(FINANCIAL TIMES) The world's biggest commercial property landlord is shuffling its US$378 billion (S$511 billion) real estate deck.
Two moves by Blackstone - the sale of BNY Mellon's London office in St Paul's to Italian insurer Generali for £465 million (S$874 million), and an approach to buy student housing operator GCP Student Living - are a sign of how landlords are repositioning their portfolios as the pandemic accelerates structural trends.
Covid-19 has hastened the decline of two key commercial property sectors - retail and offices - and prompted landlords to pile into alternatives they believe will fare better.
Top of their shopping list are: warehouses, supported by the e-commerce boom; rental flats and student housing, made attractive by home shortages and growing student populations across Europe; and life sciences campuses, buoyed by huge investment in research and development.
"These are megatrends which have been accelerated by the pandemic," said Mr James Seppala, head of real estate in Europe at Blackstone.
A decade ago, offices and shops accounted for about 70 per cent of total European property deal volume, according to Real Capital Analytics. This year they account for 35 per cent, with the residential and logistics sectors gaining ground.
Mr Mike Prew, an analyst at Jefferies, said the pandemic had accelerated the "value transfer" from retail to "beds, meds and sheds" - residential housing, healthcare and life sciences property and warehouses.
Life sciences hit record
The most likely to excite fund managers is life sciences - a niche where price records are being broken as investors look to buy into or develop high-tech campuses close to education hubs in Europe.
In May, Oxford University's Magdalen College put a 40 per cent stake in the Oxford Science Park on the market, priced at about £100 million - more than five times what the college paid for 50 per cent of the park in 2016.
"You've got burgeoning demand, insufficient supply and growing rents. Is this the fastest-growing sector bar none? Absolutely," said Mr Simon Hope, head of global capital markets at property agent Savills. Properties range from conventional offices to complex labs. The key driver of value is location. "It's 'genius loci': it's the great schools, it's the talent," said Mr Hope.
The hottest location in the United Kingdom and Europe is in the so-called "golden triangle" between Oxford, Cambridge and London.
"The world's financial firepower, particularly from the US, is trained on the UK because we've got four of the top 10 universities: Oxford, Cambridge, Imperial and University College London," said Mr Hope.
A record £2.4 billion was invested in life sciences property in the area last year and investors are still looking to deploy more than twice that amount, according to consultancy Bidwells.
"We're spending a lot of time in the life sciences space. It's underdeveloped in Europe broadly and in the UK specifically. With the amount of research institutions in the UK there's a huge opportunity," said Mr Brad Hyler, who manages a US$38 billion portfolio as head of real estate in Europe at Brookfield.
Brookfield owns half of the Harwell life sciences campus south of Oxford, and last month the Canadian investment group paid TPG Real Estate Partners £714 million for Arlington, a science and technology property group with assets in the "golden triangle".
But according to Mr Hyler, the real opportunity is in building labs and campuses from scratch. Brookfield is looking at developing around European cities in Germany, Switzerland and elsewhere.
Another emerging hot spot for property investors is logistics, where the growing popularity of online shopping has given a big boost to demand for warehouse space.
Through its Mileway subsidiary, Blackstone has accrued a large network of warehouses close to European cities, while Brookfield has spent more than €1 billion (S$1.6 billion) in the past year building a portfolio across France, Spain, Germany and Poland.
Rents from warehouse occupiers have held up relatively well during the pandemic, and demand for space has been a boon for companies in the sector.
While shares in the biggest UK office landlords, such as British Land and Land Securities, are down between 20 and 30 per cent from pre-Covid-19 levels, and shopping centre owner Hammerson has lost three-quarters, warehouse developer Segro is up 16 per cent.
Investors are also betting on the residential sector, favouring properties for rent and student accommodation.
"Look at these big European cities: They are large employment hubs with a huge housing shortage and historically stable economies. It makes a good opportunity," said Mr Mark Allnutt, senior managing director at Greystar, a US property investor that recently raised €725 million to invest in European residential property.
"People want to live in Amsterdam and London and there aren't enough homes in those cities," added Mr Seppala.
Undersupply is also a feature of the student housing market, which should help pull the sector through the disruption caused by the pandemic, said Mr Hyler. Brookfield, which owns student housing operator Student Roost, is planning to increase investment on the continent.
Offices and shops still make up more than half of the total investible property sector in Europe, according to Real Capital Analytics. As money crowds into particular asset classes, investors admit there are risks of overpaying.
Unlike the financial crisis in 2008, the pandemic has not triggered a wave of distressed assets hitting the market. But if banks lose patience with hard-hit landlords, opportunities to gamble on knockdown deals may appear, said Mr Guillaume Cassou, head of the European real estate team at private equity firm KKR.
"The important part is to play offence and defence at the same time," he said.