The alternatives real estate sector has emerged as a bright spot of activity and opportunity in an investment landscape beset by low yields and volatile returns. Allocations have grown rapidly, with 2015 seeing a record-breaking £15bn in transactions in the UK alone – that represented around a quarter of all commercial real estate investment, up from less than 10 per cent five years ago.
And the outlook remains healthy. JLL’s 2016 Alternatives Investor Predictions Survey found 79 per cent of respondents intend to up their exposure to alternatives by the end of 2019. Institutional investors are planning the biggest rise, with their exposures set to grow 7 per cent on average to 25 per cent. Private equity (5 per cent) and hedge funds (29 per cent) are also expected to expand their allocations.
So what does the future hold for the alternatives market, in the UK and beyond?
Value of education
Student housing has enjoyed the fastest increase of any commercial real estate sector. Strong global investor demand led to a record £5bn of transactions in 2015, up from £1.7bn the previous year and just £274m in 2010.
This surge stems from two major factors: asset values outpacing the more mature sectors, which have experienced significant yield compression. And, crucially, strong student demand; the student population in the UK is expected to rise by nearly 50 per cent in the next 10 years.
Tom Mundy, EMEA capital markets research director, said: “Global economic concerns are buttressing the increase in international student numbers and inherent demand for higher education that already exists. Will European growth stagnate? Will there be a hard-landing in China? Whenever there is economic instability student numbers tend to pick up.”
For the huge and varied pillars of undeployed capital currently seeking a home, the stable and visible income streams, attractive yields, decent deal sizes and relative security on offer in the student housing market are certainly proving attractive. Emerging market capital flows were especially prominent last year, with Russian money funding a number of the largest transactions. Institutional investors are also increasing their allocations, evidence of the sector’s growing maturity.
Although transaction levels in 2016 are expected to tail off to £2.5bn-£3bn, the environment remains supportive, says Mundy.
“Given the compression in sovereign bond yields, a student housing portfolio offering a 5-6 per cent yield presents an attractive proposition for any investor.”
Investment growth in alternatives thus far has focused largely on student housing in London, but this will change. Yield compression for prime student assets has been quite aggressive. In addition, student demand is changing. London, with its living costs and tuition fees, is very expensive – particularly for international students facing slowing emerging market economic growth, sliding stock markets and currency depreciations. By contrast, ‘gateway’ continental European cities such as Paris and Amsterdam that combine high education standards, English-speaking courses, minimal to no tuition fees, and lower living costs increasingly interesting.
As such, the more adventurous capital will increasingly look to mainland Europe, with investment likely to flow into the next tier of student housing markets, starting with Germany and France, and potentially the Netherlands and Spain.
Asset class evolution
As investors become more committed to alternatives as an asset class they will move into less mature areas as well.
Data centres and self-storage, for example, are now attracting new sources of capital.
“We also expect the retirement living and private rented sectors (PRS) to mature rapidly, due to their compelling investment fundamentals and the weight of investor capital targeting these areas,” Mundy added.
Demographics again play a key role, especially for retirement living. JLL research shows there is enormous pent up demand for innovative forms of retirement living, as the first baby boomers retire and demand higher quality and more housing choice.
While opportunities in alternative investments are wide ranging, understanding the drivers behind each sector will be critical in the year ahead.
“Investors must pay great attention to the trends that are emerging and risks involved,” said Mundy. “Having the knowledge to pick the right products will be vital to investment success in these rapidly developing markets.”
EMEA Capital Markets Research Director