Long-term trends in urbanisation and demographics will boost the alternative segments of Europe’s property market, which includes the Private Rented Sector (PRS), student accommodation, care homes and hospitality, according to Savills Investment Management (“Savills IM”), the international real estate investment manager.
Key attractions in these alternative sectors include long leases, indexed rental uplifts, better covenants and the potential to diversify portfolios. Prime yields are now at or below 6%, with scope for further compression as these markets develop and mature.
Savills IM believes that the key sectors set to see strong activity this year include the PRS, automotive, hospitality and socio-infrastructure markets in the UK, Germany, France, the Netherlands, the Nordics and increasingly Spain. The largest alternative real estate market is in the UK, with EUR 9.9 billion in 2015, followed by Germany (EUR 5.2 billion) and Sweden (EUR 3.5 billion).
In a report entitled Changing Landscape: European Outlook, Savills IM says alternative sectors are set to attract investors who have long-term strategies and can benefit from stable, long-term income. Despite this growth potential, however, the report says alternatives pose some challenges for investors, including transparency that is lower in certain segments than in the mainstream market. Investors also need to consider the level of maturity in the market, stock selection, business models/ease of entry, occupiers’ ability to service rent, covenant strength and exit strategies.
Kiran Patel, Chief Investment Officer at Savills IM, commented:
“Historically, the European real estate investment market has been focused around the main commercial property types of retail, office and industrial.
“However, rising competition for the best assets in these traditional markets is out-pricing some investors, who are interested in higher returns and are prepared to take more risk. These investors are looking into niche market segments, and are partnering with strong local players to benefit from higher returns.
“We have no doubt that the alternative real estate sector will further increase its share of the real estate investment universe over the coming years in Europe.”