Homeowners exchange offices to house students as the pandemic changes

The world’s largest commercial property owner mixes up his $ 378 billion real estate coverage.

Two Blackstone moves: the sale of BNY Mellon’s London office in St Paul’s to Italian insurer Generali for £ 465 million, sealed this week according to people familiar with the deal, and an approach to buying the student housing operator GCP Student Living – are a sign of how homeowners are relocating their portfolios as the pandemic accelerates structural trends.

Covid-19 has accelerated the decline of two key business sectors: retail and offices, and has motivated homeowners to stack up with alternatives that they believe will grow better.

At the top of the shopping list are: stores, backed by the e-commerce boom; rental flats and student housing, which are attractive due to the lack of housing and the growing student population across Europe; and life sciences campuses, driven by large investment in research and development.

“It simply came to our notice then. . . it has been accelerated by the pandemic, “said James Seppala, Blackstone’s head of real estate in Europe.

A decade ago, offices and shops accounted for about 70% of the total volume of European real estate deals, according to Real Capital Analytics. This year they represent 35%, gaining ground in the residential and logistics sectors.

Mike Prew, an analyst at Jefferies, said the pandemic had accelerated the “transfer of value” from retail to “beds, medicines and cutlery”: residential housing, health services and life sciences warehouses.

Life sciences reach the record

Fund managers are most likely to be excited about the life sciences, a niche in which price records are set as investors try to buy or develop high-tech campuses near schools in Europe.

In May, Oxford University’s Magdalen College put a 40% stake in Oxford Science Park in the market, priced at around £ 100 million, more than five times what the university paid for 50% of the park in 2016.

“You have a growing demand, an insufficient supply and growing rents. Is this the sector that is not growing the most? Absolutely, ”said Simon Hope, head of global capital markets for real estate agent Savills.

Properties range from conventional offices to complex laboratories. The key value controller is location. “It’s‘ genius loci ’- it’s the big schools, it’s the talent,” Hope said. The hottest location in the UK and Europe is in the so-called “golden triangle” between Oxford, Cambridge and London.

“The financial firepower of the world, especially the United States, is forming in the UK because we have four of the top ten universities: Oxford, Cambridge, Imperial and University College London,” Hope said.

In 2020, £ 2.4bn was invested in life sciences properties in the area by 2020 and investors are still looking to deploy more than double that amount, according to consultancy Bidwells.

“We spend a lot of time in the life sciences space. . . It is underdeveloped in Europe in general and specifically in the UK. With the number of research institutions in the UK there is a great opportunity, ”said Brad Hyler, who manages a $ 38 billion portfolio as head of real estate in Europe at Brookfield.

Brookfield owns half of Harwell’s life sciences campus south of Oxford and last month the Canadian investment group paid £ 714 million to TPG Real Estate Partners for Arlington, a scientific property group and with assets in the golden triangle.

But, according to Hyler, the real opportunity is to build labs and campuses from scratch. Brookfield studies the development of European cities in “Germany, Switzerland and elsewhere.”

Warehouse boom

Another emerging point for real estate investors is logistics, where the growing popularity of online shopping has given a big boost to the demand for warehouse space.

Through its subsidiary Mileway, Blackstone has amassed a large network of warehouses near European cities, while Brookfield has spent more than 1 billion euros in the last year building a portfolio in France, Spain, Germany and Poland. .

Warehouse occupant rents have held up relatively well during the pandemic, and demand for space has been an advantage for companies in the sector.

While shares of the UK’s largest office owners, such as British Land and Land Securities, are down 20% to 30% from pre-Covid levels, and Hammerson mall owner has lost three-quarters , the warehouse developer Segro has increased by 16%.

Residential opportunities

Investors are also betting on the residential sector, favoring rental properties and student accommodation.

“Look at these big European cities: they are big employment centers with a huge shortage of historically stable housing and economies. It’s a good opportunity, ”said Mark Allnutt, senior CEO of Greystar, a U.S. real estate investor that recently raised 725 million euros to invest in European residential properties.

“People want to live in Amsterdam and London and there are not enough homes in these cities,” Seppala added.

The supply provided is also a feature of the student housing market, which should help boost the sector by the disruption caused by the pandemic, Hyler said. Brookfield, owner of student housing operator Student Roost, plans to increase investment on the continent.

According to Real Capital Analytics, offices and stores continue to account for more than half of the total reversible real estate sector in Europe. As money is grouped into certain asset classes, investors admit that there are risks of overpayment.

Unlike the 2008 financial crisis, the pandemic has not caused a wave of distressed assets to hit the market. But if banks lose patience with affected homeowners, opportunities may arise to bet on negative deals, said Guillaume Cassou, head of the European real estate team at private equity firm KKR, which has just closed a fund of 2,200 millions of dollars to invest in Western Europe.

“The important thing is to play offensively and defensively at the same time,” he said.