Mixing It Up: Why Beds, Sheds, Meds Isn't The Only Investment Strategy In Town

For many investors, the strategy for the rest of this decade can be summed up in just three words: beds, sheds and meds.

Single- and multifamily rental, purpose-built student housing, senior living, co-living, logistics and last-mile delivery, and life sciences are overwhelmingly their favoured candidates for good, reliable income.

But what happens if you take a wider look? Could investors begin to turn elsewhere as their peers huddle in fewer and fewer sectors? 

The mainstream wisdom is clear: institutional-grade living spaces for students, professionals and the elderly, plus logistics and life sciences. Add this together and you have a recipe for resilience. And the case is compelling.

“Beds, meds, sheds. It's what our survey of lenders' preferences showed, and it's what they all want to lend on and are most comfortable with," Savills Head of UK and European Property Research Mat Oakley said. "For the good reason that each sector's growth is based on structural economic change, occupational demand is strong, the supply side tells a good story, and investors should get rental growth — not necessarily a thumping return, but still good rental growth. And why wouldn't you be investing in senior living in Europe? There is no way demand there isn't going to increase.”

In the last few years office property has been about as popular as the coronavirus, with the future of workspace in flux. But you have to see past the last few years, said Socius Managing Director Barry Jessup, the man presiding over office development in Cambridge, Milton Keynes, Bristol and Brighton.

“Regional offices are massively undervalued," he said. "The shift in occupier preference to higher-quality offices is exactly the same in Manchester or Birmingham as in London, but there is virtually nothing in the supply pipeline for the next three years.

"There's a snobbery about regional offices which isn't justified — I think Manchester has seen more pre-lets in the last five years than central London, and the regional cities have loyal blue-chip occupiers who aren't moving anywhere."

A handful of effectively unleasable “dark star” office buildings shouldn't be allowed to contaminate thinking about an entire sector, he added.

“People are bearish on offices, and perhaps they shouldn't be,” Oakley said. “And the U.S. investor view of UK offices is a bit overpanicked because the U.S. market has problems, but the same isn't true of Paris or London or Manchester.”

What Oakley calls “general negativity” about workspace means office values may continue to fall, but that will change, he said.

“Look at agile working. It's probably going to cut European office take-up by 10%, but that's not a cataclysm,” he said. “Leasing numbers are back up, the risk of stranded office assets is lower than in the U.S., and rents are still going up. At some point, whether it's a 25% or 30% discount on pre-pandemic capital values, somebody is going to say they can make the office maths work.”

Oakley concluded nothing fundamentally structural is happening in the European office market.

One investor taking a closer look at the sector is Tri7 partner Dan Green, now in the process of assembling a £50M-£60M portfolio of UK regional offices. He is hunting for diverse income in well-placed, small-floorplate, multi-let offices with the capacity to reach acceptable UK environmental standards.

“Pricing has drifted too far," Green said. "Investors have instead dived into beds, sheds and meds, but in a few years they will realise their portfolios aren't well weighted and will go back into regional offices, assets which are underpriced today but could be a winner."

With some love and attention, a regional office bought at a substantial 20%-plus discount today could be sold back to the fund that offloaded it sometime in the next three to five years.

So if regional offices might be a winner, can investors begin to get excited by retail? The Investment Property Forum's survey of forward-looking sentiment is already flagging retail warehousing as a hot prospect. Forecasts for retail warehousing capital value growth have been upgraded by 450 basis points from negative 6.2% to negative 1.7%. 

Shopping Centres have had trouble finding buyers prepared to buy at vendor prices since 2014, and many observers guess the price has now hit the floor. That being the case the risk is all upside, according to Oakley, and the best time to buy was about 12 months ago, before the bulk of the market called the bottom.

But the underexplored option could be high street retail, Oakley said.

“If I was a private investor, I'd be looking at nice little parades of shops,” he said. “I don't think investors have picked up on this, perhaps because the market is too granular for big investors to handle, but if agile working is here to stay and they are bears on office investment, then they should be asking, 'Where will those central business district office workers go instead?' The answer is they will be calling in at neighbourhood retailing.”

Sky-high yields also make this tempting for those with an eye for adventure, but the mainstream is the mainstream because most people like it.

Charles Ferguson Davie, chief investment officer at fund manager Moorfield Group, needs no convincing that a mix is a good idea. He has faith in mixing beds and sheds.

He has presided over diversification into joint ventures focused on single-family rental with Bricklane, open storage with Peloton, self-storage with Storage King and student housing with We Are Kin. 

"We continue to see opportunity within the beds and sheds sectors and believe that there is opportunity to be early into some of the newer and adjacent subsectors," he said. "Especially in single-family for-rent targeting the existing housing stock and student houses, and in open and self-storage. Perhaps better described as a ‘living and storage’ strategy.

"These sectors are united by a lack of institutional penetration but benefit from compelling long-term, inflation-linked growth drivers and attractive supply-demand dynamics. The challenge for institutional investors is how to access them, given the limited pool of sophisticated operators and fragmented, granular ownership of assets."