Investing in the alternative side of real estate

Article by Emily Perryman
student acommodation in the UK
Image credit: Shutterstock

Demand for properties outside of the domain of traditional commercial real estate has seen phenomenal growth in recent years.

From car parks to self-storage the combined effect of demographic changes and urbanization is beginning to pay dividends for savvy investors who have spotted potential in the ‘alternative’ properties.

According to research by JLL, transaction volumes rose from 10 percent of the overall commercial property market in 2010 to 29 percent in 2016, which marked the sector’s most successful year to date.

JLL’s Head of Alternatives Ollie Saunders explains why the drivers for the alternatives sector as a whole will remain positive going forwards.

Why is the alternatives sector thriving?

Much of the demand for alternative property stems from the emergence and subsequent maturing of new asset types, accelerated by changing demographics and the way in which we use our cities.

For instance, the aging population has resulted in a much greater need for assisted living facilities. The fact is that more of us are living longer and in poorer health Alongside this, increasing numbers of people can’t afford to get on to the property ladder, which has led to the emergence of a specialised build-to-rent sub-sector.

In addition, increased global mobility, changing lifestyle patterns and technological changes are all contributing to heightened interest in the alternatives sector.

Which are the key sub-sectors to watch?

Over the past year there has been continued growth in the more mature alternative sub-sectors such as student accommodation, which was the largest sub-sector in terms of total investment at £3.2 billion in 2016, along with care homes and build-to-rent.

A newer sector to watch out for is retirement living, which has been big in Australia and is now increasing in prevalence in Europe.

Another important sub-sector is self-storage. Self-storage is embedded into the culture of North American cities and has recently been expanding in Europe. This is because there has been a huge wave of urbanization – more and more people are moving into cities and living in smaller accommodation so they’re putting their belongings into storage units.

Will any other sub-sectors emerge?

An exciting area is data centres. Previously dominated by the financial services sector, there is growing demand from technology companies, particularly cloud operators. IBM estimates that 90 percent of all data today was created in the last two years and the growth is exponential.

The increase in demand is driven by business and personal devices, which rely on computing power and connectivity, now held within the cloud and the data centre facilities which house it.

Another emerging sector is car parks. There has been an increase in electric cars, meaning more people are going to car parks and sitting there for an hour while their car charges. There is a real opportunity for technology to improve the customer experience – for example pre-booking, payment and space allocation technology.

When does a sector mature out of being an ‘alternative’?

A sector is usually regarded as mature when it has a high deal volume and a transparent market. Student housing and leased hotels are now established sectors because they offer scale, transparency and are relatively liquid.

Care homes, hospitals and surgeries will probably become mature in around two years.

What’s in it for investors?

The growth in the alternatives sector offers investors an opportunity to align their investments with changing economics and demographics. It’s linked to inflation and the end user, who pays on an inflation-linked basis.

The sector provides good income returns, which are expected to continue to outperform. In time yields could fall, thus increasing capital values. With proactive management, there is an opportunity to increase yields because the operator is much closer to the lease.

There is scope for better risk-adjusted returns and more defensive income characteristics than traditional real estate.

What are the challenges?

Increasing development costs, land values and restrictive planning policies are key challenges. There is also the possibility than some sub-sectors will reach capacity.

Another challenge is finding the best operating partner for the assets – often a fundamentally important factor in successful investment in alternatives.

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