In relation to a previous post in which we talked about how COVID-19 will affect alternative assets. We continue to examine the current situation of the investor in Spain.
Because of their high growth capacity, this asset class continues to attract funds and companies that are scouring the market for investment opportunities in sectors with better profitability indicators than the classic residential or retail sectors.
We analyse how projects such as those linked to health care, student accommodation, retirement homes and “build to rent” will evolve after the impact of the pandemic.
How is Built to rent evolving?
Already last year, we saw strong investor interest in Built to Rent projects, with investment figures close to 1.5 billion euros.
Despite the current situation, construction activity has been maintained (with the exception of the two weeks of hibernation in activity), so the timelines of these projects should remain close to their initial dates.
With a growing trend towards renting and favourable conditions, this is likely to be a growing investment option in the future.
In this sense, regional plans are beginning to appear that include public-private partnerships to allocate land for the construction of housing that enters the market exclusively for rental purposes, thus significantly increasing the existing supply of rental housing.
What will happen to shopping centres?
In 2019, investment in shopping centres in Spain was €957 million. During the first quarter of 2020, we saw how the main indicators of shopping centres increased, both in terms of footfall and sales, compared to the same period in 2019, so it was expected that in 2020 this volume would exceed 1,000 million, but restrictions and the decrease in physical consumption have paralysed the growth of the sector, predictably delaying it until next year.
We consider it likely that the recovery in investment will go hand in hand with the ability of this segment to overcome the cessation of activity that the state of alarm entailed for almost three months. At present, almost 30% of the premises located in shopping centres remain closed.
Commitment to student residences
We note that, despite the impact of the pandemic, the growth of student residences in our country continues. Bookings for the coming academic year have increased compared to September 2019, and the promotions planned for the next two years are continuing.
In 2019, investment in student residences reached 900 million euros, including the purchase of real estate and land for development. Over the next two years, 56 new projects are planned for construction.
We must also bear in mind that it is a very fragmented market in our country, as it is mostly operated by private companies, universities and religious orders; where the five largest operators only account for 17% of the total market share.
There are currently around a thousand buildings in our country with this use, of which more than 850 are halls of residence, and the rest are residences. During 2019, the volume of available supply grew by 2,800 places, reaching 94,000, with expectations of growth to reach 120,000 in 2022. Even so, there is a large mismatch between this supply and a demand for university accommodation that exceeds half a million.
With these data, it seems clear that student residences represent a solid market. In addition to this, there is the current problem of the scarce supply of affordable rented accommodation, especially in the big cities, which are the ones where most of the university study centres are located.
Student residences will continue to be very attractive to investors despite the current crisis, either with a focus on refurbishment of existing residences or on new development projects. Portfolio transactions are expected to become more frequent in 2020, triggering an influx of core/core-plus investors attracted by the stable income stream of this asset class.
Residences for the Elderly
Over the last decade, we have observed how the traditionally atomised elderly care sector has started a process of concentration, which has accelerated over the last five years.
Currently, the ten largest operators account for only 25% of available beds, but the current crisis may increase the concentration of assets.
By September 2019, investment in these assets had reached €700 million. By the beginning of 2020, most investors specialising in this asset class had announced plans to continue buying residences over the next two years, with an annual investment volume exceeding that of 2019.
Residential homes for the elderly are assets that are very attractive to certain investors. First of all, they involve long-term leases (around 25 years), and the managers who lease these types of properties are increasingly professionalised.
Also noteworthy is its performance, with average returns close to 5% in our country.
But this is a segment that has been hard hit by the impact of the coronavirus pandemic, especially virulent among the older population, and with a high mortality rate. As a result, care homes have suffered significant reputational damage, although we must not forget that these properties are not designed or prepared to function as hospitals.
In care homes for the elderly, as in student residences, demographics are the key. Demographic forecasts predict that in 2030, 30% of the Spanish population will be over 65 years old, when the baby boomers reach this age.
In view of this scenario, the WHO recommends that all municipalities cover at least 5% of the population over 65 years of age. This would mean that, in a population of 40,000 inhabitants over the age of 65, 2,000 places in care homes would be recommended.
For all these reasons, and after a possible contraction in investment following the current economic crisis, we consider it likely that the nursing home sector will emerge stronger, modernising its facilities and refining those issues that will allow it to improve for the future.
Add to this the expected increase in demand, and its profitability, and we believe that investor interest will continue to grow over the next few years. Over the next three years, the supply of residential beds is expected to increase by around 30,000.
Growth in investment in car parks due to the increase in private car journeys
Movement within cities will be another behavioural change in the aftermath of the pandemic.
In this sense, whether due to health recommendations or individual preference, we consider it likely that the volume of short journeys in private vehicles will increase, to the detriment of public transport use, at least in the short and medium term.
However, other new trends, such as the spread of teleworking or the increased demand for domestic leisure, may lead to less travel.
Therefore, pending how society will behave once the new normality has been achieved, we will have to analyse these two variables.
It is clear that this asset class is going to increase in interest, but we will have to see how it is affected by a possible reduction in the volume of demand.
Over the past year, the profitability of parking spaces exceeded 6%, with peaks of profitability in certain neighbourhoods, such as Moncloa in the capital or Les Corts in Barcelona, where profitability exceeded 7%. The gross residential rental yield was 5.7%.
It should be borne in mind that the market is enormously heterogeneous in our country, both in the residential sector and in the garage sector, so that not all areas yield the same profitability.
It is important to point out that there are other advantages in addition to the profitability of investing in parking spaces compared to investing in housing, such as a lower price, which in turn may mean that it is not necessary to resort to financing, lower maintenance costs, a faster return (provided that a good location has been sought) and a greater capacity to liquidate the asset.
The parking sector has been enjoying average year-on-year growth of more than 3% since 2014 (and during the previous crisis, it suffered falls of less than 1% per year) so it has proven to be a stable sector, able to hold up without suffering too much in the most adverse conditions for the economy.
The parking market is an attractive sector, both in Europe and in Spain, as evidenced by the number of mergers and acquisitions in recent years, as well as the emergence of new digital operators to offer this service.
The margins generated by some of the largest operators (the 5 largest account for 50% of the total market in our country) make this asset class very attractive to investors.
Service stations sector
The service station sector is another sector that is suffering the most from the impact of the coronavirus crisis.
With a sharp decline in road traffic volumes throughout the state of alarm, and still currently standing at 75% of the usual traffic, the benefits of this type of property have been reduced. With a foreseeable reduction in travel volumes due to changes in both personal and professional behaviour, this is something that could be sustained in the medium term.
In addition, we find ourselves in a sector in transformation, in which the gradual increase in the volume of electric cars and the changes in the drafts of the Climate Change Act may generate some uncertainty when investing in this type of asset.
Data Centres
This is one of the sectors with the highest growth forecasts for the coming years. We are observing how large funds are beginning to approach this market, trying to respond to the growing needs of the main technology companies.
The data centre market in Europe represents a significant investment opportunity, in a market that will have to respond to the increased demand for this service, especially in view of the huge volume of data that will be generated when 5G enables connection between the majority of networked devices.
This strong growth will face some obstacles, such as land availability in major cities, in the vicinity of major energy production centres and existing fibre routes.
This, coupled with urban planning issues, will force data centre developers to compete on price for existing land opportunities that meet these requirements.
Private healthcare
The private healthcare sector has been growing in recent years, and this growth is likely to accelerate after the current healthcare crisis, once the initial collapse has been overcome.
If we look at data from recent years, private hospitals integrated in the Single Public Utilisation Network have increased from €620 million in 2015 to €742 million in 2019, an increase of 19%. In contrast, directly managed hospitals increased from €2.9 billion in 2015 to €3.07 billion in 2019, an increase of 6%.
Public-private cooperation in this sector is essential, especially in cities such as large capitals. If these partnerships are successful, they can become good options for investors.