2020 was one of the most memorable years in modern times. The real estate industry was forced to grapple with a global pandemic alongside the ongoing Brexit negotiations and investors throughout Europe were carefully considering their investment strategies against the backdrop of these volatile economic conditions.
Commercial real estate investment, as is often the case during an economic downturn, felt the impact. Deloitte reported a 36% year-on-year decline in deal volumes as investors hit the pause button.
Some asset classes proved to be more resilient than others. For example, supermarkets demonstrated their role as a core consistent income-producing asset class, thriving in a largely underwhelming retail sector: European retail investment between Q1 and Q3 was 11% below the five-year average according to Savills. Meanwhile, UK Supermarket Income REIT, the U.K’s largest supermarket landlord, illustrated its operational strength by achieving 100% of its rents.
The arrival of the vaccine has presented a much-needed injection of confidence and we look forward to supporting our clients in 2021. Our themes for the year ahead respond to and capitalise upon the economic and cultural conditions presented by the pandemic, whilst also recognising the importance of other long term investment fundamentals.
Value-add hotels
2020 saw the hospitality sector fall victim to the global pandemic as the travel ecosystem was thrown into disarray; the World Tourism Organisation forecast a 70% annual fall in tourist arrivals for the year.
A reduction in demand and trade has opened a window of opportunity for investors. We will be targeting underperforming and distressed assets in key European Hotel markets – many of which will be available at a discount – and consider refurbishment/repositioning programmes whilst demand is weak.
The successful rollout of vaccine programmes across Europe is set to unleash high volumes of pent-up demand amongst holidaymakers, whilst a revitalised economy and post-pandemic work culture will significantly boost the hotel market.
Value-add offices (Lisbon)
The last decade has seen Lisbon transform from a periphery commercial and tourist destination to one of the most popular in Europe. Nine years of uninterrupted growth saw tourism figures jump by 92% between 2010 and 2019, whilst the city’s office market recorded a take-up volume of 13,500 sq.m in August 2020, up 19% from the year before.
Comparatively low rents (€25.00 per sq m in Lisbon vs €35.00 per sq m in Madrid), deep occupier demand and a limitation of quality supply make Lisbon one of Europe’s most attractive destinations for commercial occupiers and investors.
Those underlying fundamentals will enable Avignon Capital to implement several value-add enhancing programmes and reposition assets in response to shifting working patterns.
Rotterdam Harbour
Rotterdam Harbour is Europe’s largest seaport and one of the globe’s most active trading hubs, recording a freight throughput of almost 470 million tonnes in 2019. It also creates, both directly and indirectly, employment for 385,000 people.
Excellent infrastructure, a sizeable supply and demand imbalance, as well as advanced plans for a large regeneration project, define an attractive investment landscape.
A Covid-19 induced slowdown of international trade means that assets located in and around the harbour will be in pole position to benefit from the inevitable uptake in trading volumes for 2021.
Our strategy will see us target industrial and office assets in strategic locations in and around the port.
UK Supermarkets
2020 saw UK Supermarkets diverge from an underperforming retail sector as its “essential” classification allowed for uninterrupted trading despite the lockdown(s).
Many have been accelerated by the Covid-19 pandemic, and the Supermarket subset has emerged as one of the most attractive investment propositions for income-focussed investors.
The relative decline of retail has forced many funds to reduce their exposure to the sector, and with supermarkets often representing the only liquid assets within that, distressed vendors are increasingly offloading non-distressed assets.
2021 will see us build a portfolio of well-priced UK supermarkets occupied by strong tenants with increasing performance.
Summary
These four investment themes present excellent opportunities for investors and will be the focus of Avignon Capital’s investment activity during 2021.
If you would like to find out more about any of these investment themes, including our target returns, please get in contact.