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CBRE Group, Inc. is the world’s largest commercial real estate services and investment firm, with 2017 revenues of $14.2 billion and more than 80,000 employees (excluding affiliate offices). CBRE has been included in the Fortune 500 since 2008, ranking #207 in 2018. CBRE offers a broad range of integrated services, including facilities, transaction and project management; property management; investment management; appraisal and valuation; property leasing; strategic consulting; property sales; mortgage services and development services.

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CBRE Global Investors, combined with CBRE Clarion Securities and CBRE Caledon, is one of the world’s leading real asset investment managers with $105 billion in assets under management.

Built up over more than 40 years, our unparalleled platform is focused on real assets, giving our institutional clients access to real estate and infrastructure in the Americas, Europe and Asia Pacific. Our clients benefit from a complete range of investment solutions including equity and debt, direct and indirect, and listed and unlisted strategies.

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The Real Estate Investments division is led by
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Regularly released content on the state of the real estate and infrastructure industry are produced by our subject matter experts and shared on their blogs. A selection of them can be found below.

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EUROPE WATCH

As temperatures in Europe begin to drop, the heat in its investment market is still holding up. But investors are finding it increasingly challenging to source attractive investment opportunities at what they feel are appropriate prices. As highlighted by multiple intentions surveys, investors in Europe are increasingly considering opportunities in the niche real estate sectors. These assets provide resilient income streams and diversification benefits. In the UK, the niche real estate sectors have gained traction in recent years given these factors in addition to the myriad headwinds facing traditional property sectors. An area of heightened activity in the UK has been in the residential sector with a particular emphasis on senior and student living as well as social housing, which is now being institutionalized. These sectors provide attractive fundamentals supported by the UK’s changing demographics. The growth in the overall population and particularly the elderly and students provides strong foundations for the senior living and student housing sectors. Finally, the ongoing supply/demand imbalance in the UK housing market and the increased unaffordability have created opportunities in social housing. In this month’s Europe Watch, we take a closer look at the growth drivers of these niche property types in the UK.

A FAST-GROWING NICHE SUPPORTED BY DEMOGRAPHICS

The UK population is projected to rise from 66 million at the end of 2017 to 74 million by 2039. With this increase, housing needs are estimated by the government at 300,000 new units yearly by the mid-2020s, with at least one third in the social segment. The changing demographic structure in the UK will also mean growing demand for all types of elderly housing for decades to come. The proportion of the population aged 65 and over has increased from 16% in 2006 to 18% in 2018 and is expected to reach 24% by 2036. Similarly, student numbers have grown consistently over recent decades. Recent data from the Higher Education Statistics Agency (HESA) suggests that student numbers reached 2.3 million in the academic year 2017/18. This trend is expected to continue as UCAS data shows that acceptances in 2017 were close to the record high reached in 2016.

NOVEMBER 2018

3,197.5

-5.9%

Euro Stoxx 50

0.00%

ECB Policy Rate

0.39%

-8 bps

10-yr. German Bond

$75.47

-8.8%

Brent Crude

Data points through end of October 2018. Change represents month-over-month change.

UK POPULATION BY AGE GROUP (MILLIONS)

Source: Oxford Economics

PRINCIPAL CONTRIBUTOR:
Ali Bouhjra
ATTRACTIVE INVESTMENT OPPORTUNITIES IN ALTERNATIVES

Of all UK dwellings, 17% are classified as social homes. These are generally leased to government backed housing associations that enjoy steady income streams and a zero-default record. The sector is highly regulated and typical leases are in excess of 20 years. The healthcare sector is also benefitting from strong demand underpinned by the country’s ageing population requiring greater levels of care and amenities. The funding structure has also changed and ‘self-pay’ has been rapidly growing. According to Knight Frank, total occupancy in care homes reached 89% in 2017 and is rising. This has led to strong weekly fees growth averaging 3.3% p.a. over the past 10 years. Similarly, the student housing sector is benefitting from the growth of the student population. According to the largest student housing operator, Unite, average occupancy rates over the last five years reached 98% while rental growth averaged 3.4% p.a. over the same period.

MARKET RENTAL GROWTH, Y/Y

Sources: Knight Frank, Unite, MSCI

THE LISTED MARKET INDICATES A POSITIVE OUTLOOK

The listed space often provides good insights into the prospects of different property sectors since the expectations of future performance are usually reflected in current pricing. A metric commonly analysed is the premium/discount to NAV. This indicator shows a clear preference of public markets in the UK for alternatives compared to mainstream property types. Student housing REITs are currently trading at 19% premium to NAV while healthcare REITs trade at 6% premium to NAV according to data from CBRE Clarion, implying the expectation from investors of positive developments in these sectors . This compares to a discount of 14% for the UK as a whole, reaching as much as 47% for shopping centre REITs. According to PropertyMatch, this trend is also observed in secondary trades for units in private real estate funds, with units in alternative property funds, mainly healthcare and student housing commanding a premium to NAV.

NAV PREMIUM/DISCOUNT BY UK SECTOR
(WEIGHTED AVERAGE)

Information is the opinion of CBRE Clarion as of 9/30/2018, is subject to change and is not intended to be a forecast of future events, or a guarantee of future results, or investment advice. Forecasts and any factors discussed are not indicative of future investment performance.
Source: CBRE Global Investors

GROWING INVESTOR APPETITE

Alternative property assets, particularly residential with its many subsectors provide numerous benefits to investors. These include diversification and their defensive characteristics given their resilience to both cyclical factors and the secular trends affecting mainstream property. Shortening leases in the UK’s traditional property sectors and the difficulty in sourcing the right product at adequate pricing are also behind the surge in investors’ appetite for niche property types. As highlighted by CBRE’s Investors Intentions Survey, 70% of investors in Europe are actively pursuing investments in the alternative space. According to RCA, investments into UK residential including student and senior housing, reached £6.2 bn in the 12 months to Q3 2018. This represents an increase of 18% from the same period last year and more than double the 10-year average. Investments in these sectors have also increased their share of total volumes to 9.9% compared to just 6.9% five years ago.

RESIDENTIAL INVESTMENT VOLUMES
(INC. STUDENT AND SENIOR LIVING)

Source: RCA

ALTERNATIVES ARE STARTING TO COMMAND STRONG PRICES

The growing appetite of investors for residential alternatives including senior and student living has continued to put downward pressure on yields in these sectors. According to Knight Frank, super prime healthcare assets are trading at below 4%, placing yields in this sector below prime City of London offices. Similarly, student accommodation assets continue to command strong prices especially in London and top tier university towns. Yields in 2018 have compressed in many parts of the market. In London where most of investors’ focus is, prime assets let to universities on an RPI review basis are currently trading at 3.75%, which marks a 25 bps yield compression from a year earlier. The relative maturity of residential alternatives in the UK and the strong pricing these assets are now trading at has pushed investors to consider opportunities in these sectors in other continental European countries, where the fundamentals are similarly attractive.

ALTERNATIVE PRIME YIELDS IN CONTEXT

Sources: CBRE Global Investors, CBRE, Knight Frank

Related Content

This information is for our clients and investors only. Please note that the content of this report is for informational purposes only and should not be viewed as investment advice or an offer or solicitation. Any opinions are solely those of the Strategy & Research Team of CBRE Global Investors and are subject to change without notice, and may not be consistent with market trends or future events. This research is based on current public information that we consider reliable, but we do not represent it as accurate, updated or complete, and it should not be relied on as such.

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