Alternative property assets are on course to capture a record share of Europe’s commercial real estate transactions this year as data centres and retirement/care homes bucked the general trend of falling investment volumes, research by Real Capital Analytics (RCA) shows.
A total of €30.1 billion of hotels, student residences, retirement and care homes, healthcare facilities and data centres exchanged hands in Europe during the first 11 months of 2016. This represents 15% of all the transactions of income-producing commercial real estate that completed in the period and is 2 percentage points more than the alternative sector’s market share for all of 2015.
These niche property sectors are known collectively as “alternatives” because they sit outside the larger and more liquid markets for offices, retail and industrial buildings that traditionally real estate investors favour. Low or negative interest rates have driven up pricing for prime assets in the mainstream real estate sectors, making investors turn to alternative property sectors that generate higher and longer-term income returns.
Tom Leahy, RCA’s Director of EMEA Analytics, said: “For the past two years specialist operators and investors have been building platforms of scale in niche markets that offer growth opportunities, attractive returns and exposure to different macro-trends. We expect this momentum to continue in 2017 and for the hotel sector in particular to establish itself as a regular feature in the real estate portfolios of institutional investors.”
RCA’s analysis of transaction pricing showed that alternative property assets exchanged hands at a median yield of 6.5% compared with 5.9% for offices, the most actively traded real estate sector in Europe.
“The higher yields generated by alternative property reflect some of the additional tenant risk and relative lack of liquidity in alternative sectors versus the core segments of the market”. “Another risk is that these properties may be purpose-built, notably in the field of healthcare, and would require significant capital expenditure for conversion into other usage. The quid pro quo to this is that tenants are generally happy to sign long-term leases”
Investment in data centres and retirement/care homes increased in value this year by at least double. This ensured that while overall investment in alternative property sector was weaker than last year, the decline was less pronounced than for income-producing commercial real estate as a whole. The performance also needs to be seen in the context of the reduced appetite for investing in the U.K., Europe’s largest market for alternative property, following the June 23rd referendum vote to leave the European Union.
Investors attempting to capitalise on Europe’s ageing population have fuelled an increase in investment in retirement and care homes across the continent, with €4.9 billion of transactions in the year to Nov. 30th, or double the investment volumes of all last year. The median pricing for these assets was 7.0%. Among the most notable deals in the sector was the completion in January of French operator Korian’s purchase of Casa Reha, Germany’s third largest nursing home operator with a portfolio of 27,500 beds with an estimated asset value of more than €1 billion.
RCA’s research showed that to date there has been more than a four-fold increase from last year in investment in European data centres to €5.6 billion. This reflected Equinix Inc.’s £2.6 billion purchase of TeleCity plc and its subsequent sale of eight centres across Europe to Digital Realty in order to obtain clearance for the takeover from the European Union’s competition authority. Separately, Equinix also purchased a data centre in Saint-Denis, northern Paris, from Digital Realty for €189.8 million.
“Prospects that interest rates in Europe will remain low for a while longer mean that investors looking for income will increasingly look to the alternative property sector, which can offer attractive income returns, the benefit of diversification and the possibility of counter-cyclical performance. We expect this pattern to continue in 2017 as more capital flows into the niche sectors that some significant players are seeking to transform through the consolidation of these often fragmented and local markets.”