Schroders is eyeing opportunities in the subsectors of major asset classes and other niche sectors as it heads into 2022.
The London-based manager, which has £17 billion (€20 billion) under management, sees dislocations in industrial, office, retail and hospitality coming, with the effect of these set to trickle into niche sectors such as life sciences and data centres.
These dislocations are being driven by factors including environmental and social impacts and public transport, as well as underwriting concerns, Sophie van Oosterom, Schroders’ global head of real estate, told affiliate title PERE at the first PERE Connect event, held at the offices of law firm Katten Muchin Rosenman in London, in December.
“In the whole market, but within the sectors as well, [there is a] bifurcation of the haves and have-nots,” van Oosterom said.
In offices, Schroders sees a 15 percent drop in demand, generally. That said, this is not applicable to every market or type of office, van Oosterom noted. Offices in well connected cities, with tenants in growth sectors, will perform differently from transport-light locales or those reliant on particular occupiers such as government, she said.
One sector Schroders is bullish about is hotels. The firm possesses internal expertise through its operational real estate strategies team, headed up by recently hired ex-SVP Global executive James MacNamara. Schroders has analysed ways to reduce hotel operating costs, an ability that van Oosterom said meant the firm was able to be competitive as the covid-19 pandemic generates investment opportunities.
“We think that there are a lot of players that have acted in the market that may have gone into hotels that don’t really understand the operations that well,” van Oosterom said.
“We see huge upside from generalists selling off those buildings, having been confronted with the results of covid. We see the upside in providing our operational services on those buildings and [driving] the net operating income.”
ESG requirements will also be important, with the firm looking to launch a UK-focused impact fund next year, which will be invested in offices as part of its mandate. Target assets will offer a mixture of amenities to tenants as one way of satisfying the firm’s social impact requirement.
“We expect rental growth specifically for assets that are catering to the ESG-savvy,” van Oosterom said. “They are providing the right services. They are providing the right space to the industries that are relevant for growth.”
Retail, the other asset class affected most significantly by the pandemic, is not out of the question for Schroders. Bankruptcies have accelerated, van Oosterom said, meaning assets in some markets could have their values marked down by as much as 30 percent. Some forms of retail should remain attractive, including assets that are well branded, assets that also perform distribution functions and those that appeal to families. “We’re very keen on retail warehousing,” van Oosterom said. “It also doubles up as a function of the last-mile logistics piece.”
Similar to many of its peers, the manager is not investing in out-of-town shopping centres, for example. Strong locations, however, allow for repositioning plays, with more densely located properties offering alternative opportunities to create value.
“If it’s in town, like the gallerias you have in Germany, they will be repurposed. There will be some office, there will be some resi, there will be some retail,” van Oosterom said. “Ultimately, it all comes down to the value per square meter. Can you make it work? Are the expectations from the seller the ones the buyer needs to make the conversions?”
Generally speaking, van Oosterom said she does not see retail rents stabilising enough to make them comfortable with repositioning plays. Where pricing means conversions are more possible, she said, is in last-mile logistics. Van Oosterom sees more value in this type of logistics property than traditional industrial assets, as the alternative value that can be created is more appealing, given their city locations. Her bearishness on more traditional logistics facilities comes down to the difficulty of underwriting future technological obsolescence.
Life sciences is emerging as an important sector in 2022 for Schroders, but van Oosterom was more tempered in her outlook on the sector’s growth prospects than some peers, particularly as assets can be inappropriately labelled as life science when they operate more like traditional offices. Nonetheless, she noted the cluster effect around education hubs as an attractive element for considering outlays.
“There is a shortage around the clusters where there are university school systems. These are where people want to be. That will impact those life science buildings, van Oosterom said. “There is value for that.”
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