Alternative property types have become mainstream asset classes in the US and real assets investment firm PATRIZIA expects a similar trend to now unfold in Europe. We speak to Mahdi Mokrane to gain a deeper understanding of the drivers behind this trend.
Over the coming years, many baby boomers will move to smaller, more manageable houses. But unlike previous generations, boomers tend to look for properties with more of a communal character when downsizing their homes, where there are shared spaces to catch up with friends and neighbours, while also making use of age-specific services.
Mahdi Mokrane, Head of Investment Strategy and Research at PATRIZIA, says this has given rise to a new form of real estate.
“If you go back to the megatrend of population shifts, one of the most powerful sub-trends is that we are seeing this generation of baby boomers ageing, but absolutely wanting to stay active physically and socially,” Mokrane says in an interview with [i3] Insights.
Baby boomers in Europe need to downsize, but they want to live close to where they used to live and so that downsizing will either lead them to taking a smaller flat or house or opt for a more communal way of living with like-minded peers. And that’s what managed best-age senior living communities have to offer
“They aspire to live in communities that are vibrant, that protect their well-being and where there are plenty of social activities going on. We like to call these properties ‘best-age living’ communities.
“Baby boomers in Europe need to downsize, but they want to live close to where they used to live and so that downsizing will either lead them to taking a smaller flat or house or opt for a more communal way of living with like-minded peers. And that’s what managed best-age senior living communities have to offer.
“These community-style properties could either be a modern or a refurbished building, but they would all have generous amenities inside and outside the asset, such as, for example, social spaces where you would have a large lounge that in some ways may resemble a hotel lobby with plenty of meeting space, a bar and dining facilities.
“As a tenant you would have your apartment and would be able to ask for any special assistance, which would be procured and facilitated by the operator. So, for example, you could benefit from gym facilities that are age adapted or digital facilities that allow you to book an appointment with a nurse or doctor. These would generally be self-paid as opposed to paid by social security.”
The Rise of Alternative Property
Alternative forms of real estate, such as best-age living, have taken up an increasingly larger part of institutional property portfolios in the United States to the point of becoming mainstream.
PATRIZIA estimates that over the past 10 years, alternative property assets have grown to now represent a cumulative asset value of over US$1 trillion or 43 per cent of the invested real estate stock in the US.
Mokrane believes this trend is now underway in Europe too, supported by a number of megatrends that have been accelerated by the coronavirus pandemic.
[The pandemic has] magnified the necessity of these new forms of real estate, such as data centres, life science space, senior housing and care homes, affordable housing that also offers amenities and community space, self-storage, cold storage and various kinds of supply-chain real estate.
“I think the pandemic has really accelerated the questioning around the large parts of traditional discretionary retail and to some extent the future of parts of the office sector,” he says.
“And at the same time, [it has] magnified the necessity of these new forms of real estate, such as data centres, life science space, senior housing and care homes, affordable housing that also offers amenities and community space, self-storage, cold storage and various kinds of supply-chain real estate.
“Residential and logistics are rapidly gaining in importance in institutional portfolios and to some extent replacing retail and office exposures, but we are also seeing a broadening of the real estate asset class that should help investors tailor and diversify their real estate exposures with the advent of alternative property types.
“These are in high demand and will probably continue to be in the next five to 10 years.”
Pandemic Impact
The global pandemic has caused a number of direct and indirect impacts on the real estate industry, Mokrane argues. It has triggered an unprecedented recession in the short term, but also showed the strong resilience of some more traditional property types, such as residential, non-discretionary (food-anchored) retail and logistics.
At the same time, it has accelerated a number of megatrends that will have lasting effects in the medium term, including e-commerce adoption, deglobalisation and nearshoring of production and supply chains, the rising importance of technology and digitalisation in all aspects of real estate, the emergence of life science and health-tech, even stronger demand for digital infrastructure and deeper integration of environmental, social and governance factors in investment management processes.
But the pandemic has also disrupted a number of megatrends. For example, the post-global financial crisis hyper-urbanisation and the dominance of the 24-hour city could be challenged by smaller and more livable cities and suburban locations, while also sparking a complete rethink of office occupation, health systems and supply chains.
We can also see these tailwinds in what we call ‘living alternatives’, such as student housing, for example. There is such a large gap between demand and supply in student housing, particularly in continental Europe, that many of the popular university towns that we like do not have enough purpose-built student accommodation
“There are two questions that this has raised. First of all, you can ask whether this trend [towards alternative assets] is going to continue in the US and I suspect that, yes, it probably will, but at a slower pace,” Mokrane says.
“Then the next question is if that is going to happen at the same speed in Europe. I think the pick-up for these alternatives needs to be backed by strong megatrends and strong demand, and we can clearly see that in the tech and digital assets space.
“We can also see these tailwinds in what we call ‘living alternatives’, such as student housing, for example. There is such a large gap between demand and supply in student housing, particularly in continental Europe, that many of the popular university towns that we like do not have enough purpose-built student accommodation.”
Partnering for Expertise
Gaining exposure to and managing some of these alternative property assets can be significantly more complicated than with traditional real estate, and in most instances requires specialised skills.
This means investors can be better off partnering with operating companies (OpCos) or property companies (PropCos) that have specialised expertise in the relevant areas.
“If you think for example of a data centre, or of a best-age living operation, then the expertise of the operator is key. You don’t improvise. You don’t declare yourself an expert in data centres or an expert in caring for active aged populations, so you need to think about how best to access the required services to optimally manage these assets,” Mokrane says.
“When we looked at the practical implementation of these strategies to access the assets in the first place on behalf of our clients, we came to the conclusion that the solution means blending OpCos and PropCos, either through hiring talent and bringing the OpCo expertise internally or partnering through a joint venture with a best-in-class OpCo.”
Another reason to use a blend of operating and property companies is that it allows the investor to better control cash flows, maximising and stabilising the cash flows, and hence de-risking the investment.
“Because these are niche and emerging [assets], you can’t easily externally procure the same professional property and facility managers that you have easy access to for say offices and retail, for example,” Mokrane says.
We don't want to invest in a niche that will stay a niche forever. We want to invest in a niche that will become a mainstream property type
“If you think of offices 30 or 40 years ago, you needed to vertically integrate the property management talent, going from the nitty-gritty of changing the bulbs to picking up the phone on your tenant calls. Today you can outsource this.
“In the future, potentially in 10 to 15 years’ time, you’ll be able to invest in these alternative assets and they won’t be niche anymore and you will be able to easily procure the property and facility management services.”
PATRIZIA believes investments in alternative real estate are likely to increase in the coming years and has been building resources to cope with the demand.
“We acknowledge that these are excellent investments and offer excellent diversification. They have a low correlation with traditional property types and contribute to the de-risking of our portfolios, but there are key operational challenges,” Mokrane says.
“You need access to the assets and for this you need to team up or build the skill set internally and that’s what we’re doing. We’re hiring in those specialist skill sets from outside of our industry. We’re bringing in the talent to be able to access the alternatives and even more importantly scale the investments.
“That is one of the key criteria: we don’t want to invest in a niche that will stay a niche forever. We want to invest in a niche that will become a mainstream property type.”
Data centres in particular have received a lot of attention during the pandemic as many people have moved to working from home. But Mokrane doesn’t think these assets have been bid up too much yet.
“There aren’t that many transactions to be able to pinpoint whether prices have skyrocketed, but there have been a couple of transactions that have still commanded a relative yield premium to prime offices or logistics, for example,” he says.
Data Hungry
The changes in digital technologies have not only given rise to new property types, but have also opened up new opportunities to deliver services to PATRIZIA’s clients. In 2019, the company made a strategic investment in WiredScore, a global rating scheme for digital connectivity in buildings.
“WiredScore is a company that measures and rates building connectivity, so as a tenant and in particular if you are a data-hungry tenant, you would want to know [the score] before renting space in a building,” Mokrane says.
“Is that building able to cater for my current and future needs in terms of data? So, you can request a report from WiredScore and we’ll give that information to you.
“The eastern parts of London, for example, in between the City of London and City Airport, is one of the best-connected high-speed internet locations and this explains why we see so many data centres in that area.
“Each city in Europe has those information highways that you need to map out. You need to be very clear about where you can plug into as a business or else you may be limited in some of your activities.
“A Google or Amazon would not locate anywhere in a city, for example.”
This article is paid for by PATRIZIA. As such, the sponsor may suggest topics for consideration, but the Investment Innovation Institute [i3] will have final control over the content. Mahdi Mokrane will also be sharing his research in a webinar: click here.
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[i3] Insights is the official educational bulletin of the Investment Innovation Institute [i3]. It covers major trends and innovations in institutional investing, providing independent and thought-provoking content about pension funds, insurance companies and sovereign wealth funds across the globe.