dynamic, lively urban spaces, attractive for different groups’.

A combination of residential, office, retail and hotel concepts in inner city locations will bring about urban development. Examples of this trend can already be seen in the Four complex in Frankfurt, in King’s Cross in London and in Bolands Quay in Dublin, where Facebook, Google and Linkedin are located.

‘Co-working and co-living concepts can be integrated in inner city, mixed-use concepts, with positive effects for both companies and employees and the flourishing of shops, restaurants and cafés,’ Beyerle said. ‘The clustering of many factors of urban living is the embodiment of a lifestyle that is attractive to innovative and creative individuals’.

Some urbanites’ world will literally be in one building. ‘We are looking at the first generation of people who may live on the top floor, work in the middle, do their shopping, dining and entertaining on the ground floor and their exercising in the basement gym,’ he said.

In order to be successful in attracting  a concentration of innovative companies and individuals, these new urban clusters must be in a central location and close to transport hubs. ‘There will be no more development in the middle of nowhere’, Beyerle said. 

Other important requirements are affordable rents, cultural attractions and leisure activities and local amenities like supermarkets, shops and medical services. Ideally, there should also be funding opportunities, banks and venture capital, a support network, universities, research centres and service providers.

Architecture is another important success factor, as buildings must have open-plan office space but also private meeting rooms and spaces for events. Other features will be industry-specific amenities. Branding, Beyerle predicts, will become increasingly important, with a central marketing concept and a professional development of new ideas.

People must be at the centre of it all because top-down, artificial projects invariably fail.

‘Human capital is the most important element for urban innovation,’ Beyerle said. ‘The start-up culture is here to stay for the foreseeable future. Creative people are usually attracted to diverse, open-minded, friendly cities with a good living and working environment. The three T’s are important: Technology, Talent and Tolerance’.

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A further $2.5 trillion of fresh capital could be invested in real estate by 2020 as private investors increase their exposure, delegates heard at Real Asset Media’s Emerging Hotspots Investment Briefing, which was held at MIPIM last week

‘Over the next three to five years we will see sources of capital changing from institutional to private wealth,’ said Damian Harrington, Director, Head of EMEA Research, Colliers International. 

Family offices, High Net Worth Individuals, foundations and private sector pension funds will become more active in the market. At the moment institutions’ allocation to real estate is 10.4% of a total pot that globally amounts to $165 trillion, but there are no figures for private investments.

‘If private wealth were to match the allocations from institutions, the amount of capital looking at property could hit $2.5 trillion by 2020, so there is a lot more money coming to the market,’ said Harrington. ‘If you put that in the context of the total spent last year, which was $1.5 trillion, then you realise that $2.5 trillion is a big number’.

In order to deploy that huge amount of capital, investors ‘will have to diversify and more across markets, across geographies and across sectors to try and find opportunities wherever they can,’ he said.

Looking at sectors, offices have stayed largely flat while retail started a comeback last year after a period of decline. The real momentum, however, is in logistics, up 89% since 2010, residential (+159%), hotels (+90%) and development sites (+659% off a low base).  Investment in residential has so far been highly concentrated in Germany, the UK and the Nordics so there is a lot of potential elsewhere in Europe, Harrington said.

A lot of capital will target cities, following the urbanisation trend and the demand for residential. ‘If we look at cross-border capital going into cities we see that Europe is already very international, attracting investment from all over the world, but over the next few years we will see a lot more capital coming from Asia,’ he said. Cities will offer the most opportunities.

From a global perspective, Europe looks like a good end of cycle yield spread option. ‘If you look at EU sectors relative to Asia and America on a yield spread basis, Europe actually offers the best spreads,’ Harrington said. ‘Particularly European logistics, but also retail and offices. This is going to continue bringing the money in’. 

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UK retail is not in a happy place, but it would be wrong to tar everything with the same brush, panellists agreed at Real Asset Media’s the ‘Two sides of the coin: Retail vs Logistics’ Investment Briefing, which was held at MIPIM in Cannes. 

‘We have a huge challenge in the UK’, said Andrew Creighton, Head of Real Estate Continental Europe, Aberdeen Standard Investments. ‘We own a lot of shopping centres like Brent Cross, Wimbledon and Brighton and the value and over-rentedness is scary. The underlying value and the rents that retailers have been prepared to pay prevent the owners from getting a return on that investment to make things happen’.

Change will have to come but it will probably be imposed from the outside rather than coming from within, he said: ‘I think valuation declines will force the issue and force change on the sector’.

Secondary shopping centres that cannot renew themselves and offer the experience customers want will become redundant and be repurposed. But other forms of retail are being successful and click and collect, which relies on the integration between online shopping and physical stores, has been particularly popular in the UK. 

When it comes to shopping centres the Australian example could come in useful, said Lachlan Macgillivray, Head of Retail Investment, Australia, Colliers International: ‘Our shopping centres are in a very different position. They are in the middle of big population centres, not in out of town locations, and they are anchored by supermarkets, not department stores’.

The upshot is that customers will visit a major shopping centre that has a $1 bn turnover at least once a week, often more, while in the UK it will be every two to three weeks.

The continuing success of shopping centres in Australia, where footfall continues to increase, is also due to the fact that e-commerce has had some challenges. ‘We don’t have the infrastructure in place to get the same delivery time-frames as the UK and speed of delivery is key’, he said. ‘Habits are also different and 95% of households have at least one car and tend to drive to do their shopping’.

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Struggling European retailers could take a leaf out of Australia’s book. The retail market is buoyant and footfall is up, Lachlan Macgillivray, Head of Retail Investment, Australia, Colliers International, told Real Estate Day at MIPIM.

The two markets have some similarities and some differences. 

One key trend has made a difference in both markets: ‘We are seeing a lot of Food & Beverage and entertainment-lead retail development at the moment,’ he said. ‘It is about re-inventing shopping centres, making them more relevant and promoting repeat visits from your catchment area’.

Statistics show the change: ten years ago, the percentage of F&B was 5-10% of gross floor space in shopping centres, while now it is 30-40%, so ‘there has definitely been an evolution’, Macgillivray said. ‘We saw that trend emerging in Asia first, in Singapore and Hong Kong in particular’.

Asia is a good place to learn from, he said, because they are good at re-inventing themselves: ‘They do it better in Asia than anywhere else because they have land constraints and it is worth looking at some of those multi-purpose developments there that have got hotels, office, residential, retail, even hospitals and international universities.’

Another clear trend in shopping centres is for carving up the space into smaller units. Where once there was a big department store, now ‘we bring in mini majors who want smaller portions of space but pay more per square foot than for a big space, they have a high turnover and they bring new customers in who were not coming previously,’ Macgillivray said. ‘It is all about driving repeat visits’.

Catchment sizes is what really makes the difference between the UK market and Australia’s. ‘If you look at a £1 bn turnover shopping centre in the two countries, Westfield London has a catchment area of 3.6 mln people, while Westfield Bondo Australia has the same turnover, but a catchment area of 450,000 people’, he said.

Australian shopping centres are getting a lot more repeat visits from their customers, who are making the trip one or two times a week, rather that once every two or three weeks like in the UK. 

Part of the reason is down to inescapable social, cultural and geographical differences. London is urban while Australia has a more suburban landscape, he said, but part of the reason is that shopping centres in Australia are supermarket-anchored, which encourages frequent visits.

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