Credit: GRI Club Sector-specific analysis from European Real Estate’s biggest players
Exclusive GRI Club Report: Offices, retail, hotels, logistics, data centres, build-to-rent, and student housing
October 23, 2024Real Estate
Written by Helen Richards
European real estate’s most prominent market players gathered at Europe GRI 2024 to participate in high-level insight exchange, involving private roundtable discussions addressing each of the industry's unique sectors.
The consequent report reveals the in-depth analysis of the trends, opportunities, and challenges in each sector, as reported during these discussions.
Read all sector-specific insights in the full GRI Sector-Specific Analysis report.
The office market is no longer considered a homogeneous asset class, after recent fragmentation into multiple specialised sectors, each with its own needs and operational complexities.
Flexible office spaces, co-working models, and high-amenity buildings catering to lifestyle needs are emerging as distinct categories. Tenants now expect more than just a functional workspace; they want spaces that offer amenities like gyms, cafes, and wellness features to attract and retain talent.
Meanwhile, investors are grappling with capital challenges, including high CapEx needs for modernising buildings to meet green standards. Sustainability is now a key driver, with retrofitting older buildings posing financial uncertainties, though there is potential for long-term value creation in green-certified offices.
Several investors reported that traditional sources of capital have been slow to return to the retail sector even as operations have improved, however they have finally started to see increased interest in recent months. There is also an uptick in interest from Asian investors who are seeing retail as a promising asset class given its inflation-hedging characteristics.
Meanwhile, the e-commerce “monster” has been somewhat tamed as consumers recognise the value of in-store experiences after being forced into online shopping during lockdowns.
This rapid revenue growth is unlikely to continue at the same pace, however, and investors are becoming more cautious about forecasting future growth rates, focusing instead on stabilising and optimising operations. Value-add strategies were a central theme of the discussion, with investors talking extensively about the operational side of value-add. Many hotels are still operated under inefficient or outdated contracts, creating opportunities for improvement.
Meanwhile, investors have found it challenging to identify high-quality hotel assets in competitive markets. Competition for quality assets is fierce, especially in well-established markets. Investors noted that many hotels are tightly held by long-term owners including both families and institutional investors, who are reluctant to sell.
Meanwhile, the demand for logistics space remains strong despite economic uncertainties, driven by key trends such as the rise of e-commerce, nearshoring, and reshoring.
Despite these strong supply-demand fundamentals, the era of double-digit rental growth appears to be over. Investors expect more modest, but steady, rental increases of 2% to 4% annually, with specific high-demand regions such as Southern Europe seeing stronger growth.
There is an increasing trend of speculative development for data centres, particularly near urban centres where demand is high. Some investors are willing to build data centres without pre-leasing, betting on the strong demand from hyperscalers and other large tenants.
Despite strong demand, the sector remains a high-risk investment option considering its capital-intensive nature, stringent energy regulations, and concerns about the potential obsolescence of data centres given the speed of technological change.
There has been an interesting shift in investor profiles in the build-to-rent (BTR) space. Historically, dominated by institutional capital and large greenfield multifamily projects, there is now a growing interest from private capital eyeing high returns in these sectors.
This shift towards private capital is seen in several European markets, but particularly in countries like Portugal, where there is a significant imbalance between housing supply and demand.
Another challenge is the operational complexity of running student housing developments. The sector's reliance on effective management is crucial, especially in times of inflation or rising operational costs, particularly impacted by energy prices. Some participants highlighted the difficulty of managing leases during inflationary periods, where long-term fixed leases might fail to keep pace with rising costs.
Investors are also acutely aware of the regulatory environments in different countries, as these heavily impact the attractiveness and profitability of student housing investments.
Read all in-depth insights into European real estate’s unique sectors in the full GRI Sector-Specific Analysis report.
European real estate’s most prominent market players gathered at Europe GRI 2024 to participate in high-level insight exchange, involving private roundtable discussions addressing each of the industry's unique sectors.
The consequent report reveals the in-depth analysis of the trends, opportunities, and challenges in each sector, as reported during these discussions.
Read all sector-specific insights in the full GRI Sector-Specific Analysis report.
Offices
While the office sector will not disappear, it is undergoing a fundamental transformation and becoming more complex, with greater emphasis on operational excellence, tenant experience, and sustainability.The office market is no longer considered a homogeneous asset class, after recent fragmentation into multiple specialised sectors, each with its own needs and operational complexities.
Flexible office spaces, co-working models, and high-amenity buildings catering to lifestyle needs are emerging as distinct categories. Tenants now expect more than just a functional workspace; they want spaces that offer amenities like gyms, cafes, and wellness features to attract and retain talent.
Meanwhile, investors are grappling with capital challenges, including high CapEx needs for modernising buildings to meet green standards. Sustainability is now a key driver, with retrofitting older buildings posing financial uncertainties, though there is potential for long-term value creation in green-certified offices.
Retail
Despite strong operational performance across most retail formats, there is a clear disconnect between this and the capital markets. Many investors noted that while their retail operations have recovered, the capital markets have not yet reflected this in terms of asset valuations.Several investors reported that traditional sources of capital have been slow to return to the retail sector even as operations have improved, however they have finally started to see increased interest in recent months. There is also an uptick in interest from Asian investors who are seeing retail as a promising asset class given its inflation-hedging characteristics.
Meanwhile, the e-commerce “monster” has been somewhat tamed as consumers recognise the value of in-store experiences after being forced into online shopping during lockdowns.
Hotels
The hotel sector has shown remarkable resilience, and hotels bounced back quickly post-pandemic in terms of revenue and net operating income (NOI), with the two extremes of the market, the luxury and economy hotel segments, showing the most significant growth.This rapid revenue growth is unlikely to continue at the same pace, however, and investors are becoming more cautious about forecasting future growth rates, focusing instead on stabilising and optimising operations. Value-add strategies were a central theme of the discussion, with investors talking extensively about the operational side of value-add. Many hotels are still operated under inefficient or outdated contracts, creating opportunities for improvement.
Meanwhile, investors have found it challenging to identify high-quality hotel assets in competitive markets. Competition for quality assets is fierce, especially in well-established markets. Investors noted that many hotels are tightly held by long-term owners including both families and institutional investors, who are reluctant to sell.
Industrial & Logistics
One of the main factors driving logistics real estate prices is the limited availability of land suitable for development, particularly near major cities and transport hubs. This scarcity is exacerbated by strict European regulations and environmental protection of land, which often restrict new developments.Meanwhile, the demand for logistics space remains strong despite economic uncertainties, driven by key trends such as the rise of e-commerce, nearshoring, and reshoring.
Despite these strong supply-demand fundamentals, the era of double-digit rental growth appears to be over. Investors expect more modest, but steady, rental increases of 2% to 4% annually, with specific high-demand regions such as Southern Europe seeing stronger growth.
More than 60 investor-led roundtable discussions at Europe GRI 2024 revealed an array of invaluable insights into the current state of the European real estate market. (Credit: GRI Club)
Data Centres
The demand for data storage and AI-driven computing will continue to grow exponentially, with projections for the market to double or triple in the next five years, regardless of improvements in data storage efficiency.There is an increasing trend of speculative development for data centres, particularly near urban centres where demand is high. Some investors are willing to build data centres without pre-leasing, betting on the strong demand from hyperscalers and other large tenants.
Despite strong demand, the sector remains a high-risk investment option considering its capital-intensive nature, stringent energy regulations, and concerns about the potential obsolescence of data centres given the speed of technological change.
Resi: Single-Family & Multifamily Build-To-Rent
The multifamily residential (MFR) sector has shown resilience despite significant challenges over the past five years, such as inflation, energy crises, and geopolitical tensions. However, while the asset class has been stable, it is certainly not immune to capital market pressures.There has been an interesting shift in investor profiles in the build-to-rent (BTR) space. Historically, dominated by institutional capital and large greenfield multifamily projects, there is now a growing interest from private capital eyeing high returns in these sectors.
This shift towards private capital is seen in several European markets, but particularly in countries like Portugal, where there is a significant imbalance between housing supply and demand.
Student Housing
Investment challenges in the student housing sector revolve around capital constraints, yield volatility, and rising interest rates. The sector remains attractive, but transaction volumes have slowed due to these economic factors.Another challenge is the operational complexity of running student housing developments. The sector's reliance on effective management is crucial, especially in times of inflation or rising operational costs, particularly impacted by energy prices. Some participants highlighted the difficulty of managing leases during inflationary periods, where long-term fixed leases might fail to keep pace with rising costs.
Investors are also acutely aware of the regulatory environments in different countries, as these heavily impact the attractiveness and profitability of student housing investments.
Read all in-depth insights into European real estate’s unique sectors in the full GRI Sector-Specific Analysis report.
