Alternative assets have experienced spectacular growth since 2010, with research from JLL showing global investment volumes for the sector reached a record high in 2016.
JLL’s Global Alternatives Sector report shows volumes reached US$52.1 billion last year, with alternatives making up 6.2 percent of the total commercial real estate market – the highest yet.
The rise of alternatives has been extremely rapid – investment in the sector has more than tripled since 2010, when investment totalled just US$14.8 billion, or 3.6 percent of the total commercial real estate market.
Student housing, seniors housing, laboratories and data centres make up more than 99 percent of the market for alternative assets, with cold storage making up the remainder.
Over 2016, the most impressive growth was in student housing, laboratories and data centres, with each exceeding its performance from the year prior. However, investment in seniors housing fell in 2016 after peaking in 2014, although volumes remain above the long-term average.
“Strong real estate fundamentals and growing institutional demand have made alternatives an attractive sector for many investors who seek to increase their exposure to real estate,” says David Green-Morgan, JLL’s Global Capital Markets Research Director. “In some markets, alternative asset classes are inching closer to becoming established asset classes alongside office, retail, industrial and hotels.”
“While they still comprise less than 10 percent of the overall real estate market, we have seen a strong and sustained trend of increasing demand for alternative assets, and we predict that this trend will continue over the next few years.”
Rather than expand to new geographies, investors are preferring to diversify their real estate holdings by moving into alternative sectors in established markets. The United States, the world’s largest market for commercial real estate, is also the global leader in alternatives, commanding a 61 percent share of the global market in 2016. In the UK, the world’s second largest market, alternatives now make up 29 percent of the domestic property market, up from just 15 percent in 2012.
There is a simple reason for accelerated investment in the alternatives sector – yields.
“As the weight of capital chasing real estate assets has increased, yields have been pushed down as investors become increasingly selective,” Green-Moran says. “We are already seeing some transactions that are approaching core asset yields in some of the more established sectors.”
“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 established asset classes such as office or retail.”
Furthermore, as yields for trophy assets continue to compress, alternatives allow investors to maintain their exposure to real estate while achieving higher returns.
According to the report, the outlook for alternatives is positive, and the sector is expected to continue its current growth trend.
“Asset classes such as student housing and seniors housing stand to benefit from the global demand for education and demographic shifts in many populous countries,” Green-Morgan says. Increasing demand for lab and data centre space is also growing, particularly in the latter sector, where barriers to entry and consolidation are driving growth in demand for IT facilities.
Even the comparative lack of data, compared to core asset classes, is no imperative to growth in the alternatives sector.
“While better information on alternatives would be welcome, the biggest impediment is the lack of stock across a wider number of markets,” Green-Morgan says.
However, although the outlook is positive, JLL cautions the alternatives sector is not entirely bullet-proof.
“Even though the markets for alternatives is bright, there are still risk factors,” he says. “Dramatic political shifts in the US and UK threaten to make them less welcoming to international students, which could negatively impact the student housing market. In the United States, the rising cost of education has led to ever-higher levels of debt for American college graduates, raising concerns about a student debt bubble.”
“Furthermore, oversupply in certain markets remains a major concern, as a majority of the ‘baby boomer’ generation has still not reached sufficient age to require seniors housing services.”
“In the lab, data centre, and cold storage space, one of the biggest risks revolves around the complexity of each asset class, and the technical and development risks that may arise.”
However, despite the risks, Green-Morgan argues alternatives can still offer considerable value to investors.
“We believe that student housing in particular will continue its impressive performance due to global shifts in labour markets and the increasing need for education,” he says. “The student housing market is well positioned to mature in established markets like the UK and US, but also in the growing markets of continental Europe and Asia-Pacific.”
“Our outlook on the seniors housing market is similar, as ageing populations in the U.S., Western Europe, Japan, and China provide enormous potential for growth given the lack of supply in many markets.”
Click here to read the full Global Expansion – Alternatives 2017 report by JLL.
Global Capital Markets Research Director, JLL