Memberships

Real estate investors invest in different real estate sectors because each sector has its own unique characteristics, risks and return potential. Traditionally, investments are mainly made in the four main sectors: homes, offices, shops and business premises/logistics. Furthermore, investments can be made in many other types of real estate, which in the Netherlands and Europe are often placed in the 'other' sector, which have a relatively small interest in the investment portfolio. Usually that interest is less than 15%. This small category often includes investments in Healthcare real estate, Senior housing, Student housing, (Life) Science real estate, Parking, Data Centers, Self Storage, Hotels, Land, Mixed Use buildings, Social real estate (Education, Childcare, Theaters, Libraries and others). social facilities, such as multifunctional accommodations), Net Lease, Debt (real estate loans), Holiday homes, Hospitality, Agriculture, Forestry and Infrastructure. Sometimes the low percentage of the 'other' sector can be explained to some extent by the fact that the property types mentioned can also be included in one of the four main sectors. For example, senior housing and student housing under the housing sector. Or mixed-use buildings within the sector that has the largest share and, for example, parking and land within the most related sector. Characteristic is that in all cases the investment volumes are low and the investments are seen as sub-sectors, niche sectors or alternative sectors. I have chosen the term alternative sectors.

Sufficient expertise

Traditionally, the focus of real estate investors is on the four main sectors: residential, retail, offices and industrial/logistics. The reason is that these sectors represent a large investment volume with many investment opportunities and have a long track record. In contrast, the alternative sectors often have a smaller investment volume and a shorter track record. As a result, they have a higher risk profile and therefore are less attractive, unless this is compensated by a higher financial return, higher degree of positive impact (sustainability) and/or better diversification. In addition, it requires more expertise to be successful.

Visible growth

In the United States, there have been many changes in the real estate sector alloction over the past fifteen years. Alternative real estate sectors have grown strongly. So strongly that the stock market index FTSE NAREIT US Real Estate Index currently consists of more than 60% alternative sectors. The growth of alternative sectors is also clearly visible in the large open-ended unlisted multi-sector real estate funds in the United States (also called ODCE funds, Open-ended, Diversified Core Equity).

More capital available

There are several factors that contribute to the absolute and relative growth of the alternative sectors. For example, specialized real estate investors initially emerged in the United States, who, through new technology and data, were able to invest on a larger scale in one or more alternative real estate sectors with more knowledge. As a result, these markets have received a greater investment volume and the portfolio contributions in terms of return risk profile and diversification have become more meaningful. This has also ensured that more capital has become available for these alternative sectors, now visible in the ODCE funds. At the same time, there were lower allocations to the traditional retail and office sectors. As a result of technological innovations and the Corona pandemic, both of these sectors have faced a structural change in shopping behavior and office use, resulting in shrinkage.

Local regulations

There are good reasons to assume that the share of alternative real estate sectors will not grow as quickly in Europe. For example, European real estate investors generally invest with a lower risk profile than American investors. As a result, the capital for alternative investments in the (still) small markets will be low. Moreover, the economies of scale of technology and data are still difficult, because in Europe we have to deal with different countries and local regulations. Sufficient reason to expect that the alternative sectors will not be larger than the traditional ones so quickly.

‘NEW TECHNOLOGY AND DATA ALLOW INVESTMENTS AT LARGER SCALE´ 

Sustainable impact

At the same time, there are broad social, demographic and technological trends that allow the share of alternative real estate sectors to increase rapidly, making it larger than the share of traditional sectors sooner than expected. This may have been driven by the large American real estate managers and investors, who are often active on multiple continents. They already have the experience and technology to quickly create scale and thus benefit from the various global trends. In the Netherlands and Europe we see that the government is withdrawing as an investor from a large number of sectors in favor of market initiatives, such as in healthcare and housing for the elderly, a rapidly growing market as a result of the aging population in Europe. At the same time, we see that the operators (tenants) in those markets are engaged in a process of scaling up in Europe and are looking for larger real estate investors with whom they can collaborate. It is expected that real estate investors will also register here, who are more focused on sustainable impact and will further increase the size of the market.

Multiple initiatives

Major technological progress in various areas is also an important driver of the growth of the “sciences” real estate sector. New discoveries and technological breakthroughs in the fields of life science, bio-science, computer & data science, materials science stimulate the demand for high-quality facilities for research and development. Science real estate is especially attractive in places where there is a strong reputation in the field of education and technology with leading universities, research institutions and innovative companies. In these places, government, education and international and local businesses work together intensively. This sector includes research facilities, laboratories, offices and manufacturing facilities, used by high-end chemical, semiconductor, computer, biotechnology, pharmaceutical and medical technology companies. The nature of these businesses requires specialized infrastructure aimed at facilitating innovation, research and development. We now see that there are several initiatives from European and American investors who are actively involved in science real estate. In Europe there is a good tradition of cooperation between universities, research institutions and innovative (inter)national companies.

‘CONCENTRATION OF REAL ESTATE MANAGERS AND TENANTS STIMULATE GROWTH IN ALTERNATIVE SECTORS’

Expectation

In this column I have mentioned only some examples where alternative sectors have a good business case to grow into mature sectors in Europe. These business cases are solid and build on the broader trends taking place in society. In addition, just like in the United States, the traditional office and retail sectors are shrinking. It is expected that investors will invest in many more sectors in the future than is currently the case.

Source: VG Visie Zomereditie 2024