Data centres and logistics assets are the big winners in real estate according to analysts, as the Covid-19 pandemic accelerates structural changes in employee and consumer behaviour.
The two asset types had already started garnering interest from investors in the last few years, as businesses accelerated digitalising their operations in tandem with the rapid growth of e-commerce. In the current crisis, these shifts have become more pronounced as people have had to work and shop from home.
Deals overall in real estate have gone down since the start of the pandemic, with many investors reassessing what the market will look like in the future.
According to Preqin, the value of deals globally was $187.3bn year-to-date, significantly below the $463.8bn spent last year.
Many retail, hospitality and office properties have experienced a decline in value. Nearly four in 10 investors in the US, the UK and Europe said they expect commercial real estate assets will fall between 5-10% in value in 2020, and nearly a third predicted a fall of 10% or more as a result of the pandemic, in a recent survey from advisory firm Duff & Phelps.
In such an environment, data centres and logistics assets are standing out.
‘The Covid-19 pandemic has highlighted how vital data centres are. Following lockdown restrictions and social distancing measures, the use of connected devices skyrocketed,’ a report from property advisory group Savills out this week noted.
Meanwhile, the pandemic has ‘accelerated’ structural drivers of the relative and absolute return outperformance of logistics real estate, according to PwC, which said in a recent study: ‘Logistics, warehousing, and fulfilment are the clear winners this year. This segment of industrial real estate has remained resilient throughout the pandemic—in large part because of a surge in demand from e-commerce, food delivery services, home improvement.’
Billion dollar data centre deals
There have been deals worth billions in data centres.
In May, KKR said it would invest $1bn into a new venture to build data centres in Europe. Meanwhile, Singapore’s sovereign wealth fund GIC teamed up with data centre provider Equnix to develop six hyper-scale data centres in Europe for more than $1bn.
According to Savills, the yields on data centres are attractive compared to other asset types, with prime core European yields ranging between 5% and 7% depending on quality and location.
Marcus de Minckwitz, director, regional investment advisory, EMEA, said: ‘Investment activity within the sector, which has historically been fuelled by new development activity and M&A, is evolving and we expect to see a more liquid market over the coming years.
‘Returns are currently very attractive when compared to other asset types and there is a very exciting growth story, which is leading to ever increasing levels of interest from investors and developers.’
The property advisers expect pent-up demand to lead to strong yield compression in the next 1-2 years.
Through the first eight months of the year, the data centre delivered a total return of 32.5%, according to FTSE Nareit, Savills noted, also highlighting the Nordics and the Netherlands as the best places for hyperscale and cloud-scale data centre investment.
‘Data centres definitely increased in value and attractiveness during Covid,’ said Robert Crowter-Jones, head of private capital at Saranac Partners.
‘The requirement for data has clearly increased with e-commerce penetration and an increasing number of companies using tech-enables solutions. We’re in a structural long-term benefit to data as it were as an asset and the value of data should be increasing over the next five years.’
However, Crowter-Jones argues that buying in at the current levels and expecting any meaningful yield compression is challenging as he expects there to be a ‘supply catch-up’.
Therefore, he is less interested in investing in established assets, and is more looking at build-to-suit and development projects.
For DWS’s head of infrastructure research Gianluca Minella, the fragmented nature of data centre assets, particularly in Europe, make it an attractive play.
‘Data volumes across Europe have increased on a daily basis by over 40%,’ he said. ‘It has been an exceptional accelerator to an underlying digitisation trend we were all observing. No one thought it would be so quick. The trend is there.’
He added: ‘The acceleration of consumer demand for data…drives a strong need for data centre capacity, particularly in Europe, where we see a market which is more fragmented so there is space for investment.’
Logistics has also been at the top of investors’ agenda both before and after Covid-19.
Since 2015, there have been nearly 1,100 deals in logistics globally, worth $138bn, according to Preqin.
Recent deals in the sector include GIC’s acquisition of a portfolio of 33 German retail logistics assets last month for an undisclosed sum; and the purchase of a 15-acre site in Heathrow, London by Oxford Properties Group and Logistics Capital Partners.
At the time of its investment, GIC’s real estate CIO Lee Kok Sun said logistics is a focus for the firm has he expects ‘the sector to generate resilient long-term returns amidst the uncertain environment, supported by growing e-commerce demand’.
Steven Schwarzman, CEO of Blackstone, said in last month’s Q3 earnings call that logistics now makes up 36% of the firm’s global real estate portfolio – or nearly $90bn of gross asset value including debt.
Last year, Ken Caplan, the co-head of the firm’s real estate business, called logistics its highest conviction global investment theme. Last month, the group acquired a UK logistics portfolio from Prologis for £473m and purchased a Swedish logistics asset from Logistea for approximately €81.3m.
But for Saranac’s Crowter-Jones, logistics assets have a similar outlook to data centres.
‘Yields are already compressed a lot in logistics, lease lengths are already long,’ he said.
One of the investments Saranac Partners is currently looking for is in a fund that focuses on building logistics warehouses, which Crowter-Jones finds more attractive.