Equity funds and investment managers have tripled their investment in alternative real estate assets -such as student housing and data centres – in the last five years, and many are seeking greater access following better-than-expected returns from their overall real estate portfolio.
Institutional participation in alternatives stood at 41 percent of the total alternatives market in 2016, nearly double the 2014 level, according to the recent Great Expansion report by JLL.
“That equity funds and investment managers have increased their acquisitions of alternatives should not come as a surprise given the clear trend of increasing allocations by these groups to real estate overall,” said JLL’s David Green-Morgan, Global Capital Markets Research Director at JLL.
Based on Preqin Investor Outlook: Alternative Assets* 1H 2017, private real estate funds generated an annualised 14.9 percent in the three years to June 2016, one of the highest returns of any private capital asset class. According to the survey, which included investors ranging from family offices to insurance and pension funds, 93 percent of the participants stated that real estate met or exceeded their expectations in 2016, more than any other alternative asset classes, including hedge funds, infrastructure or private debt.
REITS are biggest buyers
As allocations to real estate overall rise, JLL noted that the top five buyers of alternative real estate since 2012 have been REITs, developer/owner/operators, equity funds, investment managers and real estate operating companies. In 2016 alone, these five groups of investors put over US$43 billion into the market.
Of the group, REITs were the biggest purchaser, making more than US$13.4 billion of acquisitions in 2016, of which 41.3 percent was invested in data centres and 33 percent in senior housing. Specialty REITs such as American Campus Communities, Welltower, Alexandria Real Estate Equities and Digital Realty are among the most active investors in student housing, seniors housing, labs, and data centers respectively, due to their narrow focus on a single class of alternative assets.
“As the weight of capital chasing real estate assets has increased, yields have been pushed down as investors become increasingly selective. In this context, alternative asset classes within real estate provide investors with exceptional value. In addition to diversifying portfolios, they offer exposure to the sector at a relative discount to more traditional asset classes such as offices or retail space,” Green Morgan said.
While the overall volume of deals done by institutions in a joint venture with a developer or owner or operator has increased every year for the past five years, the ratio of these types of deals to overall institutional investment has not, observed JLL. “This indicates that institutions are becoming increasingly capable of acquiring, running, and managing these types of assets, without the expertise of owner/developer/operators,” according to Green-Morgan.
While investors have capital to put to work, some have expressed concerns about the prospects for real estate with asset pricing seen as a key issue.
However, Green-Morgan said that globally, construction of these assets has increased. “Big deals could very well come in a few years’ time, once some of this stock has been built and developed.”
“There is definitely more money than stock across the whole real estate market,” said Green-Morgan. Based on conversations we have had; global investors and big pension funds are putting more money into real estate even though they know it might take them a while to spend it but they want to broaden their portfolio allocations and want more exposure to real estate,” he added.
JLL regards current market fundamentals to be sustainable. “We have had this run of good performance over the last seven to eight years, it is natural for people to think that the market may be due for a correction,” said Green-Morgan. “The years of incredibly strong performance is probably behind us, but we are still seeing most investors achieving the returns they need with slightly stronger rental growth and more subdued capital growth. We don’t see any reason why real estate globally shouldn’t return 8-10 percent again in 2017.”
Global Capital Markets Research Director, JLL