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Look out for life sciences, private rented housing, coliving and student spaces. All are tipped as major growth areas for your business in 2022. So says research from the Urban Land Institute, whose Chief Executive speaks exclusively to Mix.
These days the future is a problem. On the one hand there are loud proclamations of certainty about the coming ‘new normal’. On the other, one thing we learned from last 20 months is that tomorrow is always predictable.
Keeping these two contradictory ideas in play simultaneously inevitably produces headaches, as almost everyone in the property business can attest. Luckily, a super-effective painkiller has been provided in a report published a few weeks ago by the Urban Land Institute.
Written jointly with PwC and using data from Real Capital Analytics, the report is a deep dive into both property market sentiment and property market fact. It is the 19th annual look at what makes European real estate tick, and it is the closest to certainty the property market gets.
According to this analysis, business confidence in the real estate sector is at its highest level since 2014.
On the face of it, this level of confidence is bonkers: as the report itself shows, fears about inflation, continued distress in the retail and leisure sector and the prospect of forced fire-sales are at the front of property’s list of anxieties. Each of these issues is predicted to be big (bad) news by more than 70% of the 800 plus senior property operatives interviewed by researchers.
Urban Land Institute Chief Executive, Lisette van Doorn, says the high levels of optimism her team discovered astonished her.
‘The huge level of short-term optimism is a real surprise,’ she says. ‘We’d expected some optimism because, with much of the pandemic behind us, in many sectors the market is up to, or better than, pre-pandemic levels. But what we hadn’t expected was the real excitement and I’m still not 100% convinced it is real.
‘Maybe we saw so much optimism because we did much of our research over the summer when vaccinations were going well, inflation was okay and the supply chain didn’t look like being a long-term problem – but we don’t know.
‘The fact remains that none of us have any experience of re-starting an economy – we’re all finding out as we go along – and the result is that sentiment can move up, or down, in a flash. Tell them something has changed – like energy pricing – and suddenly there is doom all over their faces.’
Lisette’s conclusion is that ‘people still find it very difficult to get balanced’ after almost two years of pandemic, lockdowns and non-normality. Mood swings, she suggests, are the new normal.
What the research can say, with some certainty, is that large bets are being placed on a handful of favoured property sectors. These will be the ones to watch in 2022, regardless of mood swings.
The pandemic has reinforced the trend of investors targeting sectors that profit from megatrends, operate anti-cyclically, and continue to generate resilient income. The vogue for beds-and-sheds investment strategies – development, logistics and residential – has been popular among UK investors. But there are other niches – which will be of more interest to Mix readers – now getting top billing from investors.
For now, things like life science floorspace, coliving and senior living may be relatively small in value, but they are regarded with out-size enthusiasm by investors.
According to Lisette’s team, the top 10 investment niches include senior living, affordable housing, private rented housing and – worth watching – healthcare and life sciences.
Social housing, coliving, student housing, coworking and hotels are to be found in the following pack, but the gap between coworking (ranked 17th) and hotels (ranked 22) is a large one, and since the list stops at No 27 (city centre shopping malls – the least favoured property class of all), the hotel ranking is hardly a compliment.
Unfortunately, the report offers no consensus on the future of offices, with some respondents enthusiastic about the future of flexible, prime assets, while others envisage an inevitable contraction in overall demand.
They do, however, conclude that there will be a lasting increase in time worked remotely, according to 85%, while 82% see a continuing role for HQ buildings in conveying culture and attracting talent, and 74% see a growing valuation gap between primary and secondary offices.
The trend to watch, however, is an increasing focus in the office market on exactly what kind of occupier takes the lease. The days when an office building was simply an office building, and the occupier simply an ‘office occupier’ are long gone in some markets, and going in others, the report indicates. Landlords and investors have realised that some occupiers – tech and life sciences are particularly favoured – have different requirements, and a different propensity to sign leases.
Landlords and investors want to move away from the concept of the ‘office occupier’ and instead think about the professional occupier, the science occupier, the tech occupier…
Lisette’s team call this ‘a more granular approach to real estate investing, drilling down into the specifics of subsectors when making asset allocation decisions’, and in the course of 2022’s mood swings, it could make all the difference.
‘The direction of travel is towards a more granular way of thinking about who occupies offices, now that investors have realised that different kinds of occupiers behave totally differently,’ Lisette explains. ‘So we’ll see more focus on life science occupiers, coworking occupiers and so on.
‘The next step after that is thinking how you manage the interface between these different users. This is going to be about a lot more than old fashioned asset management. Landlords and investors are now realising it will mean a constant conversation with occupiers and property customer service. This means a totally new direction for real estate.’
With all these changes in flux, this year’s survey showed that organisational transformation is a key five-year priority for 68% of respondents, driven by evolving relationships between landlords and tenants in every sector. The strongest influences are real estate as a service and changing customer demands, both cited by 89% of respondents. The third-ranked influence with 81% is the ESG agenda.
The wellness agenda also scored heavily among property market players. An amazing and all-but-unanimous 92% either agreed or agreed strongly that ‘health and wellbeing will remain a very important factor across all sectors of real estate’. Scarcely surprising after a global pandemic, but nonetheless an interesting measure of the mood.
But there is a downside. The report questions the property industry’s ability to adapt at the speed and intensity required, identifying an ‘entrenchment’ reflected in the view of 83% of respondents that existing culture is the greatest barrier to change in their organisations.
The report concludes that there is muddled thinking, created by a willingness to change, but uncertainty about how to do it.
More mood swings? That seems likely as the property market digests the implications of the last two years. But in some sectors, like coworking, coliving and life sciences, the 2022 swing seems to be going only one way. Up.
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