The past few years have turned the world on its head. The pandemic caused the global economy to shrink, with volatile markets and soaring inflation levels only adding to the struggles.
But the investment outlook isn’t necessarily dark across the board, as real estate’s potential as an inflation hedge has meant that activity is high. But, alongside the pandemic, the rapid rise of ESG has led to a sizeable shift in the market: with an increased demand for alternative assets, a new office structure and new requirements for buildings in general.
Faced with multiple macroeconomic difficulties, real estate heavyweight asset classes, such as office and retail, are going through a period of transition that is leading investors and fund managers to increase their exposure to alternative asset classes.
Sectors such as student housing and senior accommodation are now being viewed as underappreciated. There were record levels of students accepted into university or college last year, up 7% from 2020, according to UCAS, and the age profile across the general European population is rising, increasing the demand for elderly homes. Therefore, building new social hubs that both students and the elderly can appreciate will help bring investors and higher rent.
The pandemic upended office life, and hybrid working is here to stay. However, this doesn’t mean that city centres will become ghost towns. We are beginning to see a situation across European cities, such as Paris and London, where Tuesday, Wednesday and Thursday are hosting a return to pre-pandemic numbers. Bringing people back into the office for training and company culture is a responsibility that companies have, but in this new normal they have to find ways to incentivise them to return. Measures such as hotdesking, breakout rooms and optimising working spaces for employees are becoming even more important.
Another result of the pandemic has been an exodus of people from tier-one cities such as London or Berlin, due to the higher cost of living. The rise of satellite offices in tier-two cities, where a company sets up a smaller branch separate from their main headquarters in major cities, has been a direct consequence of this.
Cities such as Reading and Toulouse have seen their stock rising as secondary working hubs, as buildings have less competition and are cheaper, which in turn is attracting real estate fund managers.
Although the demand for office space is falling across the industry, the demand for commercial property that is ESG compliant is on the rise. To meet this demand, fund managers are both incorporating ESG-compliant buildings into their portfolios and retrofitting buildings to meet these new standards.
The European real estate market is undergoing a significant change, as the traditionally strong asset classes begin to wane due to low yields and new, stronger and more attractive classes take the reins. As the
return to the office plays out, one thing is clear: the buildings that companies are returning to must be enticing on an environmental and social level, or companies will risk losing their talent, and fund managers will see their powder pool dry up.
Tamas Mark is head of real estate, Luxembourg, at IQ-EQ
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