The investment outlook isn’t necessarily dark across the board, as real estate’s potential as an inflation hedge has meant activity is high. But, alongside Covid, the rapid rise of environmental, social and governance (ESG) concerns has led to a big shift in the market: with an increased demand for alternative assets, a new office structure and new requirements for buildings in general.
Faced with multiple macroeconomic difficulties, real estate heavyweight asset classes such as offices and retail are going through a period of transition that is leading investors and fund managers to increase their exposure to alternative asset classes.
Sectors such as student housing and senior living are now being viewed as under-appreciated. Record levels of students were accepted into university or college over the last two years, up 7% from 2020, according to UCAS, and the age profile across the general European population is rising, increasing the demand for retirement homes. So building new social hubs that both students and the elderly can appreciate will help bring in investors and higher rents.
The pandemic upended office life, and hybrid working is here to stay. However, this doesn’t mean city centres will become ghost towns. Across European cities such as Paris and London, we are starting to see a return to pre-Covid footfall on Tuesdays, Wednesdays and Thursdays.
Bringing people back into the office for training and company culture is a responsibility that companies have, but in this new normal, they have to find ways to incentivise them to return. Hot-desking, breakout rooms and optimised working spaces for employees are becoming more important.
Another result of Covid has been an exodus of people from tier-one cities such as London and Berlin, due to the higher cost of living. The rise of satellite offices in tier-two cities, where a company sets up a smaller branch separate from their main HQ in major cities, has been a direct result of this.
Places such as Reading and Toulouse have seen their stock rising as secondary working hubs, as buildings have less competition and are cheaper, which in turn is attracting real estate fund managers.
Although office demand is falling across the industry, demand for ESG-compliant commercial property is rising.
To meet this demand, fund managers are incorporating ESG- compliant buildings into portfolios and retrofitting buildings to meet these new standards.
The European real estate market is undergoing a huge change, as the traditionally strong asset classes begin to wane due to low yields and new, stronger and more attractive classes take the reins. As the return to the office plays out, one thing is clear: the buildings that companies are returning to must be enticing on an environmental and social level, or companies will risk losing their talent and fund managers will see their powder pool dry up.
Tamas Mark is head of real estate, Luxembourg, at investor services group IQ-EQ