Savills Investment Management (Savills IM), the international real estate investment manager, has published its latest outlook report for real estate investment markets in 2022. While next year may mark a turning point for both office and retail investment as the world continues to recover from the COVID-19 pandemic, sectors such as living, logistics and real estate debt also look set offer compelling opportunities.
Although a number of geo-political and macroeconomic opportunities and risks lie ahead in 2022 – from major elections across Europe, the tensions between the US and China, to global supply chain disruption – inflation looks set to be the biggest challenge investors will have to navigate. More than four fifths (82%) of survey respondents highlighted inflation as the greatest threat to real estate investment in 2022, ahead of an economic downturn (68%) and potential further COVID-19 restrictions (66%).
Despite a challenging backdrop, the global investor survey showed a significant increase in appetite for real estate in 2022. Nearly three quarters (73%) of respondents expect their investment in property to increase in the coming 12 months, compared with 45% last year.
One of the driving factors behind this renewed confidence is that 74% of the investors believe that their investments performed well in the wake of COVID-19 compared to a ‘normal’ year, with 72% stating that performance was better than expected.
The vast majority of participants expect investment volumes to rise again in 2022. Although it is very close at the top, “beds and sheds” lead the way by a narrow margin. However, participants also see growth potential in the retail and office sectors, indicating the hope of a slow return to some kind of normality.
Savills IM believes that retail is unfairly maligned and wrongly considered as a single entity. As a result, 2022 could be a turning point for the sector as many investors have been overlooking the opportunities in food retailing, retail parks and factory outlet malls or in repositioning assets to create alternative use value.
The report also found that investor confidence is on the rise, and they will continue to move up the risk curve in 2022. Value-add strategies are expected to prosper in the next year with 63% of respondents highlighting them as their preferred investment style. Investors also highlighted co-investment (62%) and opportunistic (58%) as attractive investment approaches for the coming year.
Environmental, Social and Governance (ESG) themes are likely to continue to dominate the investment universe in 2022 as governments and companies embark on their pathways to a carbon neutral world. Over four out of five of respondents (82%) to our survey believe that the current focus on climate change will have an impact on their investment strategy. The vast majority of surveyed investors (79%) also expect there to be a demonstrable increase in the demand for green-labelled properties over the coming 12 months, with 26% expecting a significant rise.
Kiran Patel, Global CIO and Deputy Global CEO, Savills IM, commented:
“Looking into next year, we believe beds and sheds will continue to remain in vogue. Given low yields in industrial and logistics properties, investors have no choice but to think outside big boxes and invest in promising subsectors such as urban and last-mile logistics, light industrial estates, and cold storage. We expect a polarisation of the office market with a strong focus among investors on prime properties.
“In the residential sector, scalable and operationally light segments such as multi-family, purpose-built student accommodation (PBSA) and healthcare assets promise adequate risk-adjusted returns.
“Debt-investing continues to provide attractive risk-adjusted returns with downside protection. Being at the lower end of the capital stack, in today’s environment of global supply shortages, rising inflation and growing property obsolescence due to climate adaptation, an allocation to real estate debt could be an attractive option for long-term investors.”
Savills IM’s 2022 Sector outlook:
We believe in the future of the office as the hub of company operations and that it will remain a major target sector for investors.
Investors need to carefully consider pricing and potential future capex requirements, particularly for older buildings. Moreover, income streams are potentially less secure as tenants require more flexible lease terms.
We have a preference for multi-let core/core plus office buildings near transport hubs in CBD locations and well-established city fringe locations in key markets across Europe.
Industrial & logistics will remain one of the most preferred commercial real estate sectors in 2022. We expect to see another year of outperformance of investment volumes.
With yields at historically low levels, generating income return through stock selection and active asset management to unlock rental growth are now the most important factors.
Pricing is challenging, investors need to be careful about rental growth assumptions and obsolescence risks.
We believe that urban and last mile logistics, light industrial estates and cold storage sub-sectors now offer investors diversification opportunities because they are benefiting from the long-term trend towards the faster movement of goods and supply constraints on urban land.
We remain optimistic for the sector to rebound in the mid-term and continue to see buying opportunities in a selective manner in 2022.
We believe that investors should consider strong income producing opportunities in value and convenience retail parks and retail warehouses in strong micro-locations, with stabilised lease-contracts and competitive covenant concepts (e.g. omnichannel sales formats).
We also have a preference for daily goods and grocery retail formats – such as supermarkets and food discounters – as well as larger food anchored retail parks and neighbourhood centres in urban areas across Europe.
We believe the sector offers both diversification and durable income streams, underpinned by demand and supply imbalances.
‘Living’ does not face the technological disruptions of commercial sectors and rent collection levels have remained robust.
The sector is maturing rapidly, and this presents significant opportunity for investors across borders and the risk spectrum.
We are most focused on the scalable and operationally light segments, namely multi-family and PBSA.
Debt investing continues to provide attractive risk-adjusted returns with downside protection due to the underlying income-producing asset.