LOOK AHEAD 2023: The end of the ‘beds and sheds revolution’

An investment strategy dominated by the logistics and residential sectors is not in the cards for Hines’ European business in 2023.

This is because of fewer compelling investment opportunities in both property types, according to Alex Knapp, chief investment officer for Europe at the Houston-based manager. “The beds and sheds revolution that’s been happening for the last several years is over and we are taking a more balanced investment view,” he said. “Something we were seeing already over the last 12 or 18 months is that despite the unquestionable fundamentals of logistics and residential, pricing was elevating up to a level where there wasn’t a material advantage over the other product types.”

Those property types include office, which in Europe is less in flux than in North America, and retail, which has already corrected significantly during the pandemic. “The balance of opportunity between the four product types becomes more even,” Knapp explained. “And that makes sense. It’s expected that you can’t have a trajectory forever of two asset classes outperforming.”

Because of this, so-called pie-chart investing – which targets growing specific allocations in a portfolio – has or will soon come to an end. Knapp pointed to the logistics sector, which has repriced the most dramatically on a percentage basis of the four main product types. “It’s come off because there was a period of overenthusiasm or exuberance in the logistics markets where people were looking at a run up in performance and even as late as last year deciding they need to materially increase their exposure to logistics,” he said. That led to some investors buying up properties indiscriminately, without taking into account the quality of the asset or its ability to produce future rental growth.

Knapp expects the opportunity set among the four main property types to become more balanced going forward. With logistics becoming less attractive on a relative basis, “the other product types are more in sync with each other, so there’s not such an obvious call on where to focus on in the major four food groups,” he remarked. “The opportunity set for the next year then becomes more about recapitalizing people whose capital positions are no longer viable. So in simple terms, looking for discounts, rather than focusing on specific product types.”

He added that investors have a natural tendency to seek out the next big opportunity, with many now looking to emerging sectors for “the next logistics.” But while niche property types such as cold storage, self-storage and senior living have investment appeal, very few of them can offer the ability to invest at an institutional scale.

Ultimately, “the world goes to a place where you’re more agnostic on product type and you have fewer tailwinds of yield compression,” Knapp continued. “So secular yield compression is over. And the focus areas then become the ability to grow income in any given product type, in any given asset over time.”

Income growth potential, moreover, will require not only good asset selection, but also the ability to improve and operate those assets well at a local level. For this reason, Hines is investing heavily in its property management and operations platforms in Europe.

“In this world where the big beta predictions, the high level, sectoral bets are less clear, the way to create value and differentiate becomes more granular work, at the asset level,” he said. “For us, building out operational teams, growing property management and operational expertise at the local level across product types, is the way to create sustainable value. But it’s not as easy as just going to buy all the warehouses you can find.”