26 November 2020
While containing the spread of the pandemic will remain the focal point, other challenges also lie ahead in 2021. The impact of the UK leaving the EU will come into full effect. Climate-related risks, rising inequalities and continuous geopolitical tensions likewise remain, all of which could threaten global stability. Embracing disruption to protect existing portfolios and identify new investment opportunities is, therefore, ever more important. Part of this involves capitalising on structural trends that have accelerated as a result of COVID-19.
Savills IM’s 2021 Outlook report, titled “Building resilience in global real estate portfolios”, envisages no major demise of the office sector despite the increase in agile working driven by the pandemic. Offices in CBD locations with good transport links are here to stay while the resilient income streams of food retail assets represent a strong buy for core/core-plus investors. Logistics, which has been a clear winner throughout the pandemic because of the increase in online shopping, will continue to be backed by solid fundamentals and structural tailwinds, the report emphasises. But with returns on traditional property assets – office, industrial and retail – low, investors are also looking to alternative sectors such as student housing, build-to-rent accommodation and senior living.
New research included in the report shows that 59% of real estate investors globally expect real estate markets in Europe to recover in 2021, with just over half (52%) expecting the recovery to begin between Q2 and Q4 next year. Some 45% of investors expect that real estate investment will increase over the next 12 months, and 25% expect investment levels to stay the same.
Andreas Trumpp, Head of Research, Europe, Savills IM, commented:
“Our research shows that real estate investors are confident about 2021, and recent positive announcements about the availability of a vaccine could certainly accelerate the recovery, boost sentiment and help cross-border investments to flow again.
“The pandemic has clearly caused multiple disruptions in the economy and the commercial real estate markets. Nevertheless, in seeking new opportunities, investors should embrace the structural trends that have accelerated because of COVID-19.”
Key themes highlighted in Savills IM’s 2021 Outlook report include the following.
Logistics to remain ‘investors’ darling’ in 2021
Logistics is set to remain a bright spot within the real estate landscape. Backed by solid fundamentals and structural tailwinds such as a further increase in e-commerce and low overall vacancy rates, investor sentiment is particularly positive for logistics. Savills IM still likes modern distribution centres with a strong long-term covenant in the main logistics clusters along the major motorways and transport networks across Europe.
In addition to the investment manager’s current investment approach, a strategy specifically aimed at urban logistics assets offers an attractive proxy to capture both the growth in e-commerce as well as urbanisation amid the market downcycle. Savills IM’s research found that logistics is the most favoured sector among real estate investors, with 57% and 55% seeing increasing investment in big box distribution centres and last mile/urban logistics assets, respectively.
Retail – food and discount segments show resilience
Food retail offers a resilient investment income stream and therefore is a strong buy for core/core-plus investors. Savills IM’s research found that 80% of real estate investors globally expect investment in food retail assets to increase or remain stable. Attractive risk-adjusted returns are also still available for investors in the outlet mall segment in Western Europe.
Offices are here to stay
Although only 16% of real estate investors see investment in CBD offices increasing in 2021 and 43% see it decreasing,1 Savills IM believes that those assets that are efficient, accessible and offer strong amenities in locations with good transport links are likely to perform better in the long-term. Face-to-face office collaboration facilitates knowledge spillovers, learning and mentoring; improves creativity; and enhances productivity. The office is also a hub for social interaction, fueling a collaborative and productive company culture.
‘Living’-focused alternatives are on the rise
Alternatives such as senior care and student accommodation are a strong buy for investors who want to add value-add elements to their portfolios. The strong demand characteristics associated with an aging population on the one hand and the higher education sector on the other have not changed.
 Source: Research conducted on behalf of Savills Investment Management by PollRight among 122 institutional investors in October 2020. Investors came from a global database centred around North America, the UK and Continental Europe, and held an average AUM of £18.9 billion ($25 billion) in real estate investments.
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