Article
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.
October 9, 2020
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.
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”).
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)
New technology, accompanying economic structural change, and changing consumer habits are all shaping the real estate sector. Here is a selection of promising specialty real estate options:
Data centers
Data and computing centers are secure places for data storage that make the IT infrastructure as a whole more secure. They provide a number of services, including cooling systems for servers, an uninterrupted power supply, physical security measures for data records, cloud-based document-management options, and software solutions. Demand among businesses for a modern IT infrastructure and cloud solutions is the most significant driver; private and public cloud applications for end users represent additional growth areas.
Self-storage
In contrast to traditional storage spaces, self-storage facilities give tenants individual access to their goods – often around the clock. The storage units are often individual lockable boxes, containers, or outdoor spaces that can be rented on a short-term (monthly) basis. The digitalization trend is having an impact here too – from online booking all the way through to digital access systems that allow 24/7 access to the storage units and make processes more straightforward for clients and storage providers alike.
Radio communications towers
The antennas in radio communications towers with the relevant ranges make mobile and wireless communication possible. As the telecommunications industry and new mobile communication standards such as 5G continue to grow around the world, so too does the demand for specialty real estate options for antenna systems. The US and Europe are the core markets here, with developing countries becoming increasingly more significant as data communication there is often only possible via mobile radio.
1. Industry report: Online commerce in 2019, IFH Köln. https://www.ifhkoeln.de/pressemitteilungen/details/ifh-koeln-prognostiziert-umsaetze-im-onlinehandel-steigen-2019-auf-68-milliarden-euro/.
2. Mobile commerce (M-commerce) in Switzerland, Europe, and globally (Aioma).
Source: Credit Suisse, otherwise specified.
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