Inside the crystal ball: Where you should be investing in real estate?
The future of real estate is being constantly debated. Asset classes are being put under the spotlight and scrutinised as to whether they will provide returns in years to come. Market experts are also leveraging industry data to predict exactly what will survive, thrive and suffer. So what would it be like to see inside the crystal ball?
Join us as we bring together experts to discuss and debate the impacts of the past year, where the value will be in the future, and the importance of planning, analysing and modelling your portfolios.
Speakers:
- Allen Chilten, managing director, Capital Markets, Patrizia
- Pete Finnerty, EMEA investment solutions director, MRI Software
- Abigail Shapiro, head of office, retail & life sciences, Oxford Properties
- Richard Starr, executive director – head of property, Palace Capital
- Nick Winsley, managing director & head of investments, AEW
- Chair: Tim Burke, deputy editor, EG
“These are crazy times. And when you have crazy times, you need to think ahead of everyone else.”
Pete Finnerty likely speaks for most property professionals in his colloquial summary of how to navigate the real estate investment market during the Covid-19 pandemic.
The investment solutions director for Europe, the Middle East and Africa at MRI Real Estate Software is trying to adapt his company’s offering as clients adapt their own strategies in the face of, well, crazy times.
“Clients are in a position where they need to look at their portfolios, they need to reconcentrate in some areas, potentially dispose of assets in other areas,” Finnerty says as he maps out how he and colleagues are helping customers model their shifting portfolios. “And so they really need tools that allow them to do that: ‘What if we buy this asset? What if we dispose of that asset? How does that affect the total returns and yields on our funds?’”
Plenty of questions and a growing pressure to answer them. Finnerty was speaking on an EG webinar about how investment houses are responding to the challenges of Covid-19 across various segments of real estate, including offices, retail, residential and industrial. Guests from AEW, Oxford Properties, Palace Capital and Patrizia also shared their take on how to spot value and where the post-pandemic markets might take the industry.
The good news? Investment activity is picking up. Nick Winsley, managing director and head of investments at AEW UK, points to an upturn in international investor appetite for UK strategies as the vaccine drive has got underway.
“We spent a lot of time last year on calls with investors, and there was lots of good idea sharing and lots of discussion,” he says. “Through the first quarter of this year and up to the year to date, we feel that those conversations have moved on, turning into actual investments – and investments in really exciting strategies that are coming about as the impacts of the pandemic are being felt.”
Revamping retail
Some such strategies will envision new uses for old assets. Winsley points to AEW’s UK Urban Real Estate Fund, set up shortly before the onset of the pandemic to hunt down value-add opportunities in town centres.
“We’d seen a significant decrease in pricing over, say, a 10-year period, but we still felt there needed to be more and we were waiting for a bit of a correction,” he says. “Little did we know that the global pandemic was around the corner. That’s accelerated the decline much further and more quickly, especially in town centres and high street retail.”
That fund is looking to buy and reposition struggling assets. “They just happen to be a retail building at the moment, and over our whole period we’ll look to get vacant possession, go through change of use and look to exit in four or five years as a site suitable for build-to-rent or offices,” Winsley adds. “It’s going to be a really exciting time seeing how that strategy unfolds.”
At Oxford Properties, head of office, retail and life sciences Abigail Shapiro sees opportunity in retail despite the raft of problems – but the upside is diminishing in some quarters.
“I don’t think the high street is dead, particularly for certain locations,” Shapiro says. “Regent Street, Oxford Street, Bond Street – those places and the amenity value and the connectivity they have will continue to be an area where people go to have a level of experience. That said, you were already seeing pre-pandemic some stabilisation of rental levels. So in terms of future upside, I would probably say it’s more limited.”
Oxford Properties is looking at out-of-town retail park investment, Shapiro adds, with an eye to conversion potential for last-mile logistics. “The location is key, tenant profile is key, rental tone is key – so it’s a very selective strategy,” she says. “But we do see that yields came out pretty significantly. And there’s an interesting arbitrage that we think is there between that and where core logistics assets are pricing now.”
Office opportunities
The panel offered mixed thoughts on the post-pandemic office and what the occupancy outlook means for the asset class.
Richard Starr, head of property at Palace Capital, believes the talk early in the pandemic that homeworking will make swathes of office space redundant was misplaced.
“The knee-jerk reaction was that what happened as a result of Covid will change everything forever,” he says. “I think we’ve been through this so many times in different guises to know that actually nothing lasts forever… It’s an evolvement rather than not requiring [offices] anymore.”
Starr is drumming three attributes into his team about the future of the workplace: occupiers will want space that is flexible in terms of leasing arrangements, adaptable in terms of layout and connectable in terms of its tech. Get those right, he says, and demand will come.
“The market is picking up,” Starr adds. “We’re having more tenants requesting terms now than we have for the last year. We are very confident about the office space going forward – as long as you can incorporate those three mantras of flexible space, adaptable space and connected space.”
AEW’s Winsley is less sure, pointing to a rise in the London office vacancy rate during the pandemic from around 5% towards double digits.
“Anecdotally, various brokers or commentators are saying it could move a bit further – so we could see in a 12-month period a doubling of the vacancy rate, and we haven’t seen an impact on occupancy levels in that market since the global financial crisis,” he says, adding: “Sometimes we look at the City to see how the regional markets are going to look in maybe six or nine months. If that is an indicator of things to come, it could be a demanding market for landlords over the next few years.”
BTR’s boom
The build-to-rent buzz is only growing among panellists, with demand spiking in the UK.
“BTR is quite a specific UK opportunity, given the lack of institutional stock and the stock that is there is all being built at the moment,” says Allen Chilten, head of funds for capital markets at Patrizia. “Income-producing, ready-built product is very scarce.”
Chilten estimates up to $8bn (£5.7bn) is targeting residential real estate from institutional investors, and that some 15% of that could be earmarked for the UK.
“The UK BTR space is only going to get more crowded and location is the key part to it,” he says. “We’re big believers in using data intelligence to make better investment decisions, and we see this as a differentiator going forward to allow us not only to look at streets in certain cities as to which are buys and which are sells, but also what is the make-up of the perfect property for that micro location based on macro factors and the demand of the region?”
That tech drive is keeping Finnerty and colleagues at MRI on their toes on the property management side of the industry too.
“The technology around BTR is a little bit behind in the UK marketplace compared to, say, the United States, where you have property management systems that are doing all the accounting, all the billing,” Finnerty says.
“What we see is that clients are really trying to provide an end-to-end offering, a total turnkey solution, particularly in markets like London, where you have young executives making good money…. So what we’re busy doing at MRI is adapting those solutions that we already have, that we have been providing at scale to large residential businesses in the US, and trying to apply those same types of technologies over here.”
And in BTR, as across all areas of real estate investment, panellists agreed that using the right tech to gather the right data – and then working out how to extract its value – will be crucial as the markets recover from Covid-19.
“I’m a big believer in the power of data,” says Oxford Properties’ Shapiro. “As we think about how we shift into a post-pandemic world, we are no longer competing just with the likes of the group collected on this call. We’re actually competing with the likes of Google and Amazon, who are bigger real estate owners than Oxford globally.
“The reality is they’ve got a huge amount of data and understanding about human demand. If they are intelligent, they will continue to leverage that data and understand where to be focusing in providing certain real estate solutions. To date they’ve been focusing on logistics and data centre assets, but that can evolve. And if we want to be relevant as a business in the future, we have to be able to harness, analyse and have transparency on our own data points and leverage that to make better investment decisions.”
To send feedback, e-mail tim.burke@egi.co.uk or tweet @_tim_burke or @estatesgazette
