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Growing demand for specialty real estate

Trends such as digitalization and e-commerce are progressively changing the opportunities that are available for investing in real estate abroad – in particular in specialty real estate. Investors can engage in this trend through indirect real estate investments.

There are a number of advantages associated with indirect real estate investments. Investors can invest in properties with relatively low levels of capital while at the same time diversifying risk by diversifying their portfolio. For real estate funds – particularly investment foundations – in Switzerland, the dominant focus is on the residential sector, while stock corporations normally have a commercial focus. This is not going to change for the time being. The dominant sectors internationally are the office, residential, and retail sectors. However, there is an emerging trend toward specialty real estate, which is also expected to make its way to Switzerland. Specialty real estate is specifically tailored to certain uses. The trend is also being shaped by technological change – particularly the growth of digitalization and e-commerce. Consequently, companies operating in these sectors tend to be part of major real estate investment trusts (REITs).

Logistics space: online retail is the driving force

There are differing opinions today as to whether logistics properties still fall under specialty real estate. Nevertheless, the sector, which is benefiting strongly from the shift in consumer activity away from brick-and-mortar retail toward e-commerce, has been considered by investors worldwide as one of the most popular investments for some years now. It is structural change that is making investing in logistics real estate attractive – not just for REITs, but also for unlisted real estate funds and direct investors.

Major leading online retailers require three times more logistics space than traditional retailers who physically store many of their products on their business premises. The limited supply of modern logistics space in locations with favorable transport links harbors a high growth potential because e-commerce is still in its early stages. In 2019, online retail in consumer goods grew by 9%, to EUR 63 bn.1

The e-commerce industry’s share of global retail revenue has risen steadily in recent years. In 2015, it accounted for 7.4% of all retail revenue; by 2018, the figure had already risen to 11.8%, and it is still rising. By 2021, e-commerce is expected to make up 17.5% of global retail revenue.2 The COVID-19 pandemic is likely to accelerate this growth.

Specialty real estate is on-trend

In addition to logistics properties, investors are also increasingly discovering other specialty real estate. As a result of digitalization and the internet, radio communications towers and data centers, for example, are in high demand. Radio communications towers are benefiting from strong growth in the volume of data being transferred to cellular networks, and from the switch in transmission technology to the 5G standard. Data centers are expected to continue experiencing strong growth in demand for standardized and scalable cloud-based IT solutions. At 18.5%, radio communication towers represent the biggest sector on the US real estate equity market (Dow Jones US Real Estate Index, REITs share 95%) ahead of residential properties (13.4%) and data centers (11.9%) (see table “Distribution by investment sector”).

Distribution by investment sector as of the end of August 2020

Radio communications towers 18.5%   Self-storage 5.4%
Residential 13.4%   Hotel/resort 4.1%
Data centers 11.9%   Real estate services 4.7%
Retail 10.0%   Financing/mortgage 3.1%
Industry 10.1%   Woodland/farmland 2.6%
Office 7.5%   Media 0.8%
Health care 7.9%      

US real estate equities
Source: Dow Jones US Real Estate Index

The real estate equity market can be seen as something of a pioneer. However, if we look at the transaction market for direct investments and allocations in unlisted real estate funds, we can see that the traditional sectors are still dominant.

Harrison Street recently published a report putting the transaction volumes in the senior housing and student housing sectors in the US at USD 11 bn and USD 4.8 bn, respectively (for the first eleven months of 2019). By comparison, the transaction volumes in the office and industry sectors in 2019 were around USD 138 bn and USD 112 bn, respectively. (Source: RCA)

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Logistics property performance boosted by e-commerce growth

Source: MSCI IPD Census 
Last data point: Q4 2019