Needs-based sectors, like residential senior housing, student accommodation and self storage give Heitman plenty of chances to scour Europe for opportunities and utilise its scale.
Self-storage in Europe is still in its emerging stages, far behind the US, where the manager has been investing since the 1990s.
“When we first turned up to self storage conferences in the 1990s, everyone was wearing dungarees and there were no revenue management systems and there was a general lack of sophistication,” Caleb Mercer, managing director, European private real estate, at Heitman said at the Investment Magazine Real Estate Investment Conference at the end of February.
“That’s what we’re seeing here in Europe now, though perhaps not quite dungaree territory.”
Mercer outlined the nascent stages of professional management systems that are around 30 to 40 years behind the US, yet the fundamental opportunity remains.
“The amount of self storage we have in Europe per capita is very low, and there are low levels of existing supply,” Mercer said.
“That’s despite the fact the average house size is half of that in the US.”
As investors become more familiar with specialty real estate fundamentals, the managers improve their systems and liquidity enters the market, Mercer expects the sector to grow exponentially, pushed along by Covid.
However the deal size remains very small, which can prove a problem for asset managers wanting to get into the market.
Mercer described two routes. Firstly, managers can go in and buy an existing portfolio, though there aren’t many available, but these will attract a 30 per cent premium.
“That’s the easy route, though it’s not great for returns,” he said.
Or secondly, managers need to start small – at around $30 million or so – and handle a whole series of individual transactions to build scale.
“If you really build from the base, where there are plenty of transactions and you can get behind quality stock, you can very easily get there,” he said.
Mercer said this strategy applies to self storage, to residential, to student accommodation and senior housing.
Heitman’s approach in Europe is to screen across the demographics across each sector, look at the supply side, and assess the income premium.
Mercer said Germany remains attractive in self-storage, while it’s massively under supplied, and the United Kingdom is actually seeing a slump in senior housing supply, despite its population growth.
Nordic residential is also an opportunity while population growth kicks up a gear.
REITs have started to move into these opportunities in recent years, which are acting as competitors to the likes of Heitman who have specialty understanding in how to run different accounts in different countries with different sectors.
“We are seeing the public REITs make the shift into the speciality sectors, but they are trading at a massive premium,” said Mercer, adding this trend follows on from the United States.
“But the trouble they face is they want big scale portfolios to really build that critical mass.”
Rather than just compete, Heitman has used this new demand by aggregating up two of their portfolios one and selling to the REITs.
Mercer pointed to a large residential portfolio that was taken out by Venovia, a large listed European property company.
“They loved that because it had the scale that really doesn’t grow quickly,” Mercer said.
Residential supply hasn’t been able to keep up with new household growth since 2006 in Europe, said Mercer, though it’s running at about half the rate than the United States.
Europe’s residential markets are regulated so people don’t lose their houses if they stop paying rent, and owners can’t get back that discounted rent.
“People stop paying for their car before they stop paying for their house,” said Mercer, though the residential fundamentals proved to be particularly resilient during COVID19.
“People have kept paying rent for their assets so they keep performing during difficult times,” Mercer said.
“And sure enough, we found with the exception of perhaps students, rent collection outperformed during COVID19, with 98 per cent collection rates.”
Dublin saw some weakness as expats headed home, the Amsterdam centre where there’s a large AirBNB presence took a hit, and there was a small decline in prime London, but overall European real estate has been very resilient.