A key topic in many discussions at the recent Expo REAL in Munich was the role that alternative real estate investments could play for more and more investors struggling to find new sources of yield.
Social property such as care homes, kindergartens, schools and universities offer potential to forecast cash flow many years in advance. They offer potential for superior yields and the assets can be more effectively structured. With a little know-how, it looks like a sensible proposition for investors to increase their focus on social real estate.The European Central Bank’s low interest rate policy is pushing bond yields to record lows, and investors are desperately seeking alternative investment classes. In this context, real estate is high on the list of priorities as property offers a high degree of security and comparatively acceptable yields. But aggressive bidding for properties is making it ever more difficult to achieve investment objectives.
“For example, when office properties in prime locations are offered on the market, it is typical that eight to ten interested parties go away empty-handed”, says Ralf Kemper, Head of Valuation & Transaction Advisory Germany at JLL. They are increasingly on the lookout for alternative properties outside the traditional asset classes of office, retail, residential and logistics; examples include healthcare properties such as care homes and hospitals, serviced apartments, car parks and data centres.
Experts agree that hardly any prime located office properties in the Top 7 cities are now available for yields in excess of 3.0%. Even yields for logistics properties have almost halved to less than 4.0% within the last 10 years. Only a few years ago, these were regarded as alternative real estate investments - rather like hotels are now.
Hotel investment volume more than tripled between 2012 and 2018
According to Christoph Schumacher, Global Head of Real Estate at Credit Suisse Asset Management, alternative assets may be characterised by yields which are typically higher than for classic investment properties, and these are now recognised as a high-quality asset class all of their own in terms of investment volume and the achievable yield and structure, which means that they are also potentially suitable products for institutional investors.
“The prime example is hotels: investor activity in the sector has been made more accessible thanks to the boom in city tourism and the professionalisation of the segment”, explains Roman Tkaczenko, Senior Manager at Engel & Völkers Hotel Consulting. Investment volume has more than tripled in the period 2012 - 2018 from €1.2 to around €4 billion. Hotels are no longer seen as alternative real estate products, but have now become a mainstream asset class.
Serviced apartments and micro-living: new lifestyles in the big cities
The residential segment is about to polarise. Serviced apartments and micro-living are the new ways to live within the urban environment. “The most interesting aspect from an investor’s viewpoint is the low level of management input compared to hotels”, says Maximilian Ludwig, Head of Retail and Hotels at Real I.S. Investors appear to be satisfied with lower yields compared to hotel investments, but there is limited product available.
There is a different story in the case of healthcare properties. “The investment market is more mature and many investor groups have been looking at this segment for some time now”, says Claudius Meyer, MD at CR Investment Management. One of the leading investors in the healthcare sector is AviaRent, a Frankfurt-based initiator of special funds acting on behalf of pension funds and insurance companies with €1.5 billion worth of assets under management.
Social property: potential to forecast cash flow many years in advance
The principal targets are care homes and assisted living properties, which offer a net return in the order of 4.75%. “The segment offers the best growth prospects”, says Hannes Ressel, director at AviaRent. The current demographic developments mean that by the year 2030, around €80 billion will need to be invested in care home new-build and modernisations in Germany alone.
The sector is the key target for the Third Swedish National Pension Fund operating in Germany via its subsidiary Hemsö, which manages a property portfolio in the order of €5 billion. “There is no commercial asset class offering the potential to forecast cash flow so precisely so many years in advance as social property”, says Jens Nagel, MD of Hemsö Germany. Its focus includes care homes, children’s day nurseries, schools and universities. Although the benefits are clear, it may be some time before the sector gains traction with asset managers.
Major open-ended funds remain focused on offices and retail properties
“Germany’s principal open-ended property funds remain focused on offices and retail”, says Michael Schneider, MD of IntReal International Real Estate KVG. The two sectors account for over 70% of the funds’ portfolios. Other well-established use types such as residential and logistics account for minimal shares. Special funds for institutional investors tend to react quicker and more vigorously to new investment trends.
“In the wake of emerging investment segments, the discovery process tends to move as follows: a small number of trailblazing investors – the so-called first movers – show initial interest in the sector. At a later point when the remaining market players have grasped the opportunities and risks associated with the asset class, both demand and prices would tend to rise and yields would fall”, says Kemper.
Alternative real estate investments require expertise
Many alternative real estate assets are operational properties, and their evaluation requires a significant level of know-how. “The professionalism of the operator and the marketing concept are just as important for us to evaluate as the quality and location of the property”, says Jan Linsin, Head of Research Germany at CBRE. That knowledge is just as important in the assessment of social property investments as it is in the case of car parks and data centres.
“The fact that institutional investors favour car parks is astonishing in view of the climate change debate” adds Schumacher. But there is a huge requirement for car parking in the cities. Frank van der Sant, Chief Commercial Officer at Apcoa Parking Group, which operates 300 car parks in Germany, sees opportunities in the sector offered by the transformation to e-mobility.
Future trend: networked mobility
“The future belongs to networked mobility”, says van der Sant. Car park operators such as Apcoa are set to benefit from this trend in the same way as car sharing service station, e-bike and e-scooter providers. The explosion in data storage due to the digitalisation process is not limited to the transport sector. “The requirement for storage capacity and data centres signals huge growth rates” says Schumacher. The development of this into a stand-alone investment asset class in Europe is still at an early stage.
