Hotels, Healthcare & Student Housing are on the rise

Transcription

1 Hotels, Healthcare & Student Housing are on the rise

2 1. Setting the scene The term alternative originates from the medieval Latin alternativus and is defined by the Cambridge dictionary as something that is different from something else, especially from what is usual, and offering the possibility of choice. The word has a long-standing history in areas such as music, fashion and energy. More recently, the term has also entered the investment universe with alternative investments generally referring to investments other than stocks, bonds and cash. From an investment perspective, commercial property itself, is considered an alternative investment class, but within commercial property, alternatives generally describe those assets that not covered by the traditional sectors offices, retail and industrial. For the purposes of this research, alternatives include all subsectors that are not traditional (eg. student housing, care homes, hotels, PRS schemes, and others). Mixed-use schemes that include alternative sectors are also included in their entirety. While alternative property may sound like a niche market, its importance has grown consistently over the last several years, so much so, that its designation as alternative is looking increasingly like a misnomer. Overview overall investment volumes Figure 1: UK commercial property investment 2018 YTD, by sector Around the turn of the millennium, alternatives accounted for less than 10% of all UK commercial property investment. In volume terms alternative transaction volumes averaged 1.5bn per year between 2000 and 2004, compared to 9.4bn for retail and 11.2bn for offices at that time. Industrials were far less important to investors, averageing just 2.8bn per year. However, there has been in a shift in investor interest over the past few years. Alternative investment volumes have accounted for more than one quarter of all UK commercial property transactions in each year since 2015, and have since become the second most sought after sector behind offices. In 2017, transaction volumes reached 17.6bn, easily outpacing both industrial ( 11 billion) and retail ( 8.3 billion). In the first ten months of 2018, investment into alternatives stands at around 15bn, breaking through the 10bn mark for the fifth year in a row. In fact, the alternatives share of all UK commercial property investment is on course to reach a new record high in 2018, currently accounting for roughly one third of all transaction volumes. In some of the CBDs, alternatives are of even greater importance. In Manchester, they account for over half of all transaction volumes in 2018 so far 1, with two of the largest deals recorded in the PRS sector. Legal & General bought a 350 unit PRS scheme in Deansgate for 200m and a joint venture between Get Living and Triangle Investor Partners acquired 546 units for 180m at 4.5% IY. Only recently, Aviva purchased Enterprise City for 300m, comprising TV and film studios, hotels/leisure and various property infrastructure across ten buildings. The number of alternative and mixed-use investment deals shows a clear upward trend, further highlighting the growing interest in the non-traditional sectors. In 2008, there were only around 150 transactions completed in the alternative sector. Since then, the number has increased every year, almost passing the 1,000 mark in 2017 something which is likely to be repeated in As of 17 October

3 Figure 2: Overall investment volumes Alternative investment by sub-sector Student housing In recent years, there has been an investment surge in student accommodation. Accounting for less than 2% of alternatives in the early 2000s, transaction volumes in the student housing sector broke 1bn for the first time in 2011, reaching an all-time high of 4.6bn in 2015, according to Property Data. In 2017, student accommodation alone accounted for roughly one third of overall alternative investment. Although it looks unlikely that 2018 will break through the 4bn mark again, demand for student accommodation remains strong, with a growing interest from overseas investors. This parallels the growth in overseas student numbers, the result of active recruitment policies of UK universities. Figure 3: Alternatives share of all investment So far in 2018, overseas capital accounts for roughly two thirds of the total investment volume in the sector. The three largest deals are all portfolios. The Enigma portfolio (bought by Brookfield Asset Management for 520m) contains 15 purpose built stdent accomodation assets with almost 5,500 beds across 12 cities including London, Bath and Birmingham, but also other student centres such as Sheffield and others. The Investment Rationale UK student accommodation has developed into one of the best performing asset classes over the past five years and remains an attractive asset class, with specialist funds, REITs and particularly overseas investors who are able to benefit from sterling s current weakness. Investor demand for student property has remained strong in 2018, with prime operational assets being in particularly high demand. Investors are attracted to the strong underlying fundamentals that the sector offers. Prime yields for modern, income producing assets in the best university cities have compressed over the course of the year and are now in the range of 5.00% % has continued in a similar manner to 2017, with demand in the sector being underpinned by Purpose Built Student Accommodation s ( PBSA ) which has strong cash generating characteristics and a reputation as a safe asset. Matthew Beech, Senior Surveyor, National Capital Markets 3

4 Hotels The UK is one of Europe s most popular holiday destinations, with only France, Spain and Italy attracting more tourists. London is also one of the world s largest commercial centres. Hotels have, therefore, been of interest to investors ever since the data series began in 2001 when its share stood at 30% of all alternative investment. The sector accounted for over 50% of all alternative investment between 2002 and 2006, but increasing interest in other alternative sectors means that the share of hotels in 2018 is back down to only a third of the alternative sector. In absoloute terms, volumes have risen from an annual average of 1.8bn between 2001 and 2010, to 3.5bn between 2011 and The sector appears more volatile than other alternative sub-sectors which is most likely a result of a relatively low number of large deals which can distort the figures on an annual basis. The Investment Rationale The sentiment for investment into the hotel sector has increased dramatically over the past few years as investors are attracted by the long leases and index linked reviews associated with the budget sector of the market. This has resulted in the current yield for prime hotels falling to the lowest level we have ever seen, at sub -4%. Demand is still very strong for the right product and high prices are still being achieved. As the market has matured, allocation to tenants has become fulfilled by certain funds and yields are increasingly beginning to look expensive. The market is now beginning to look at a closer relationship with operators to take advantage of a better understanding of the business. The opportunity to acquire higher quality product and potentially higher returns means that we are beginning to see investors prepared to move away from full repairing and insuring leases with index linked reviews towards taking more operational risk by entering management agreements, hybrid leases with landlord obligations and rents linked to performance. Tim Meakes, Director of National Capital Markets Healthcare The healthcare sector will grow in importance over the coming years and decades as the UK s ageing population will create demand for new technologies, services and housing models, according to the Government s Industrial Strategy White paper. 2 The healthcare sector, especially elderly care homes, saw considerable consolidation and corporatisation in the 2000s. Improved quality and effective management were accompanied by investment yields falling from double-digits to lower single digits in line with other prime long-lease secure assets. While investor confidence in the sector was dealt a blow in 2011 by the Southern Cross crisis, confidence has since returned as new operating models have proved sustainable. Healthcare REITs have proven generally unaffected by the EU vote to leave, with share prices in the primary and secondary care sectors trading, at the end of November 2018, virtually at par with their immediate pre-vote levels. This reflects both the stability of the sector as well as the long-income nature of property tenure. In the year to date, investment volumes in this sector stand at roughly 1.3bn, accounting for just under 10% of all alternative investment transactions. The Investment Rationale Most investment into the healthcare sector is in care homes for the elderly. This is largely a function of the size of the market vis a vis the other areas of healthcare, although certainly the ever rising elderly population makes it an area where many forecast long term sustainable growth. At the top end of the private fee paying market prime yields have compressed to sub 4%, although most investment transactions will range between around 4% to 7%. Senior Housing or Retirement Villages are now increasingly on many investors lips, drawn to the rising elderly demographic profile. These assets are similar to care homes, but also offer a residential angle, with some synergies in respect to PRS and Student Accommodation. Max Broadbent, Director of Healthcare Figure 4: Alternative investment by sub-sector 2 HM Government, Industrial Strategy. Building a Britain fit for the future, p.52. 4

5 Who invests in alternatives? There has been a shift in investor interest for alternatives since the start of the millennium. Between 2000 and 2006, private property companies accounted for around 45% of alternative investment, with overseas investors making up a further 23%. Quoted property companies were only responsible for roughly 4% of investment volumes over this period. With many REITs focusing recently on alternative investment, it may not be a big surprise that quoted property companies account for a much larger share today. In the first ten months of 2018, they made up 12% of alternative investment, four times higher than in the early 2000s. Overseas interest for alternatives has also increased over the years and makes up the largest investor group. In 2018 so far, overseas capital accounts for 44% of all alternative investment. In contrast, private property companies have a far smaller share of the investment market than in the past. This may reflect their role as developers and JV partners with operators who always see selling as their exit. Overseas investors are the main net buyer of alternatives Not only have overseas investors dramatically increased their exposure to UK alternatives, they are also the main net buyer of these assets. Their net investment since 2000 stands at 21.9bn 3, far higher than any other investor type. That said, UK institutions ( 14.5bn), private investors ( 2.1bn) and quoted property companies ( 1.6bn) are also net buyers. Interestingly, overseas investors are the only investor group to have not been a net seller of UK alternatives since entering the market. This may reflect a long-term outlook by foreign investors, with the UK market more mature and transparent than many other property markets around the globe. This development sits in stark contrast to the trend for private property companies. Being a net buyer in each year between 2000 and 2007, they have since been a net seller of alternatives. Consequently, they now only account for around 20% of alternative investment, down from over 50% at the start of the millennium. Figure 5: Alternative investment by investor type Figure 6: Net investment into alternatives since 2000, bn 3 Includes all mixed-use schemes and leisure 5

6 2. Why invest in alternatives? Alternative investment began as a means of diversifying portfolios and increasing exposure to longer and, arguably, more stable income streams than are generally achievable in the main commercial sectors. Over time, these characteristics have grown in importance and are supported by several factors that pull investors towards these sectors. Urbanisation, general demographic trends and an ageing population will support the need for PRS, mixed use, healthcare and other specialist assets to fulfil the evolving needs of the population, while rising tourist numbers (Visit Britain forecast 41.7 million overseas visits to the UK in 2018, a 4.5% increase from 2017) will increase the demand for hotel rooms. Demographic trends are usually predictable and it is, therefore, possible to forecast demand for the aforementioned sectors. Moreover, occupier demand for some alternative sectors is less cyclical than in the traditional sectors and therefore less exposed to economic shocks. However, there is no doubt that there are also risks associated with alternative investments. Despite, in many cases, having higher yields than the traditional sectors, alternative assets are often reliant on operator performance and are heavily exposed to management risks and/or costs. 6

7 Long-term investment opportunities Return profile Alternative sectors may attract those investors that are seeking stable and long-term income rather than short-term strategies seeking to materialise cyclical growth opportunities. One of the key compelling aspects of those sectors is the prevalence of long leases of up to years, often in combination with sale and leaseback or income strips strategies whereby an investor buys an income stream, rather than the physical asset. Alternatives are, therefore, considered by some as relatively defensive, stable and low-risk investment vehicles. This is especially important to investors that require secure inflation-linked cash flows. A pension fund, for example, may require a predictable income stream in order to pay pensions in the future. Income strips and leaseback strategies Income strips and leaseback strategies are interesting for both investors and owner-occupiers as these models offer owneroccupiers the possibility to unlock capital while continuing to occupy their premises as stated in the lease contract. The real estate owner can, therefore, use the freed capital to satisfy other business needs. While a leaseback contract transfers the asset to the investor, the income strip strategy allows owner-occupiers to keep the ownership of an asset. A tenant retains the option to buy back the property at the end of the lease as long as they have not defaulted on any rent payments. Looking at the return profile of alternatives supports the argument of stability and less volatility. Since 2002, the average total annual return on residential property was higher than any other sub-sector covered by MSCI/IPD. Hotels, industrial, leisure and other all outperform all property too, while two of the three traditional sectors, namely office and retail performed worse. A slightly different picture emerges when analysing the trend since 2014, arguably the peak of the current commercial property cycle. Industrial has been the star performer in recent years and, in many ways, the evolutions of the industrial sector has been driven by many of the same forces that have been driving interest in alternatives - structural changes in demand, driven by demographic change and consumer behaviour. Figure 7: Average annual total returns compared averages compared with Source: MSCI/IPD, Colliers International 7

8 For more information, please contact: Oliver Kolodseike Research & Forecasting Max Broadbent Healthcare Tim Meakes National Capital Markets Matthew Beech Student Housing Colliers International UK, 50 George Street, London This report gives information based primarily on Colliers International data, which may be helpful in anticipating trends in the property sector. However, no warranty is given as to the accuracy of, and no liability for negligence is accepted in relation to, the forecasts, figures or conclusions contained in this report and they must not be relied on for investment or any other purposes. This report does not constitute and must not be treated as investment or valuation advice or an offer to buy or sell property. Colliers International is the licensed trading name of Colliers International Property Advisers UK LLP (a limited liability partnership registered in England and Wales with registered number OC385143) and its subsidiary companies, the full list of which can be found on Our registered office is at 50 George Street, London W1U 7GA. This publication is the copyrighted property of Colliers International and/or its licensor(s) All rights reserved.