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Sponsor Interview
A supplement to
Institutional Real Estate Americas
PATRIZIA AG
Future-proofing real estate portfolios
the challenge is anticipating how the
‘WE ARE NOW IN LIFT-OFF MODE’ working-from-home model is going to
FOR ALTERNATIVE PROPERTY play out. How is that going to affect
TYPES IN EUROPE the office market in terms of capital
expenditure? And how will it change the
The global COVID-19 pandemic has caused three major direct definition of core and the rental growth
and indirect impacts on the real estate industry: going forward? Pre-pandemic, demand/
supply was in check and even in favor
1) Triggered an unprecedented recession in the short term and
of rental growth. But that is changing,
exhibited the strong resilience of some traditional property types,
and some megatrends are favoring a
such as residential, food-anchored retail and logistics.
whole host of alternative property types,
2) Accelerated megatrends that will have lasting effects in including student housing, senior living,
the medium term: Ecommerce adoption, de-globalization single-family homes, co-living, micro-
and nearshoring, rising importance of digital infrastructure, living, apartments, hotels, childcare
emergence of life sciences and health-tech, and a deeper centers, healthcare facilities, self-storage,
integration of ESG in investment-management practices. cold storage, data centers, urban
logistics, communication cell towers,
3) Disrupted industry beliefs: The post-GFC hyper-urbanization medical offices, life sciences, flex offices,
and the dominance of the 24-hour city could be challenged parking — generally, and even social
by smaller and more livable locations and a rethink of office infrastructure, which fits quite nicely with
occupation, health systems and supply chains. impact investing.
Retail and office assets, which still account for the bulk of typical Our thesis is that we are on the cusp
institutional real estate portfolios in Europe, will become less dominant of major changes in Europe. Changes
given the headwinds they are facing: ecommerce and remote working. in the United States have accelerated
tremendously over the last 10 years,
Residential and logistics are rapidly gaining in importance in particularly after the global financial crisis.
institutional portfolios, and we are seeing a broadening of the real In Europe, we are experiencing the same
estate asset class that should help investors tailor and diversify their megatrends, and there is no reason the
real estate exposures with the advent of alternative property types. same causes would not lead to the same
Alternative property types have become mainstream in the United effects, albeit with nuances. We think
States over the past 10 years and now represent a cumulative that is going to have a massive impact.
asset value of more than $1 trillion, or 43 percent of the real estate To back that thesis, we have combined
invested stock. These properties fall loosely into four categories: living NCREIF and Nareit data to measure the
alternatives; healthcare and well-being; supply chain; tech and digital. growth in assets under management for
the traditional and alternative property
Chase McWhorter, Institutional Real Estate, Inc.’s managing director, types in the United States, irrespective
Americas, recently spoke with Mahdi Mokrane, head of Investment of whether they are owned by a REIT, a
Strategy & Research for PATRIZIA AG, about how these trends toward separate account, an investor, etc. The
alternatives are likely to impact the European investment market. growth at the back end of the period
is really driven by residential, industrial
and logistics, and not by office, let alone
How would you describe the differences particularly discretionary spending by retail. [See Figure 1.] We also see the
between the alternatives marketplace in retail formats and shopping centers. growth of alternative property types, and
the United States vs. Europe? The pandemic accelerated something it is spectacular. Out of $2.6 trillion, $1
that was already in the cards, and it trillion is alternative now, and $1.6 trillion
The comparison is fairly straightforward is made up of traditional property types.
is starting to look ugly in the United
— the U.S. alternatives market is a $1 Kingdom and continental Europe. This Investors have a choice of more than
trillion market, whereas in Europe, the will have investors thinking about their four property types to choose from, and
size of the market is one-tenth or less future allocations. Retail exposure has that includes assets with infrastructure-
of the U.S. alternatives market. Retail been shrinking continuously in Europe like features, such as cell towers and
in both regions has been challenged, in the past decade. In terms of offices, data centers, to very sophisticated
SPONSOR INTERVIEW | 1 | 2021
PATRIZIA AG
hotels or alternative ways of living, to
industrial and urban logistics — a whole
CAROSSA QUARTER: CREATING AN 1,800-UNIT
host of property types, all driven by
different trends and drivers, some of “BETTER LIVING” COMMUNITY IN BERLIN
them correlated, and others not. That’s
interesting from a portfolio construction In May 2021, on behalf
and diversification perspective. of its institutional clients,
PATRIZIA AG took a majority
What would you say are the main drivers
90 percent stake in a new
for this increase in alternatives?
transformational residential
The future-proof portfolio in the United development in the Carossa
States is quite diverse compared with Quarter, located in Berlin’s
20 years ago, and this is driven by Spandau district. Spandau is
demographics, urbanization, as well as a rapidly improving locality in
tech and digital. Cell towers and data Berlin that will benefit from the
centers were among the key drivers of redevelopment of the former
the push into alternative property types; Tegel airport into a new technology center, the Urban Tech Republic, and further investments
they may plateau now, and the next leg from tech companies such as Siemens.
of growth will probably be led by other On completion in 2025, the approximately 10-hectare (25-acre) freehold site, which
property types. We think future growth has been rezoned from industrial to residential, will be a waterfront city quarter with views
will be underpinned by ESG, in terms of across the Havel river, delivering 1,800 living units comprising traditional housing, as well as a
making sure you cater to the needs of significant proportion of micro-living, senior-living, co-living and affordable housing. PATRIZIA has
commenced construction with its local development partner, Kauri Cab, and this 125,000-square-
tenants thinking of energy efficiency and
meter (1.3 million-square-foot) net development is projected to have a gross development value
well-being, but also by impact investing,
(GDV) of approximately €750 million ($891 million) and involves the creation of an entirely new
in terms of delivering social infrastructure
neighborhood with beneficial shared community facilities in one of Europe’s most dynamic cities.
that cannot necessarily be provided by The Carossa Quarter will be built to DGNB Gold Standard for sustainability, with all
local authorities or governments. There communal energy supplied by onsite rooftop solar panels. However, it is the integration of
is a role for institutional investors to approximately 5,000 square meters (53,820 square feet) of commercial shared facilities in the
come in here. residential development that will set new social and environmental standards for such a major
After the GFC, demand in the United development. The quarter will incorporate a variety of tenant facilities and communal space
States emerged for tech-driven real designed to create a better social and environmental place, including co-working offices, guest
estate, as well as for stable income rooms, fitness facilities, bike maintenance and repair rooms, a DIY workshop, package receipt
that could be achieved by investing in and sending desk, e-mobility facilities, kindergarten, and even canoe rental.
property types that had strong tailwinds
and a yield premium from which they
could benefit from for a long period. huge tailwinds of 4G — 10 years ago, to downsize, but don’t want to go into
Meanwhile, the oversupplied office we were going from 3G to 4G, and a standard nursing home. They are still
and, to some extent, retail sectors that really pushed the demand for quite active, and they are looking for a
got less attention. Investors saw the technology-driven real estate. community.
value of using both diversification and Aging populations have also been a real Looking ahead in Europe, we see the
return-enhancing strategies, which estate driver in the United States and knowledge economy as a driver —
they probably found in cell towers Europe. There is demand in senior living for example, with the recognition that
and data centers, because of the from couples or individuals that need student housing has been left as an aside
in most of continental Europe. Student
Figure 1: U.S. alternatives represent more than 43% of the invested stock in 2020 housing is rapidly becoming its own asset
Cell towers, data centers, net leases and healthcare have been the main drivers of alternatives. class. In all, there is a significant demand-
100%
90%
supply imbalance in favor of these more
80%
alternative sectors, as opposed to the
70%
traditional four.
60% Do you believe the path forward for
50% Europe is that these alternative assets
40% classes will become more attractive to
30% investors than traditional real estate?
20% As a whole, yes, there will be strong
10% growth in new property types. But to the
0% question, will these be the same as those
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Cell Towers Data Centers Net Lease & Gaming Self-Storage
that we saw in the United States? The
Healthcare Hotels Other Industrial / Logistics answer is no. Are the tailwinds and the
Sources: PATRIZIA AG, Green Street, NCREIF, Nareit. Information as of March 30, 2021. factors the same? Probably, but the mar-
AMERICAS | 2 | 2021
PATRIZIA AG
ket structure in Europe is quite different. What are some of the other challenges think about which investment structure
Europe is not just one large country where an investor might face who was looking to use as an investor. Do you go
you can scale. A lot of these alternative to invest in alternative property types in through a separate account? Do you
property types need platform investing. Europe? invest in a fund? Or do you do it
They are complex; they need special tal- The first challenge would be choosing yourself? We would say, find the right
ent and skillsets to even get access to the which property type you wanted to partner that can source, access and
product and then to manage the proper- invest in and finding the appropriate manage these assets.
ties appropriately and de-risk them. access route. The fact that that route What do you think makes PATRIZIA the
In the United States, you can easily scale doesn’t exist through the listed sector right partner?
your strategy, whereas in Europe, each in Europe today, as it does in the First, experience. For example, we
market is quite different. It starts with, United States, means you have to pick have invested in residential platforms
who owns those assets today, and who a partner who can provide access to the in scale; repositioned, enhanced and
is going to be the tenant and occupier product. Often you need to source the optimized staff management; and
in the future? That may vary, country product very early, and many of these optimized occupancy, and, by that, I
by country or even city by city, so you alternative niche property types need to mean thousands of apartments. We
need people on the ground to help you be built or go through an active asset have also used some of our capital
map out the opportunities and scale your repositioning. pools to dip into emerging property
investments. Regulation can also vary For instance, we are thinking of types to acquire knowledge, and we
from country to country for, say, nursing converting ailing hotels into senior- have joint-ventured with experts in each
homes, data centers, or the cell towers living assets or converting an old field. Now we are gaining confidence
that we have seen represent a huge factory plant into new urban quarters, and we are hiring the resources and the
chunk of the alternatives in the United as we are doing in Spandau in Berlin. expertise internally to be able to scale
States. We probably would not have the There was an old airport in Berlin to in alternatives. We are hiring specialists
planning consent in many countries in the northwest that is now closed, and in data centers, flexible offices, hotels,
Europe for huge towers because of the a new international airport has now senior living, medical offices and
urban regimes. We are talking about 500 been opened to the southeast of the healthcare.
million inhabitants living in maybe half city. This means there is land that can We have had a social healthcare fund
the space of the United States, which has be reused in that northwestern part of in Germany for several years. It is
360 million inhabitants, so the density of Berlin, and we have just bought, on doing very well, and we think there
occupation of the space in Europe and behalf of our clients, a huge site that is now perhaps a continental Europe
the competition for that space differs we completely repositioned to include or full European play to execute with
from that of the United States. alternative living. A third challenge is to this strategy. We have the scale,
knowledge and experience — and
the willingness — to do this at a
regional level, and we acknowledge
CONVERTING A HISTORIC LISTED WINERY INTO A STYLISH that the lessons we have learned from
SENIOR-LIVING SOCIAL CARE FACILITY our existing plan — from taking over
platforms, managing them, through
PATRIZIA, on behalf of PATRIZIA Social to selling them — give us a strong
Care Fund III, signed a 20-year-plus competitive advantage, in addition to
lease with leading care operator Advita our 900 people on the ground.
for a community of 46 assisted-living In the United States, COVID-19 seemed
units, 12 shared apartments, 20 to accelerate existing trends. What are
intensive-care beds, and 40 day-care you seeing in Europe in terms of the
beds. Located in the romantic Nahe pandemic’s impact?
valley in Bad Kreuznach, 80 kilometers We see similar patterns in terms of
(50 miles) southwest of Frankfurt, a acceleration of trends. One of those
region known for its health resorts and is that real estate is becoming more
vineyards, the impressive refurbished operational. It requires more hands-on
listed building of the former Anheuser- management. When you manage
Fehrs winery is complemented by four new buildings on the site. With an intensive-care retail assets that are facing headwinds,
center, shared apartments, day-care facility and assisted living, the site offers a wide variety you need to get your hands into the
of living and care solutions, as well as a restaurant and common areas. PATRIZIA invested operations more, accept more flexible
approximately €250 million ($297 million) into 13 properties in Germany in 2020, on behalf conditions and even leases, and work
of the fund, and closed on a 5,000-square-meter (53,820-square-foot) assisted-living closely with your tenants — because if
property in Amsterdam in June 2021, bringing the total portfolio value to approximately your tenant thrives, you thrive with your
€360 million ($427 million) across 19 assets. tenant. You can’t just go out and find
another tenant.
SPONSOR INTERVIEW | 3 | 2021PATRIZIA AG
Another trend is the resilience of a select It will likely take a little more time to A second way ESG standards intersect
number of happy few property types, get wide acceptance around some with alternatives is that landlords and
one of them being residential and the of the more tech-oriented property managers, such as PATRIZIA, can have
other being industrial and logistics — types. For digital, the execution is a a key role in both mastering the energy
in particular, the urban logistics and bit trickier, and it is very specialized. efficiency of buildings in the common
the emerging logistics property types. There are questions around changes in areas and inducing tenants to pick
Cold storage, self-storage, etc., have technology that could make some of renewable energy for their electricity.
emerged from being very niche or edgy these assets obsolete more quickly than At PATRIZIA, we’ve been doing this
to becoming more mainstream. one may think, and there is also the massively in our residential portfolio
energy footprint that raises questions. over the past few years.
A third trend, which has not yet been
resolved, is a paradigm change about The infrastructure around energy and The third element is that we can do a
urbanization — whether this big technology is one where we see massive lot to enhance the amenities and well-
urbanization trend that we have seen investment opportunities from a risk- being within the buildings we manage.
will continue or pause or reverse. We adjusted return angle, but scalability still In Germany, the United Kingdom
think it has paused, but that it will not needs to be proven in Europe. and other countries where we are
reverse. Throughout the pandemic we developing residential and alternative
How do ESG factors interrelate with
have used our data intelligence tools living, we are now factoring in elements
some of these alternative property types?
to capture every single apartment and such as communal gardens, driverless
If you speak to people around Europe, transportation, bicycles and DIY facilities
house that was on offer around Europe,
one of their key concerns is access to to allow tenants to customize their flats.
for sale or rent, to capture trends and
good-quality, well-amenitized residential The Berlin Spandau redevelopment is a
kinks. And the only city where we have
in the most attractive cities — from great example of this. We are focused
seen the urban population caving is
Dublin all the way to Munich, Berlin, on tenant well-being and making sure
inner-city London. All other cities we
Paris, Madrid and Amsterdam. We are that, whatever we build and whatever
looked at in Europe have exhibited
not building enough residential that is we manage, we can improve the carbon
stable or heightened residential
affordable for the median household footprint, but also the air quality and any
attractiveness.
in many cities, so from an impact- other element that impacts the well-
Which alternative property types offer investment perspective, this is a massive being of whomever occupies or uses the
the right combination of performance opportunity. buildings we manage.
and scale for investors in Europe to move
the needle in the next decade?
In terms of offering the best risk-adjusted
returns, scalability and diversification
potential, we think alternative living is CONTRIBUTOR
here to stay. Investor acceptance is higher Mahdi Mokrane
because these properties are adjacent to Head of Investment Strategy & Research
investments that investors probably have M +44 207 761 3420
exposure to. They readily understand
Mahdi.Mokrane@patrizia.ag
that, while the dynamics may be slightly
different, they are not too difficult to
understand and you don’t need to be an CORPORATE OVERVIEW
absolute specialist to benefit from these With 24 offices globally, PATRIZIA AG has been active as a real estate investment
trends. We see alternative living as very manager since 1984. The firm manages €47.0 billion ($57.0 billion) of assets for
scalable on a European basis. more than 400 institutional clients in the residential, office and retail sectors, as
Senior living, or best-aged living as we well as in the sphere of senior living, hospitality and logistics real estate across the
like to call this niche, is pan-European, risk spectrum.
even though some cities may be more
attractive than others. Student housing,
CORPORATE CONTACT
in terms of scalability, comes in a second.
And then we have co-living, which is Robert Bilse
very attractive, and offers a solution to Head of North America, Capital Markets
housing inaffordability and access to M +1 973 868-0558 | Robert.Bilse@patrizia.ag
residential in the primary, more attractive
cities, but that is a smaller, less scalable
www.patrizia.ag
segment. Healthcare is readily scalable as
an investment opportunity.
Copyright © 2021 by Institutional Real Estate, Inc. Material may not be reproduced in whole or in part without the express written permission of the publisher. This article presents
the author’s opinions reflecting current market conditions. It has been prepared for informational and educational purposes only and should not be considered as investment advice
or as a recommendation of any particular security, strategy, investment product or offer. Past performance is not necessarily indicative of future performance.
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