Outlook 2021 Building resilience in global real estate portfolios - Savills Investment Management

Page created by Fred Terry
 
CONTINUE READING
Outlook 2021 Building resilience in global real estate portfolios - Savills Investment Management
Outlook
2021
Building resilience in global
real estate portfolios
Outlook 2021 Building resilience in global real estate portfolios - Savills Investment Management
OUTLOOK 2021
2                                                                                                                           3
                                                                                                            savillsim.com

                                           A message from the Global
                                           CIO and Deputy Global CEO
Outlook                                    When we entered 2020, we could have not anticipated

2021
                                           how different this year would turn out to be. The global
                                           COVID-19 pandemic has radically changed the way we
                                           live, work and play. Some of the major central banks
                                           have implemented a ‘whatever it takes’ policy to save
                                           economies, lowering interest rates to around zero
                                           and conducting large-scale asset purchases through
                                           quantitative easing programmes. Meanwhile, global
GLOBAL CONTACTS                            sovereign debt levels continue to grow.

                                           While containing the spread of the pandemic will remain
       Kiran Patel                         the focal point, other challenges also lie ahead in 2021.
       Global CIO and Deputy Global CEO    The impact of the UK leaving the EU will come into full
       kiran.patel@savillsim.com           effect. There are climate-related risks, rising inequalities
                                           and continuous geopolitical tensions all of which could
       Andreas Trumpp                      threaten global stability. Embracing disruption to
       Head of Research, Europe            protect existing portfolios and identify new investment
       andreas.trumpp@savillsim.com        opportunities is, therefore, ever more important. Part of
                                           this involves capitalising on structural trends that have
                                           accelerated as a result of COVID-19.

                                           This year for the first time we have conducted a survey
       Matthias Düsing                     for our Outlook publication. Some 45% of investors
       matthias.duesing@savillsim.com      expect that real estate investment will increase over
                                           the next 12 months and 25% expect investment to
                                           stay the same. The even lower-for-longer interest rate
       Judith Fischer                      environment leaves investors with less choices to meet
       judith.fischer@savillsim.com        their return targets. Given the challenges facing financial
                                           markets, we believe investors need to look at alternative
                                           asset classes with more attractive risk-adjusted returns.
       Matteo Vaglio Gralin                Real estate has the characteristics and fundamentals to
       matteo.vagliogralin@savillsim.com   take advantage of this secular shift in capital markets.

                                           The Savills Investment Management Outlook 2021 report
       Benedict Lai                        features our views on the commercial property markets,
       benedict.lai@savillsim.com          serving to help investors build resilience in global real
                                           estate portfolios in these unprecedented times.

       Hamish Smith                        Kiran Patel
       hamish.smith@savillsim.com          Global CIO and Deputy Global CEO
Outlook 2021 Building resilience in global real estate portfolios - Savills Investment Management
OUTLOOK 2021
4                                                                                                                                              5
                                                                                                                               savillsim.com

Contents                                                                                          38.
                                                                                                  House views: Europe
06.                      18.                                                                      BELGIUM
                                                                                                  PAGE 38
                                                                                                              IRELAND
                                                                                                              PAGE 43
                                                                                                                              PORTUGAL
                                                                                                                              PAGE 48

Our top commercial       A new ‘mixed-working’ approach                                           DENMARK     ITALY           SPAIN

real estate investment   means physical offices are here to stay
                                                                                                  PAGE 39     PAGE 44         PAGE 49

                                                                                                  FINLAND     LUXEMBOURG      SWEDEN

picks                                                                                             PAGE 40     PAGE 45         PAGE 50

                                                                                                  FRANCE      NETHERLANDS     UNITED KINGDOM
                                                                                                  PAGE 41     PAGE 46         PAGE 51

08.
                                                                                                  GERMANY     POLAND
                                                                                                  PAGE 42     PAGE 47

Risks and                                                          28.
opportunities                                                      Spotlight on the ‘S’ in ESG
in 2021                                                                                           52.
                                                                                                  Asia-Pacific on a path to a new

14.                                                                30.                            normal fraught with volatility
                                                                   Technology as disruptor
Investors will
                                                                   and facilitator
increasingly look to
move up the risk curve                                                                            56.
                         20.                  22.                  34.
                                                                                                  House views: Asia-Pacific
                         European             Defensive food                                      AUSTRALIA             SINGAPORE

                                                                   Market turbulence creates
                                                                                                  PAGE 56               PAGE 58

                         logistics to         and discount                                        JAPAN                 SOUTH KOREA

                         remain               retail subsectors    interesting opportunities in   PAGE 57               PAGE 59

                         ‘investors'          show resilience      real estate debt investment
                         darling’ in 2021     to disruption
                                                                                                  60.
                                                                   36.                            Industrial a bright spot amid
                         24.                                       European occupier and          pain of ‘pandemic pause’ to
                         ‘Living’-focused alternative asset        investment markets to          US commercial property
                         classes on the rise                       remain subdued into 2021       market activity
Outlook 2021 Building resilience in global real estate portfolios - Savills Investment Management
OUTLOOK 2021
 6                                                                                                                                                                                                                          7
                                                                                                                                                                                                           savillsim.com

Our top commercial real
estate investment picks
EUROPE                                                                                                          ASIA-PACIFIC

            Office                                                 Logistics                                                Office                                               Logistics
• Multi-let core/core plus office buildings near       • Core/core-plus assets with a strong long-term          • Fringe-of-CBD or Grade B properties in prime       • Logistics properties across Asia-Pacific,
  transport hubs in CBD locations and well-              covenant in the main logistics clusters across           locations to carry out value-add/ core-plus          particularly last-mile distribution and fulfilment
  established city fringe locations across Europe        Europe                                                   opportunities in Singapore and Seoul                 centres owing to strong secular trends

• Long-income core office opportunities                • Modern distribution centres along the main             • Offices in regional Japanese cities as occupiers   • In markets with a shortage of modern logistics
  in regional cities mainly in Germany, the              motorways and transport networks such as the             become more cost conscious                           facilities amid rising land prices suggests
  Netherlands, Poland and France                         North Sea-Baltic, the North Sea-Mediterranean                                                                 opportunities to create mixed-use logistics
                                                         and the Atlantic corridors                                                                                    facilities such as cold storage and general
                                                                                                                                                                       logistics facilities
                                                       • Logistics facilities in regional markets in well-
                                                         connected locations in France, Germany, the UK

            Retail                                     • Urban logistics units and multi-let assets close to

• Larger food anchored retail parks and
                                                         large and densely populated areas across Europe
                                                                                                                            Retail
                                                                                                                                                                                 Residential
  neighbourhood centres in metropolitan areas of                                                                • Opportunities to acquire underperforming
  Tier 1 and Tier 2 cities across Europe                                                                          smaller sub-regional shopping centres
                                                                                                                  to reposition as neighbourhood centres

                                                                   Alternatives
• Daily goods and grocery retail formats such as
                                                                                                                  particularly in Australia                          • High quality assets that offer stable income
  supermarkets and food discounters in urban
                                                                                                                                                                       streams, such as the Japanese multifamily
  areas across Europe
                                                                                                                                                                       residential sector
                                                       • Residential, particularly build-to-rent multi-family
• Destination and convenience segments of the
                                                         buildings and student accommodation in the UK,
  outlet centre market in Western Europe
                                                         and healthcare and senior care facilities in Italy,
                                                         providing long-term, stable income returns

                                                                                                                            Real estate debt
            Real estate debt                                                                                    • Funding gap opportunities in the debt
• Debt investing can provide an attractive, robust                                                                and mezzanine loan space in Australia
  income-based return underpinned by European
  property, which will exhibit lower volatility than
  in the previous cycle correction
Outlook 2021 Building resilience in global real estate portfolios - Savills Investment Management
OUTLOOK 2021
8                                                                                                                                                                                                                                                                      9
                                                                                                                                                                                                                                                     savillsim.com

Risks and opportunities in 2021
                                                                                                                     FIGURE 1: WHAT WILL BE THE MOST SIGNIFICANT POLITICAL CHALLENGE FACING THE WORLD IN 2021? (% OF RESPONDENTS)

                                                                                                                     50%

    The EU Recovery Fund offers the chance for          Brexit – changes ahead, deal or no deal                      40%

    further political integration
                                                        With only around 40 days (at time of writing)
    Europe’s political fragmentation is a reality at    until the UK’s Brexit transition period is due
                                                                                                                     30%
    both the national and EU levels. The COVID-19       to expire on 31 December 2020, negotiations
    crisis has revealed the limits of the EU, which     continue. While an agreement is in both
    operates as a technocratic administration           sides’ interest, with time running out and
                                                                                                                     20%
    parallel to rather than sovereign over              differences remaining on a few key issues there
    respective nations. Competing social models         remains a risk that negotiations will reach an
    have been more or less able to respond to the       impasse and negotiators will fail to strike a
                                                                                                                     10%
    health crisis, resulting in tensions between        deal. Such an outcome would be an economic
    countries for several months.                       blow for both the UK and EU as the imposition
                                                        of tariffs increases the cost of imports.
    These have partially relaxed with the agreement                                                                     0
                                                                                                                              China tensions          Political unity in    The UK’s post-Brexit         Maintaining             Middle East                 Other
    on the EU Recovery Fund in July 2020. New           That said, the hit to GDP for both parties                             with the US            the US post the         settlement with            unity within             tensions
                                                                                                                                                    presidential election          the EU               the Eurozone
    balances, coalitions and counterweights have        would be small in comparison to the impact
    emerged. Nonetheless, political turbulence          of the pandemic. Even if a deal is reached,                  Source: Research conducted on behalf of Savills Investment Management by PollRight among 122 institutional investors in September 2020.
    is set to continue throughout 2021, as                                                                           Investors came from a global database, centred around North America, the UK and Continental Europe, and held an average AUM of GBP 18.9 billion
                                                        businesses will face a different trading                     (USD 25 billion) in real estate investments.
    economic, geopolitical and social challenges        environment    as   customs    checks   are                  Note: Multiple answers were possible.

    as well as climate-related risks still need to be   introduced, potentially disrupting supply-
    addressed. The compromise on the Recovery           chain times, and UK financial institutions
    Fund points to a further integration process        are faced with a less secure equivalence
    of the EU; however, due to a second wave            regime. For property markets, long-term
    of infections across Europe and discussions         changes are likely to be more important                                                                                                                             Geopolitical tensions continue to
    on fund governance, the package might be            for   occupier    demand,   including   the                                                                                                                         put global economy at risk
    delayed, or countries might reconsider the          impact of new technology and increased                                                                                                                              Broadening our focus to global
    loans component.                                    agile working.                                                                                                                                                      geopolitics, bilateral tensions that
                                                                                                                                                                                                                            have intensified since the start of
                                                                                                                                                                                                                            the COVID-19 pandemic will likely
                                                                                                                                                                                                                            continue into 2021. Aside from

    US presidential election leaves the country divided                                                                                                                                                                     the US-China trade war, which is
                                                                                                                                                                                                                            considered the most significant
                                                                                                                                                                                                                            political challenge in 2021, according
    Of course, 2020 represented a political turning point for the US as well as the UK. As feared, the US
                                                                                                                                                                                                                            to our investor survey, geopolitical
    presidential election remained undecided after the first highly anticipated election night, but unforeseen was
                                                                                                                                                                                                                            tensions have escalated globally
    the four-day election mini-series that would ensue. Although Joe Biden won the election, the race to win the
                                                                                                                                                                                                                            (figure 1). The refugee crisis is
    US Senate will not be decided until January, with two run-off elections in Georgia. If the Republicans manage
                                                                                                                                                                                                                            currently flying under the radar
    to maintain control of the Senate, a divided Congress could hamper Biden’s presidency. Hopes for major
                                                                                                                                                                                                                            but could flare up again quickly,
    infrastructure spending such as a ‘green new deal’ will be tempered, with further fiscal stimulus packages
                                                                                                                                                                                                                            particularly if tensions between
    likely to be scaled back.
                                                                                                                                                                                                                            Greece and Turkey regarding gas
    However, President Elect Biden’s proposed corporate tax increases may now be less likely, too, which could                                                                                                              fields in the east Mediterranean Sea
    help support the economic recovery. In our view, the election result will not have an impact on the global                                                                                                              tighten further. Risks are tilted to the
    real estate markets at least in the short term, with the impact from the COVID-19 pandemic more likely                                                                                                                  downside overall in 2021, which may
    to a be a significant driver of occupier markets. We think investors are well-advised to focus on market                                                                                                                affect corporate expansion plans.
    fundamentals, economic and interest rate cycles as well as longer-term trends such as urbanisation, climate                                                                                                             For instance, firms such as Nike,
    change, digitisation and technology.                                                                                                                                                                                    Apple and Samsung Electronics
                                                                                                                                                                                                                            are reducing reliance on China to
                                                                                                                                                                                                                            mitigate geopolitical risks.
Outlook 2021 Building resilience in global real estate portfolios - Savills Investment Management
OUTLOOK 2021
10                                                                                                                                                                                                                                           11
                                                                                                                                                                                                                             savillsim.com

                                                                                  Reshoring – a boost for the industrial and logistics sector?

                                                                                  While the pandemic presents a                                 reversal of the trend to offshoring                        Where there could be some
                                                                                  number of downside risks for the                              would be positive for industrial                           increased demand opportunities
                                                                                  global economy and commercial                                 and logistics occupier markets.                            in the short term would be if firms
                                                                                  property markets, it could also                               But reshoring usually entails higher                       look to hold more inventory in
                                                                                  provide    an    opportunity   for                            production costs due to higher                             order to minimise supply-chain
                                                                                  increased industrial and logistics                            wages. Therefore, the key question                         disruptions. But this would likely
                                                                                  demand. And not one related to                                is, how much are consumers                                 be a one-off boost, with regional
                                                                                  increased online penetration.                                 prepared     to   pay   for    more                        markets such as Central and
                                                                                                                                                localised production?                                      Eastern European countries most
                                                                                  COVID-19      has     exposed    the                                                                                     likely to benefit. The CEO of
                                                                                  fragile nature of today’s supply                              Given the already complex nature                           Prologis,   the    world’s   largest
                                                                                  chains,    reigniting    a    debate                          of global supply chains, we think                          logistics investor, has suggested
                                                                                  around      (de)globalisation    and                          that the near-term opportunities                           that just-in-time supply chains
                                                                                  the possibility of firms reshoring1                           from     reshoring     are   limited,                      could become just-in-case supply
                                                                                  production capacity. The trend of                             particularly in high-wage developed                        chains, with companies carrying
                                                                                  manufacturers relocating at least                             markets. We think that it is more                          5-10% more inventory in the future.2
                                                                                  some production back or close                                 likely that companies will seek                            But like reshoring, the extent to
                                                                                  to domestic markets can have                                  to increase the resilience of their                        which this boosts occupier demand
                                                                                  commercial benefits – diversifying                            supply chains by diversifying across                       will depend on firms’ trade-off
                                                                                  suppliers to reduce possible supply                           low-cost countries, which could                            between the costs of holding
                                                                                  chain    disruptions,     shortening                          benefit industrial and logistics                           higher inventories and supply
                                                                                  transport times and aiding to                                 demand in other parts of Asia                              chain disruptions.
                                                                                  reducing carbon emissions. A                                  (away from China).

A slower-than-expected economic recovery

As economies reopened after             social distancing and/or local
COVID-19–related          lockdowns,    lockdowns       risk    undermining
global activity started to recover      consumer and business confidence,
quickly. The US for example, had        holding    back      spending    and
regained around 66% of lost             investment decisions. This would
output by the end of Q3, while the      be    negative     for    commercial
Euro-zone had made up around            property occupier markets and
70% of its fall in GDP. But with        near-term rental growth prospects.
many      countries     experiencing    In particular, the retail and leisure
second waves of infection and           sectors look particularly exposed
localised     lockdowns,      various   to lower footfall and soft consumer
indicators suggest that recovery        demand, as well as the office sector
momentum is losing steam sooner-        if firms put off expansion and
than-expected. Indeed, a number         re-location decisions.
of    forecasters,   including    the
International Monetary Fund have        That said, should the recovery start
cut their outlook for 2021.             to stall, this will almost certainly be
                                        met with more support from central
With unemployment rising and the        banks, either in the form of interest
strength of the recovery still very     rate cuts or additional quantitative
dependent on the path of the virus      easing. The possibility of even lower
and the speed at which a vaccine        government bond yields would be
might be available, we could yet        supportive for capital flows into real
see further downgrades for growth       estate as investors seek relatively
in 2021. Prolonged periods of           higher returns.
                                                                                  1
                                                                                      Offshoring/reshoring is defined as shifting production or service facilities away from or closer to the domestic market.
                                                                                  2
                                                                                      Nareit, “Prologis CEO expects shift away from lean supply chain strategy post-COVID”, 30 July 2020.
Outlook 2021 Building resilience in global real estate portfolios - Savills Investment Management
OUTLOOK 2021
12                                                                                                                                                                                                                                                      13
                                                                                                                                                                                                                                       savillsim.com

                                 Will financial market volatility be a boon for real estate?

                                 To mitigate the impact of COVID-19 on economies, countries
                                 have introduced fiscal stimulus measures to support
                                 companies via credit guarantees, and workers through
                                 subsistence payments. At the same time, some of the
                                 major central banks have implemented a ‘whatever it takes’
                                 policy to save economies, lowering interest rates to around
                                 zero or ventured into negative territory and are conducting
                                 large-scale asset purchases through quantitative easing
                                 programs boosting up their balance sheets (figure 2).

     FIGURE 2: CENTRAL BANKS BALANCE SHEETS TO GDP (%)

      140                                                                                                    Due to the significant amount of                         need to support private and public             with less choices to meet their
                                                                                                             spare capacity in the economies,                         consumption, invest in high-tech               return targets. In this new reality,
                  ECB    FED        BOE       BOJ
                                                                                                             inflation is set to remain low, posing                   sectors,    foster    infrastructure           asset allocators should rather
      120
                                                                                                             various threats to growth. Until                         investments, implement structural              lower their return expectations
                                                                                                             this returns to a sustainable level,                     reforms and offer incentives for               than stretching too far and
     100                                                                                                     central banks are unlikely to lift                       private and corporate investments.             making sacrifices on asset quality.
                                                                                                             interest rates, meaning bond yields                                                                     Further, with historically low and
                                                                                                             and returns will also remain low.                        Secular shifts in capital markets              negative yields in the bond markets
      80
                                                                                                             Moreover, the adjustment should be                       benefit real estate                            (figure 3) and high valuations in
                                                                                                             gradual to give the economy time                                                                        the financial markets, investors
      60                                                                                                     to adapt.                                                In the absence of favourable                   need to consider to looking at
                                                                                                                                                                      outlooks for demographics and                  alternative asset classes offering
                                                                                                             Although uncertainty is likely to                        productivity     growth  in  most              attractive risk-adjusted returns in
      40
                                                                                                             continue in 2021, governments                            advanced economies, the most                   order to enhance their portfolios.
                                                                                                             may start to gradually cut support                       likely scenario is a prolonged                 We believe real estate has the
      20                                                                                                     for COVID-19 and move towards a                          phase of economic stagnation                   characteristics and fundamentals
                                                                                                             model that promotes productivity                         with low growth and low inflation              to take advantage from this secular
                                                                                                             growth. To be successful they                            (‘stagflation’), leaving investors             shift in capital markets.
        0
            2007 2008 2009   2010      2011   2012   2013   2014   2015   2016   2017   2018   2019   2020

     Source: Macrobond, October 2020

                                                                                                                  FIGURE 3: GLOBAL NEGATIVE-YIELDING BONDS (USD TRILLION) AND AS A SHARE OF ALL BONDS OUTSTANDING (%)

                                                                                                                  18      Global negative yielding debt (USD trn; LHS)                                                                             30
                                 Systemic risks are on the rise
                                                                                                                          Global negative yielding debt as a share of all bonds outstanding (%; RHS)
                                                                                                                  16
                                 Global sovereign and corporate debt levels, which were                                                                                                                                                            25
                                                                                                                  14
                                 historically high even before the current crisis, have been
                                 ballooning. While economic leveraging has helped avoid                           12                                                                                                                               20

                                 further damage in the short-term, questions are being                            10
                                                                                                                                                                                                                                                   15
                                 raised about the sustainability of the global debt pile                           8
                                 and rising systemic risks in the financial and nonfinancial
                                                                                                                   6                                                                                                                               10
                                 corporate sectors over the longer run.
                                                                                                                   4
                                                                                                                                                                                                                                                   5
                                 Wider unintended consequences, such as the risk of major                          2

                                 misallocations of capital towards unproductive segments,                         0                                                                                                                                0
                                 and the ‘zombification’ of banks and companies have                                   OCT 10        OCT 11         OCT 12          OCT 14         OCT 15          OCT 16   OCT 17    OCT 18      OCT 19     OCT 20

                                 increased. Furthermore, the impact of the rising debt
                                                                                                                  Source: Bloomberg (October 2020)
                                 burden on future investment capabilities have the potential                      * Bloomberg Barclays Global Aggregate Negative Yielding Debt Index
                                                                                                                  ** Bloomberg Barclays Global Aggregate Bond Index
                                 to hamper economic growth as well as fiscal resources to
                                 tackle future downturns in the long-run.
Outlook 2021 Building resilience in global real estate portfolios - Savills Investment Management
OUTLOOK 2021
14                                                                                                                                                                                                                                15
                                                                                                                                                                                                                  savillsim.com

                                                                                                                                                                                           Riskier investments usually experience
                                                                                                                                                                                           greater yield shift at times of market

Investors will
                                                                                                       FIGURE 5: WHEN DO YOU THINK THE EUROPEAN REAL ESTATE
                                                                                                       MARKET WILL BEGIN TO RECOVER?
                                                                                                                                                                                           stress, meaning they can potentially
                                                                                                                                                                                           deliver stronger returns through a
                                                                                                                                                                                           recovery phase. While core is still

increasingly look to
                                                                                                       30%
                                                                                                                                                                                           relevant in many real estate strategies,
                                                                                                                                                                                           pricing expectations were elevated

move up the risk curve
                                                                                                                                                                                           even before COVID-19, already forcing
                                                                                                                                                                                           investors to move up the risk curve.

                                                                                                       20%
                                                                                                                                                                                           We believe that a number of investors
                                                                                                                                                                                           are    currently   re-evaluating   their
                                                                                                                                                                                           investment strategies to prepare for
                                                                                                                                                                                           the real estate market recovery phase.
                                                                                                                                                                                           Slightly more than 50% of the surveyed
                                                                                                       10%                                                                                 investors expect the real estate markets
                                                                                                                                                                                           in Europe to recover between Q2 and
                                                                                                                                                                                           Q4 2021, as the region began facing a
                   ANDREAS                         BENEDICT
                                                                                                                                                                                           second wave of infections in Autumn
                   TRUMPP                          LAI
                                                                                                                                                                                           2020. About one-fifth expect a recovery
                                                                                                        0%                                                                                 from Q1 2022 (figure 5).
                                                                                                              Q3     Q4      Q1       Q2       Q3       Q4      Q1       It will   Don’t
     There is a big question mark about what real estate will look like                                      2020   2020    2021     2021     2021     2021   2022 or    never     know
                                                                                                                                                              beyond      fully
     in a post–COVID-19 world, and what it means for investors and                                                                                                      recover            We believe that real estate will remain
     their strategies. The pandemic has both served as an accelerant                                   Source: Savills Investment Management Investor Survey (September 2020)              appealing to investors within the lower-
     for real estate trends that were already underway while also                                                                                                                          for-longer interest rate environment.
     challenging traditional notions of various real estate sectors.                                                                                                                       Indeed, research from Preqin indicates
                                                                                                                                                                                           healthy momentum in fundraising
     In an uncertain economic environment with low interest rates,                                                                                                                         activities, and dry powder ready to
     real estate investors are directing more commitments towards                                                                                                                          be allocated into the asset class in
     riskier opportunities. In our investor survey we found that the                                                                                                                       2021. 45% of investors we surveyed
     majority of respondents believe that value-add, opportunistic                                     FIGURE 6: OVER THE NEXT 12 MONTHS, HOW DO YOU EXPECT                                expect higher real estate investment
     and core-plus investment strategies will be most popular in the                                   INVESTMENT IN PROPERTY TO CHANGE COMPARED TO THE                                    volumes over the next 12 months
     wake of COVID-19 (figure 4).                                                                      PREVIOUS 12 MONTHS?                                                                 compared to the previous 12, 30%
                                                                                                                                                          Decrease dramatically            think that investment volumes will
                                                                                                                                                                                           decrease whereas 25% expect no

          FIGURE 4: WHICH OF THE FOLLOWING INVESTMENT STYLES DO YOU BELIEVE WILL
                                                                                                                                                                                   5%      changes at all (figure 6).
          BE MOST POPULAR AMONG REAL ESTATE INVESTORS IN THE WAKE OF COVID-19?
                                                                                                                              Increase                                                     Funds targeting European real estate
          40%                                                                                                              dramatically                                                    have continued to attract investment,
                                                                                                                                                                          Decrease

                                                                                                                                   11  %                                 moderately        with 40 securing a total of EUR 18
                                                                                                                                                                                           billion in H1 2020 despite market
          30%                                                                                                                                                                   25%        uncertainties, according to Preqin. The
                                                                                                                                                                                           market environment in 2021 is likely to
                                                                                                                             Increase                                                      continue to be shaped by high liquidity,
          20%                                                                                                              moderately
                                                                                                                                                                                           uncertainty and volatility fuelling market
                                                                                                                                34%                                                        polarisation. The stable income, low
           10%
                                                                                                                                                                                           volatility and relatively attractive risk-
                                                                                                                                                                          Stay about
                                                                                                                                                                            the same       return profile of real estate strategies
                                                                                                                                                                                           will help ensure that they see rising
           0%
                 Value-add     Opportunistic        Core          Core-plus             Debt   Other
                                                                                                                                                                                25%        demand from both income-seeking
                                                                                                                                                                                           investors and those aiming to capitalise
          Source: Savills Investment Management Note: Multiple answers were possible.                                                                                                      on future capital value growth after the
          Investor Survey (September 2020)                                                             Source: Savills Investment Management Investor, Survey (September 2020)
                                                                                                                                                                                           current phase of repricing.
Outlook 2021 Building resilience in global real estate portfolios - Savills Investment Management
OUTLOOK 2021
16                                                                                                                                                                                                                              17
                                                                                                                                                                                                                savillsim.com

FIGURE 7: WHICH GEOGRAPHIES DO YOU BELIEVE WILL
ATTRACT THE MOST REAL ESTATE INVESTMENT IN 2021?
                                                                                                       BELGIUM                 PAN-EUROPEAN

                                                                                                          3%                      14%
                                                                                                       NETHERLANDS

                                                                                                                  3%                 SWEDEN
                                                                                                                                                                                                     JAPAN

                                                                                                                                        6    %                                                       13%
                                                                                              UK
                                                                                                                                                   FINLAND

                                                                                              30   %
                                                                                                                                                       8%
                                                                                                                                                                                             SOUTH KOREA

           CANADA                                                                                                                                                                            11%
           23%
                                                                                  IRELAND
                                                                                                                DENMARK

                                                                                  11   %
                                                                                                                      8%                      POLAND

                                                                               FRANCE
                                                                                                                        GERMANY                   7%
                                                                               10%                                        17%
                                                                                 PORTUGAL
                                                                                                               ITALY
                                                             USA
                                                                                 7    %
                                                                                                              5%                                                                                              CHINA

                                                             33    %
                                                                                      SPAIN                                                                                                                   13%
                                                                                                       LUXEMBOURG
     Against this backdrop, traditional property
     strategies are likely to require a rethink. Lease
                                                                                      8   %
                                                                                                                 5%
     flexibility is set to become increasingly favoured
                                                                                                                                                                          MALAYSIA                         PAN-ASIAN

                                                                                                                                                                                                           22%
     by tenants, although the extent to which such
     leases provide for items such as break rights,                    PAN-AMERICAN
                                                                                                                                                                          7%
                                                                         8%
     rent suspensions and even force majeure – which
     are becoming more common as a result of the
     pandemic – may negatively impact on valuations                                                                                                                              SINGAPORE
     and risk ratings. Going forwards, lenders and
     investors will demand scrutiny around contracts,                                                                                                                            19%
     including provisions in place and key assurances,
     as well as a much more informed, granular
     approach to asset selection.
                                                                                                                                                                                      AUSTRALIA

     Via our survey we found that investors are holding
     back their European real estate allocation plans
                                                                                                                                                                                      14%
     in the short-term but remain confident about the
     asset class in the longer-term (figure 7). North
     America, the UK and Asia currently look more
     appealing to investors than Europe. We also
     found that investors appreciate pan-continental
     strategies across Asia and Europe as this helps                                                   Source: Savills Investment Management Investor, Survey (September 2020)
     mitigate the impact of volatility in certain markets.                                             Note: Multiple answers were possible.
Outlook 2021 Building resilience in global real estate portfolios - Savills Investment Management
OUTLOOK 2021
    18                                                                                                                                                                                                                      19
                                                                                                                                                                                                          savillsim.com

A new ‘mixed-
working’ approach
                                                                         In fact, new research finds, some                      are likely to become more prevalent.               issues, such as social impact, are
                                                                         46% of UK office workers intend                        The pressure on costs due to                       increasingly important for investors.6
                                                                         to split their working time between                    greater asset management will

means physical                                                           home and the office, while 30% plan
                                                                         to return five days a week.4 Similarly,
                                                                                                                                be upwards, but the trade-off
                                                                                                                                for increased occupier flexibility
                                                                                                                                                                                   Occupiers tend to take office
                                                                                                                                                                                   space in locations that offer good

offices are here
                                                                         62% of Google employees expressed                      might limit the fallout we expect                  transport     links,   entrepreneurial
                                                                         an interest in returning to the office                 to see in property rentals and                     spirit and universities producing
                                                                         part-time,5 all of which suggests                      therefore pricing.                                 a well-educated workforce, which

to stay
                                                                         a new ‘mixed-working’ approach.                                                                           reinforces     the    advantages    of
                                                                         Working in the office versus working                   In    the   post–COVID-19    period                central locations, as highlighted
                                                                         remotely are increasingly being                        employers are also likely to start                 in our Dynamic Cities Index.7
                                                                         viewed as complementary options,                       placing greater emphasis on the                    Moreover, if people work fewer
                                                                         rather than an either-or choice.                       quality of the office environment,                 days a week in the office, they
                                                                                                                                including more desk space per                      might prefer city centre locations
                                                                         That said, from an occupier                            employee and more breakout                         that offer a wider range of services
                                                                         perspective, the need for more                         facilities. This is likely to lead                 and amenities. Central business
                                                                         flexibility is likely to gain momentum.                corporate responsibility to move up                district (CBD) offices are, therefore,
                     JUDITH FISCHER                                      We do see this as an ongoing                           the agenda even faster than before.                one subsector that we believe
                                                                         characteristic feature of the real                     While environmental factors have                   should be a mainstay of any
         While many commentators and mainstream media                    estate market. For example, shorter                    tended to be the focus of ESG,                     future     diversified   real  estate
         outlets were quick to predict the death of the office when      lease lengths or earlier break options                 our survey finds that ‘S’-related                  portfolio.
         the COVID-19 pandemic first began, the reality is looking
         increasingly different. Three of the five ‘FAANG’ tech
         companies (Facebook, Amazon, Apple, Netflix, Google),
         all of which previously announced that they would allow              FIGURE 8: EU OFFICE-BASED EMPLOYMENT GROWTH
         their employees to work from home permanently, have
         signed office leases in major global cities. Most prominent           2.5%

         is Facebook’s lease of 730,000 sq ft (ca. 68,000 sq m) of                                                                                          2.2%                        Forecast
         office space in New York City.
                                                                               2.0%
                                                                                                                                                                   1.9%
         2021 will undoubtedly be a challenging year for the office                     1.6%                                                 1.7%    1.7%
         sector as result of increasing job losses – a consequential                                                                                                                            1.6%
                                                                                1.5%                                                  1.5%
         side effect of COVID-19. Weak employment conditions                                                                                                              1.3%                         1.2%
         will weigh on office space demand and rental growth
                                                                                1.0%
         prospects (figure 8). However, we remain optimistic                                                   0.8%
         about the sector in the long-term, as office-based                                             0.7%                                                                                                  0.7%
                                                                                                                                                                                                                     0.6%
         collaboration is an integral part of productivity, creativity         0.5%                                           0.5%
         and company culture.                                                                                          0.3%
                                                                                                                                                                                         0.1%
                                                                               0.0%
         The COVID-19 pandemic has accelerated the trend
         towards agile working, but physical offices are here to
         stay. Most employees want to work in the office, be it                -0.5%            -0.6%
         only for a few days per week, as it serves as a hub for
         social interaction, facilitates face-to-face collaboration                                                                                                              -0.9%
         and improves ingenuity.                                               -1.0%
                                                                                       2008    2009   2010     2011   2012    2013   2014    2015   2016    2017   2018   2019   2020    2021   2022   2023   2024   2025

4
  British Council of Offices, October 2020                                    Source: Oxford Economics (September 2020)
5
  Google staff survey, The Guardian, September 2020
6
  Savills IM Investor Survey, September 2020
7
  https://www.dynamiccities.savillsim.com/
OUTLOOK 2021
20                                                                                                                                                                                                                                                                                 21
                                                                                                                                                                                                                                                                  savillsim.com

                                                                                                                                                                                                                           Insights from Alistair Ennever,
European logistics                                                                                                                                                                                                         Portfolio Manager, Savills IM

to remain ‘investors                                                                                                                                                                                                       1. In your opinion, where is the logistics market
                                                                                                                                                                                                                           heading to in 2021?

darling’ in 2021
                                                                                                                                                                                                                           It is seen as being amongst the most defensive
                                                                                                                                                                                                                           products, currently offering long-term sustainable
                                                                                                                                                                                                                           income supported by underlying occupier demand.
                                                                                                                                                                                                                           In my opinion, pricing will continue to harden in
                                                                                                                                                                                                                           2021 in this low interest rate environment as long
                                                                                                                                                                                                                           as the debt market remains open for business.
                                                                                                                                                                                                                           The challenges are around availability of product and
                                                                                                                                                                                                                           increasing logistics-focussed planning restrictions
                                                                                                                                                                                                                           across Europe. Tenant solvency could become an
                       MATTHIAS DÜSING                                                                                                                                                                                     issue if the wider European economy is harder hit
                                                                                                                                                                                                                           than expected.
       Logistics is positioned well to         online grocery. On the downside,                                           historical lows. In aggregate, we          Secular demand drivers have the potential to carry    2. Given logistics is the ‘hottest game in town’
       remain a bright spot within the         however, economic headwinds are                                            do not think this is indicative of         forwards the demand surplus, at least in some         now, in which segments do you see the most new
       real estate landscape. Backed by        weighing on occupier demand,                                               an immediate supply-side risk.             market segments. E-commerce has accelerated           opportunities?
       solid fundamentals and structural       leading to overall muted or                                                The shortage of developable                since the start of the COVID-19 pandemic, fuelling
       tailwinds, investor sentiment is        even negative rental growth in                                             land will remain a key challenge           additional demand. Income-orientated investors’       I believe that several investors will have to
       particularly positive for logistics.    some markets.     An anticipated                                           in the mature Western European             focus is on the consumption end of supply-chains      complement their existing core investments with
       Among those investors polled            economic rebound could trigger                                             markets, where future supply               and last-mile distribution warehouses in the key      build-to-core strategies where they either develop
       in our survey, more than 55%            new requirements in the mid-                                               is kept tight by restrictive               logistics hubs of Western Europe. In particular, we   speculatively themselves or back developers.
       are planning to increase their          term, though.                                                              zoning. In Central, Eastern and            see opportunities in:                                 Investors will also start to consider geographies
       exposure to the sector in 2021.                                                                                    Southern Europe, on the other                                                                    previously thought of as more peripheral, like
                                               Oversupply is a potential threat in                                        hand, availability was already             • markets with fast-growing online penetration        Portugal, Ireland, Denmark and Finland, to
       A 'wall of money' will keep pricing     some geographies. Completions                                              trending upwards pre—COVID-19,               rates — such as Central and Eastern Europe as       generate greater returns. Occupier demand in
       in the core and core-plus segments      have been above their long-term                                            and the overhang of speculative              well as Southern Europe – which offer attractive,   these markets is also set to improve as nearshoring
       challenging.      Further      yield    averages across Europe, while                                              projects     will need    to    be           albeit selective, risk-adjusted returns             becomes a focus for many supply chains.
       compression in primary markets          vacancy rates have reached                                                 absorbed first.                            • last-mile and urban logistics, which continue to
       such as Germany, France and the                                                                                                                                 attract interest based on the online shopping       3. In the mid- to long-term, what are the biggest
       Netherlands also seems likely.                                                                                                                                  boom and the defensive nature of urban              trends you are seeing?
       We expect the spread between                                                                                                                                    land values
                                                   FIGURE 9: RISK-RETURN PROFILES OF EUROPEAN LOGISTICS MARKETS                                                                                                            We see continued occupier investment in the
       core and non-core to increase
                                                                                                                                                                     • pronounced     value-add    and    opportunistic    automation of their facilities. This has wider
       as an outcome of investors’                                         6.5
                                                                                                                                                                       strategies within buy-to-let or build-to-core       implications for building design, reliance on labour
       excessive ‘flight-to-safety’. Market                                6.0                                             Denmark
                                                                                                               Portugal                             Ireland            approaches, where investors are teaming up with     and locations. Multi-storey centres are becoming
       diversification will be key in 2021                                 5.5
                                                   Expected Prime Return

                                                                           5.0
                                                                                                 Finland
                                                                                                                                                                       developers to unlock scope for higher returns       more prevalent in dense metropolitan locations for
                                                      (p.a. % 2020-25)

       as well to achieve risk-adjusted                                                                        UK
                                                                           4.5                  Poland
                                                                                                               Average Return
                                                                                                                                                                                                                           several occupiers as they look to maximise the use
       returns (figure 9).                                                 4.0                                                                                       One e-commerce subsector to watch in 2021 is          of logistics assets. Re-purposing of retail assets
                                                                           3.5         France                  Sweden                                                online grocery. Still in its infancy, it is showing   to logistics is a very exciting trend to watch. We
       Investors would be wise to                                          3.0         Germany
                                                                                                                                                                     exceptional growth, but requires specific fit-outs
                                                                           2.5          Netherlands                                                                                                                        hope to see a continued focus of developers and
       consider moving up the risk curve                                                                                           Spain
                                                                                                                                                                     dedicated to food distribution. The UK, Nordics,
                                                                           2.0                  Italy                                                                                                                      investors on enhancing the sustainability credentials
       to capture capital and income                                       1.5                                                                                       Netherlands and Germany will be first-movers in       of new and existing facilities. Encouragingly,
       growth. New opportunities will                                      1.0                                                                                       this growing niche. The main question facing this
                                                                                 5.0      7.0            9.0     11.0       13.0           15.0   17.0        19.0                                                         developers in Europe are integrating ESG into
       arise from the reassessment of                                                                                                                                trend is how fast demand will continue to grow,
                                                                                                 Historical Risk (Standard Deviation 2000-19)                                                                              their design and build processes to deliver suitable
       manufacturing   supply    chains,                                                                                                                             how supply can deliver suitable solutions and,
                                                   Source: PMA (October 2020), Savills Investment Management (October 2020)                                                                                                product to the market.
       and accelerating trends around                                                                                                                                ultimately, whether current valuations and forward
       e-commerce, urban logistics and                                                                                                                               pricing anticipations based on these are justified.
8
    Property Market Analytics (October 2020)
9
    Local brokerage companies
OUTLOOK 2021
22                                                                                                                                                                                                                                                        23
                                                                                                                                                                                                                                          savillsim.com

                                                                                                                                     In fact, investors with a defensive investment approach
                                                                                                                                     have been able to benefit from stable and inflation-

Defensive food and discount
                                                                                                                                     linked income returns in the grocery retail sector.
                                                                                                                                     This is reflected in our investor survey. Food retail
                                                                                                                                     is the only segment of the retail sector where investors want

retail subsectors show                                                                                                               to increase rather than decrease their exposure (figure 10).

resilience to disruption
                                                                                                                                     We think integrated food retail facilities in growing urban
                                                                                                                                     locations close to customers seem to be best placed to
                                                                                                                                     outperform in this context. Investors should be able to
                                                                                                                                     achieve attractive yields, particularly since there is the
                                                                                                                                     opportunity to increase capital values by adding student
                                                                                                                                     housing, residential or other uses on top of such assets in
                                                                                                                                     densely populated cities.

                                                                                                                                     The outlet segment seems to have recovered well after
                 ANDREAS TRUMPP
                                                                                                                                     the COVID-19 lockdown period, particularly those schemes
                                                                                                                                     with strong management. However, centres that rely on
     Brick-and-mortar retail has been                                                                                                tourism continue to be challenged by lower turnover levels.
     in a very difficult position since
     long before the beginning of the            FIGURE 10: WHICH OF THE FOLLOWING RETAIL SECTORS DO YOU                             Outlet malls in areas without broader travel restrictions
                                                 BELIEVE WILL SEE THE GREATEST INCREASE AND DECREASE IN                              and where international tourism is not a major factor have in
     COVID-19 crisis. Almost all non-            INVESTMENT IN 2021 COMPARED WITH 2019 AND 2020? (RATIO OF
     food retail units were closed               'INCREASE' VERSUS 'DECREASE' RESPONSES)                                             some cases produced stronger sales than the same period in
     across large parts of Europe                                                                                                    2019. This is partly due to some latent spending power, but
                                                  15%                                                                         15%
     during March and April. This has                                                                                                also to consumers feeling safer in the outlet environment,
                                                 10%                                                                          10%    which normally offers outdoor shopping and parking as
     prompted        some      important
     changes in retailer business                 5%                       Retail            Shopping              High       5%     well as a secure, well-managed experience. We maintain
                                                                           Parks              Centres          Street Units
     strategies. For example, a number            0%                                                                          0%     our view that attractive risk-adjusted returns are still
                                                          Food
     of retailers are planning to notably         -5%     Retail                                                              -5%    available for investors if they focus on destination and
     shrink their store networks to              -10%                                                                         -10%   convenience segments of the market.
     reduce the rental burden of                 -15%                                                                         -15%
     physical shops. They are now                -20%                                                                         -20%
     placing greater emphasis on
                                                 -25%                                                                         -25%
     their e-commerce strategies, with
     far-reaching implications for the
                                                 -30%

                                                 -35%
                                                                                                                              -30%

                                                                                                                              -35%
                                                                                                                                          Insights from Ian Jones, Director, Investment, Savills IM
     retail property market.
                                                 Source: Savills Investment Management, Investor Survey 2020                              1. In your opinion, will online ever have the chance to completely fulfil customer needs in grocery?
     This has magnified concerns                                                                                                          There are clear reasons why online is struggling to replicate the customer’s in-store experience. For grocery
     that many real estate investors                                                                                                      shopping, freshness matters and hand picking – i.e. the customer’s preference to see, touch and choose
     already had about investing in         as groceries are nondiscretionary                  Supermarkets and food-anchored             the product – is still key. Research suggests that in Europe, customers typically purchase on the day of use.
     retail. However, more nuanced          purchases. We think investors                      retail park valuations do not look         Online cannot accommodate impulse purchases either.
     consideration seems advisable.         should focus on grocers with                       overly stretched in the context of
                                                                                                                                          2. But isn’t online grocery shopping more convenient for customers?
     Some formats, such as food             the best in-store and online                       other retail segments and appear
                                                                                                                                          In a lot of cases, timed deliveries are not convenient. Most customers would prefer to make a quick stop
     retailing and outlet malls, continue   offerings, since e-commerce is                     particularly attractive compared
                                                                                                                                          at their grocer when returning from work than being obliged to stay for a timed delivery. And generally, it
     to be resilient to e-commerce          also rising in the grocery segment.                with risk-free rates. While average
                                                                                                                                          is about more than food. Most supermarkets offer a range of complimentary impulse goods, and adjacent
     trends. Shopping centres and           Most       leading     supermarket                 prime property yields are still
                                                                                                                                          services include banks, coffee shops, dry cleaners and alcohol stores.
     certain high street properties, on     and      discounter    chains   are                close to record lows, the average
     the other hand, do not provide         already implementing protective                    pan-European prime supermarket             3. Is there a cost advantage for either the customer or the online grocer?
     the     required    stability   that   measures such as enhancing                         yield stood at about 5.3% in               Customers prefer comparison shopping in store to get the lowest prices. National infrastructure does
     security-orientated investors are      the       customer      experience,                September and is likely to                 not work for grocery, so an online grocer must have a warehouse in every major urban area with a fleet
     currently seeking.                     optimising in-store technology                     compress further in 2021. This is          of vehicles. This is putting pressure on margins, which is why the home delivery model generally erodes
                                            and     developing     omnichannel                 more than 500 basis points above           profitability — even with a fee.
     Grocery retailers benefit from         strategies to future proof their                   the average European 10-year
     relatively resilient income streams    store networks.                                    government bond yield.
OUTLOOK 2021
 24                                                                                                                                                                                                                                                                 25
                                                                                                                                                                                                                                                    savillsim.com

‘Living’-focused                                                                                                                                    STUDENT HOUSING/PURPOSE-BUILT STUDENT ACCOMMODATION (PBSA)

alternative asset                                                                                                                   Rising demand for higher education
                                                                                                                                    is underpinning the growth of the
                                                                                                                                                                                        The growth of the student market
                                                                                                                                                                                        has boosted investor interest
                                                                                                                                                                                                                                  Despite a steady increase in
                                                                                                                                                                                                                                  availably, the provision of PBSA

classes on the rise
                                                                                                                                    student accommodation sector.                       in stable, long income streams.           beds hasn’t matched demand.
                                                                                                                                    In the EU, for example, the number                  Between 2010 and 2015, investment         Across Europe, the number of
                                                                                                                                    of full-time university students                    averaged EUR 3.2 billion per annum.       PBSA beds per 100 students is
                                                                                                                                    rose by over 1 million between 2013                 This more than doubled to EUR 7           low, even in markets like the UK
                                                                                                                                    and 2018.12                                         billion p.a. between 2016 and 2019.14     which is considered to be more
                                                                                                                                                                                                                                  mature than other European
                                                                                                                                    Governments’ desire to increase                     While     COVID-19      has      raised   markets. Data from Bonard show
                                                                                                                                    higher    education   attainment                    questions about near-term demand          that less than one in three students
                                                                                                                                    has supported this trend. The                       given the prospect of lower onsite        in the UK has access to a PBSA bed.
                                                                                                                                    European Union’s Europe 2020                        student numbers this year, students       This falls to one in ten in Germany
                                                                                                                                    strategy,  for  example,   aimed                    have generally been keen to get           and less than one in twenty in Italy
                                                                                                                                    to have at least 40% of 30-34-                      back to university campuses.              and Portugal (figure 11).15
                                                                                                                                    year-olds   complete  a    higher                   While teaching models are likely to
                                                                                                                                    education course.                                   adapt to technology, the prospect         While it is important to take into
                                                                                                                                                                                        of in-person knowledge transfers          consideration local conditions in
                        HAMISH                MATTEO
                                                                                                                                    In addition, the global shift towards               leading to creativity and innovation      university markets, the student
                        SMITH                 VAGLIO GRALIN
                                                                                                                                    a service-based economy, along                      – not to mention perhaps the most         housing    market   can    provide
                                                                                                                                    with digitalisation and automation,                 appealing aspect of university for        appealing opportunities for long-
        With interest rates at rock bottom and returns on                                                                           have highlighted the importance of                  many, social interaction – means          term investors.
        traditional property assets – office, industrial and retail                                                                 higher education for young people                   students are likely to demand more
        – low, investors are looking to alternatives.                                                                               to compete. Increased mobility                      than just online lessons in the future.
                                                                                                                                    and the rise of the middle classes
        Between 2010 and 2014, investment in alternative                                                                            in developing countries, who have
        assets averaged EUR 30 billion per annum (p.a.) across                                                                      a strong appetite for top-ranking
        Europe. This rose to EUR 82 billion over the next four                                                                      universities,   have    underpinned
        years, with its share of total commercial property                                                                          demand from foreign students –
        hitting 32% in 2019, up from 19% in 2010.10 Apartments                                                                      40% of the world’s top universities
                                                                                                                                                                                            NETHERLANDS
        and hotels have been the dominant alternative sectors,                                                                      are in Europe.13
        accounting for close to 80% of such investment in 2019.
                                                                                                                                                                                            16                                    GERMANY

        The attraction of different commercial property assets        That said, alternatives are not as straightforward
                                                                                                                                    FIGURE 11: PBSA PROVISION
                                                                                                                                    RATE % (PROPORTION OF
                                                                                                                                                                                                                                      13
        – such as hotels, student housing, senior living, build-      or transparent for investors as offices or industrial         BEDS TO STUDENTS)                              UK

                                                                                                                                                                                   31
        to-rent or life sciences – is not just in their potential     assets, presenting unique challenges. Indeed, a shift         Source: BONARD
                                                                                                                                    (October 2020)
        for higher returns, but also in their long leases that        to more operational real estate may take some
        offer stable income returns. They can also present an         investors out of their comfort zone. The European                                                                                                                   POLAND
        opportunity for inflation-linked rental growth, which is      market also varies enormously by asset type,                                  IRELAND
                                                                                                                                                                                                                                              12
                                                                                                                                                    19
        particularly appealing for the likes of pension funds.        depth and maturity. For example, investment in
                                                                      apartments totalled EUR 53.6 billion in 2019, student
        Alternatives are not just about higher returns. They          accommodation transactions were worth EUR 9.4                                                                 SPAIN

                                                                                                                                                                                    7
        can also offer counter-cyclical characteristics. Take, for    billion and self-storage just EUR 183 million.11                                                                                                                   AUSTRIA

                                                                                                                                                                                                                                              11
        example, that during normal downturns, demand for
                                                                                                                                                                  PORTUGAL
        higher education often increases, boosting the appeal         We think that the following three ‘living’ sectors, benefit
        of student housing. Alternatives also allow investors to
        diversify risk.
                                                                      from strong underlying structural trends that provide
                                                                      long-term investors with appealing opportunities.
                                                                                                                                                                  6                                             FRANCE
                                                                                                                                                                                                                                               ITALY

                                                                                                                                                                                                                   14
                                                                                                                                    12
                                                                                                                                       Eurostat, September 2020

                                                                                                                                                                                                                                                 5
                                                                                                                                    13
                                                                                                                                       The Times higher education 2020 rankings
                                                                                                                                    14
                                                                                                                                       Real Capital Analytics, September 2020
10
     Real Capital Analytics, September 2020                                                                                         15
                                                                                                                                       BONARD, a PBSA and living sector research
11
     Real Capital Analytics, September 2020                                                                                            and data specialist, October 2020
OUTLOOK 2021
 26                                                                                                                                                                                                                                        27
                                                                                                                                                                                                                        savillsim.com

                         BUILD-TO-RENT (BTR) RESIDENTIAL ACCOMMODATION
        Like other ‘living’ sectors, BTR is           safe haven asset, as rental income tends
        supported by long-term demand drivers.        to be more secure than in other sectors.
        In particular, rising urbanisation, smaller   In the near term, the economic downturn
        households and affordability constraints      is likely to limit rental growth prospects.
        to home ownership are forcing younger         Consideration also needs to be given to
        people to rent for longer before              potential changes in tenant expectations
        purchasing their first home.                  as a result of experiences from COVID-19                                                   FIGURE 12: PROPORTION OF 75+ POPULATION, AS A % OF TOTAL POPULATION
                                                      lockdowns. This could include greater
                                                                                                                                                       Italy
        These trends explain why institutional        demand for balconies, larger communal
        residential investment in Europe has          areas or the provision of space to work
                                                                                                                                                      Spain
        more than doubled since 2014 to EUR           from home.
        54 billion in 2019. Admittedly, Germany                                                                                                    Germany
        – one of the few European countries           While tenant preferences might change,
        with a well-established institutional         we do not anticipate any major shifts in                                                       France
        BTR sector due to the low proportion          the underlying demand drivers. These
        of home owners – accounted for 34% of         will continue to underpin the need for                                                     Netherland
                                                                                                                                                                                                                               2050
        this. Even so, average investment there       good quality, institutional BTR residential
                                                                                                                                                                                                                               2019
        rose from EUR 5.7 billion between 2010        properties. As such, we believe that                                                           Poland
        and 2014 to EUR 15.5 billion between          the BTR sector will continue to offer
        2014 and 2019.16                              investors good long-term investment                                                               UK
                                                      potential. More so now, given net yields
        Stable, long-term income returns in the       in this sub sector are on a par with                                                          Sweden
        sector are also appealing for investors.      prime office and logistic yields. An aspect                                                          0              5              10             15                20          25
        During times of economic turbulence,          that was not the case 5-10 years ago.                                                      Sources: Savills Investment Management, Oxford Economics (August 2020)
        residential property is often viewed as a

                                                                                                                SENIOR LIVING
                                                                                                    The senior living sector has been        In the near term, therefore, it is                 life expectancy has been steadily
                                                                                                    impacted by the COVID-19 crisis          all about finding an asset that is                 increasing for many years; baby
                                                                                                    throughout 2020. We expect that          resilient to regulatory changes and                boomers are entering retirement
                                                                                                    the sector will continue to suffer       that has the capacity to manage                    age and given their high-income
                                                                                                    by weaker demand from residents,         crisis situations such as COVID-19.                potential they expect a good quality
                                                                                                    higher costs and a less dynamic          Fund managers must negotiate                       of life. On the supply side, the
                                                                                                    investment market into 2021.             an attractive entry price. Demand                  provision of new developments is
                                                                                                                                             may remain moderate, if increased                  low on average. The recovery will
                                                                                                    To put prospective residents more        operating costs leads to higher costs              start once there is some degree
                                                                                                    at ease, safety standards must be        for residents, especially if they rise             of certainty about the COVID-19
                                                                                                    reviewed and enhanced. In the            above the average pension income.                  outlook. Moreover, a transformation
                                                                                                    meantime, weaker demand for beds                                                            may be on the horizon in the form
                                                                                                    will detract from income. The risk of    Nonetheless, we remain positive                    of increased privatisation. Investing
                                                                                                    increased regulation is also likely to   in the long term about this sector.                in this sector is a strong buy for
                                                                                                    add further cost pressures on the        There is a substantial imbalance                   players who want to move up the
                                                                                                    sector, both in terms of labour and      between demand and supply. The                     risk curve and add value-add
                                                                                                    operating expenses.                      population is aging (figure 12);                   elements to their portfolios.
16
     Real Capital Analytics, September 2020
OUTLOOK 2021
28                                                                                                                                                 29
                                                                                                                                   savillsim.com

                                                              But the ESG focus is starting to change. Investors increasingly demand concrete
                                                              evidence of what firms are doing in relation to S and G issues. This is not surprising

Spotlight on
                                                              given concerns around ‘greenwashing’ – the claim that a product or strategy
                                                              is ‘greener’ than its reality. Additionally, poor governance can increase risks for
                                                              investors, especially if an investment is linked to unethical or misleading business

the ‘S’ in ESG                                                practices. There has also been a marked shift in investor mindset, with an expectation
                                                              that businesses and investors will make a positive contribution to society, not just
                                                              to shareholders.

                                                                   We asked Lucy Winterburn, Director, Investment, Savills IM, about how S
                                                                   issues are evolving and becoming increasingly important for real estate
                                                                   investors.

                                                                   The focus of ESG in the real estate industry has tended to be on the E,
                                                                   but this appears to be changing. How are you seeing investors views
                 HAMISH SMITH
                                                                   towards S and G issues evolving?

                                                                   Social and governance issues are racing up the agenda, with more and
     Environmental, social and governance issues (ESG)             more investors wanting to know what we are doing on the social side to
     have become a hot topic in the property world as              make a real positive contribution. And not just for Savills IM as a business.
     investors increasingly consider the impact of real            Investors also want to know how we ensure that their assets and their
     estate on the environment and people who live,                tenants can make a positive impact too.
     work and play in built space. It is not just financial
                                                                   Can you give an example of how Savills IM is supporting clients and
     returns that drive investment decisions today.
                                                                   tenants with their social goals?
     Investors also want greater transparency around
     environmental and social responsibility from their            At one of our recently completed industrial logistics scheme in Didcot, UK,
     managers and advisers, and the businesses in                  we included generous green space, encompassing a walking and running
     which they entrust their money.                               track, landscaped garden and water features and an amphitheatre for
                                                                   workers to enjoy. Amenity space for workers only tends to be considered
     This reflects a growing recognition of changing               in the office sector, but there is no reason why it shouldn’t be a key
     societal concerns and the recognition that ESG                consideration in other sectors as well.
     factors can play a positive role in a corporate
     context, such as via improving and protecting                 Does a lack of measurability or industry standardisation hold back S
     brands, attracting and retaining talent, and                  issues from being on more equal footing with E?
     reducing long-term risks.
                                                                   It definitely makes it harder to quantify betterment and to compare apples
                                                                   with apples, but ultimately, that isn’t an excuse. We must demonstrate 'S'
     In the real estate industry, ESG has tended to focus
                                                                   impact considerations in our strategies. It would be foolish to ignore the
     on environmental sustainability considerations –
                                                                   tidal wave of interest in this area – investors have choice.
     E factors. Increased awareness of climate change,
     legislation aimed at reducing carbon emissions
                                                                   Small businesses often say that they don’t have the resources to focus
     and initiatives such as net-zero carbon have
                                                                   on ESG issues. How does Savills IM help them to make an impact?
     underpinned this. At Savills IM, for example, the
     need to consider the lifecycle of a building, in both         We have many smaller tenants who we engage with to try and understand
     development and use, in order to truly embrace                what we can do to support their ESG agenda and local community
     net zero carbon means that design teams are                   needs. ESG initiatives don’t have to be grandiose and expensive – simply
     challenged to make specifications that will future            improving recycling, installing more efficient lighting or supporting a local
     proof new assets.                                             food bank can all have important positive impacts. Collaboration is of
                                                                   paramount importance to this success. One of the few positive outcomes
     Measurability also explains why E factors have                of COVID-19 has been increased tenant engagement across our portfolios,
     hogged the limelight thus far. It is far easier to            with a recognition that working together can reap rewards for both owner
     calculate the amount of CO2 saved by using                    and occupier.
     renewable energy sources than to quantify
     whether an employee is being treated fairly or not.
OUTLOOK 2021
30                                                                                                                                                                                                       31
                                                                                                                                                                                        savillsim.com

Technology as disruptor                                                                                                                 SMART MOBILITY AND CONSTRUCTION

and facilitator
                                                                                                                           Driverless    car    technology   in      Some         demographic         groups
                                                                                                                           combination with the Internet of          may choose to relocate to well-
                                                                                                                           Things has the power to transform         connected satellite suburbs and
                                                                                                                           the way cities function. In city          towns that still offer good amenities
                                                                                                                           centres, it could release parking         and variety of uses, functioning as a
                                                                                                                           spaces for redevelopment into             polycentric system of employment
                                                                                                                           affordable housing or green public        and population distribution. This
                                                                                                                           areas. In retail destinations, it         trend is likely to create more demand
                                                                                                                           could free up lots for outdoor            for decentralised, well-connected
                                                                                                                           leisure, food and beverage or             mixed-use developments offering
                                                                                                                           alternative uses such as apartments,      good quality, affordable housing
                                                                                                                           flexible office space, self-storage       and      services.     This    includes
                 ERI MITSOSTERGIOU
                                                                                                                           or last-mile logistics.                   convenience          retail,    flexible
                 Savills European Research Director
                                                                                                                                                                     workspace, health and wellness
                                                                                                                           With      on-demand        automated      centres and communal areas.
     The real estate industry has been experiencing the disruptive impact of                                               mobility, residential choice will
     technology, with implications for occupier requirements, construction,                                                not fully rely on transit hubs            Construction technologies that
     property management and financing tools as well as transaction                                                        and connections, but also on              help reduce costs and facilitate
     processes, to name a few. The COVID-19 crisis is accelerating change,                                                 inter-modality     between      public    flexible space production – such as
     putting pressure on the industry to react. Technology will enable buildings                                           transport       and        car-sharing    3D printing, modular construction
     and cities to respond to the shock and recover.                                                                       services. In combination with the         and the use of robotics – are more
                                                                                                                           rise of agile working, this could take    efficient, less labour intensive and
                                                                                                                           some demand pressure from                 could relieve high costs and labour
                                                                                                                           the     most     expensive      cities,   shortages in the construction
                                                                                                                           which have become congested               industry. This could transform the
                                                                                                                           and unaffordable for large groups         residential sector in particular,
                                                                                                                           of the society.                           and offer a solution to housing
                                                       SMART CITIES, BUILDINGS AND INVESTORS                                                                         shortages in major cities.
                                           Technology and automation are           pandemic,     automated     building
                                           helping developed cities overall to     controls that factor in temperature,
                                           become more efficient, sustainable      air quality, weather conditions and
                                           and safe. The use of sensors allows     occupancy will also be used widely.
                                           for better management of traffic,       These technologies help manage
                                           energy and waste at all levels. And     building systems, optimise energy
                                           data collected from communities’        and space usage and improve user
                                           electronic infrastructure is used to    experience and wellbeing.
                                           enhance efficiency and adaptability
                                           in the way people use space.            Big data will not only be a tool for
                                           Citizens have become the sources        the efficient design and operation
                                           of big data via their mobile devices,   of smart cities and buildings, it can
                                           and city managers are applying          also become a facilitator of more
                                           big data analysis to monitor and        informed decisions by investors
                                           anticipate urban phenomena.             and developers. By measuring
                                                                                   and analysing the impact of
                                           At the building level, the adoption     market conditions on building
                                           of smart technologies is likely to      performance, they can create
                                           pick up strongly as a means to          algorithms to anticipate future
                                           ensure that buildings help prevent      trends and opportunities.
                                           contagion in the future. But post-
OUTLOOK 2021
32                                                                                                                                                                                                                                                                    33
                                                                                                                                                                                                                                                      savillsim.com

                                                                                                                                    Location will remain important as people become more
                                                                                                                                    selective with regards to the neighbourhoods and the cities
                                                                                                                                                                                                                      FIGURE 14: WORKING AGE (15-64)
                                                                                                                                    they choose to live in. People will prefer to live in mixed-use,                  POPULATION GROWTH (%) 2020-30
                 THE AUTOMATION EFFECT                                                                                              walkable and cyclable communities in proximity to amenities,
                                                                                                                                    cultural attractions and green spaces, with access to quality                           Stockholm
                                                                                                                                                                                                                          Luxembourg
     The big question about technology             About 14% of the global workforce,                                               and affordable housing as well as jobs. Cities – which offer a                                Malmo
                                                                                                                                                                                                                          Copenhagen
     is the impact that it will have on            or circa 375 million workers, will                                               high quality of life, ensure their citizens’ safety, wellbeing and                              Oslo
                                                                                                                                                                                                                         Inner London
     employment and the demand for                 probably need to build new skills                                                are more resilient to external shocks – will attract both highly                             Genève
                                                                                                                                                                                                                                  Zürich
     workspace. Artificial intelligence is         and redefine their career paths by                                               skilled people and businesses. They will remain the main hubs
                                                                                                                                                                                                                           Gothenburg
                                                                                                                                                                                                                                Brussels
     replacing repetitive and predictive           2030 as a result of these trends.19                                              of innovation and growth. The Savills IM Dynamic Cities Index
                                                                                                                                                                                                                               Toulouse
                                                                                                                                                                                                                                 Málaga
     white-collar jobs, while automation           At the same time, aggregate                                                      helps to identify the factors that make a city attractive to
                                                                                                                                                                                                                                 Prague
                                                                                                                                                                                                                             Edinburgh
                                                                                                                                                                                                                                 Nantes
     and robotics have implications                machines will add jobs to the                                                    talent, resilient to disruptive technology and a leader in the                            Bordeaux
                                                                                                                                                                                                                                 Bergen
     more so for blue-collar jobs. Higher          economy. There are already new                                                   knowledge economy.20                                                                      Ljubljana
                                                                                                                                                                                                                                  Dublin
     business efficiency could lead to             industries emerging from the                                                                                                                                                 Helsinki
                                                                                                                                                                                                                                 Belfast
     reduced demand for office, retail             technology sector that are creating                                              Working-age populations across European cities are set to                                     Bristol
                                                                                                                                                                                                                                 Vienna
     and warehousing/factory space.                new specialisations, such as life                                                increase by an average of 1.5% over the next 10 years, Oxford                          Manchester
                                                                                                                                                                                                                            The Hague
     However, demand for higher-skilled            sciences, e-commerce and gaming.                                                 Economics statistics suggest, with the strongest growth in                                    Tallinn
                                                                                                                                                                                                                          Birmingham
     workers is likely to remain strong, as        Besides, the expected rise in                                                    Stockholm (14.7%), Copenhagen (9.9%), Oslo (9.3%) and
                                                                                                                                                                                                                                 Leipzig
                                                                                                                                                                                                                           Amsterdam
     robots will lack creativity and social        productivity can lead to economic                                                London (9.2%) during this period (figure 14).
                                                                                                                                                                                                                                    Lyon
                                                                                                                                                                                                                               Tampere
     intelligence. Therefore, automation           growth, further investment and                                                                                                                                          Nottingham
                                                                                                                                                                                                                                 Aarhus
                                                                                                                                                                                                                                 Munich
     is likely to pose a bigger threat to          rises in employment.                                                             In this new era of competition between cities, national and local                            Madrid
                                                                                                                                                                                                                              Budapest
     income equality than to work itself,                                                                                           governments need to invest in smart technologies to become                                Bratislava
                                                                                                                                                                                                                                    Sofia
     as the balance of power shifts in                                                                                              more adaptable and resilient. Technology will shape the ‘new                                 Utrecht
                                                                                                                                                                                                                               Glasgow
     favour of educated workers.18                                                                                                  normal’, facilitating the creation of smarter, more sustainable                                Berlin
                                                                                                                                                                                                                                  Sevilla
                                                                                                                                    and more liveable buildings and cities.                                                   Hamburg
                                                                                                                                                                                                                                  Cardiff
                                                                                                                                                                                                                               Sheffield
                                                                                                                                                                                                                             Barcelona
                                                                                                                                                                                                                               Dresden
                                                                                                                                                                                                                              Frankfurt
                                                                                                                                                                                                                                    Graz
                                                                                                                                                                                                                               Antwerp
                                                                                                                                                                                                                               Bologna
                                                               THE IMPACT OF THE PANDEMIC                                                    FIGURE 13: PLEASE SELECT WHICH LOCATION YOU THINK                                     Rome
                                                                                                                                                                                                                                    Paris
                                                                                                                                             CAN BEST FACILITATE THE FOLLOWING FACTORS (%)                                      Warsaw
                                                                                                                                                                                                                               Marseille
                                              It is widely accepted that the             location. ‘Location, location, location’                                                                                                   Brno
                                                                                                                                                                0          20        40   60         80         100                Leeds
                                              COVID-19 crisis has and will further       has always been the key factor                                  Personal
                                                                                                                                                                                                                       Groot-Rijnmond
                                                                                                                                                                                                                              Stuttgart
                                              intensify the use of technology,           determining the attractiveness and                               growth                                                              Liverpool
                                                                                                                                                                                                                                     Lille
                                              bringing forwards some of the              value of a building. Will it remain                            Work/life
                                                                                                                                                                                               Company office                   Bremen
                                                                                                                                                                                                                                 Krakow
                                              trends and the changes that were           relevant in the new post-pandemic                               balance                               At home                               Nice
                                                                                                                                                                                                                                  Lisbon
                                                                                                                                                                                               Both
                                              already underway. This raises more         normal? The short answer is, ‘yes’.                 Sense of belonging/
                                                                                                                                                                                                                                  Milano
                                                                                                                                                                                                                            Strasbourg
                                                                                                                                               pride in company                                                                València
                                              intense questions about the future                                                                                                                                            Nuremburg
                                                                                                                                                                                                                          Grad Zagreb
                                              of buildings and cities. Working from      Until a vaccine is found, social                                                                                                     Zaragoza
                                                                                                                                                  Physical health                                                                   Bonn
                                              home, shopping from home, eating           distancing and intensive hygienic                                                                                                     Cologne
                                                                                                                                                                                                                                Forence
                                              from home and learning from home           protocols will reduce personal                                                                                                             Metz
                                                                                                                                                    Mental health                                                           Düsseldorf
                                              became increasingly routine during          contact to a certain extent. In the                                                                                                Bucharest
                                                                                                                                                                                                                                  Bilbao
                                              the lockdown, generating concerns          short term, technology will help                                                                                                      Wroclaw
                                                                                                                                              Quality family time                                                                 Torino
                                              that people will not go back to            compensate for the loss of direct                                                                                                 Thessaloniki
                                                                                                                                                                                                                              Hannover
                                              densely occupied buildings and cities.     human interaction through virtual                                                                                                      Ostrava
                                                                                                                                                                                                                                 Gdansk
                                                                                                                                                   A daily routine
                                                                                         communication. In the medium to                                                                                                        Palermo
                                                                                                                                                                                                                                 Poznan
                                                                                                                                                                                                                                  Napoli
                                              The difficulty is that cities have         long –term, however, collaboration,                          Time spent
                                                                                                                                                                                                                                 Genova
                                                                                                                                                     commuting/
                                                                                                                                                                                                                                 Plovdiv
                                              always been enablers of creativity,        growth, the generation of ideas                                traveling                                                                  Essen
                                                                                                                                                                                                                                Vilniaus
                                              innovation and economic activity, with     and the development of talent                       Cost of commuting/                                                                    Porto
                                                                                                                                                        traveling                                                            Dortmund
                                              buildings driving human interaction.       will continue to require personal                                                                                                          Lódz
                                                                                                                                                                                                                                 Athens
                                              During the pandemic, technology            interaction     in  physical    space.                                                                                                      Riga
                                                                                                                                             Source: KKS Savills Office FiT survey
                                              allowed us to perform our activities       Buildings will remain relevant and will                                                                                                        -20   -10   0    10     20

                                              solely, remotely and independent of        adapt to change (figure 13).
                                                                                                                                                                                                                      Source: Oxford Economics
                                              18
                                                 Oxford Economics
                                              19
                                                 McKinsey Global Institute                                                          20
                                                                                                                                         https://www.dynamiccities.savillsim.com
You can also read