Investors seeking sustained income drive decade of growth in UK alternative property assets market
Alternative assets accounted for 28 per cent of all UK commercial real estate investment in 2018, the highest annual share on record, following a decade of growth, according to new research from Cushman & Wakefield.
The allocation to alternatives – commercial property other than office, retail or industrial assets – in 2009, in contrast, was just 5 per cent of total investment in the UK. The following decade has seen investors, keen to maintain yields and keep allocations achievable, look to a broader range of targets, investing an increasing proportion of capital into hotels, student living, residential, healthcare, data centres, self-storage and car parks.
Cushman & Wakefield’s Broader Horizons - The Attraction of Alternative Real Estate report examines the trends behind this growth during this time. Two factors have been key to this growth, which continued in Q1 2019 with alternatives accounting for over 40 per cent of total UK investment.
Firstly, decreasing lease lengths in mainstream sectors have driven institutions to seek out alternative, sustained income streams. Now, 53 per cent of long income funds’ assets are in alternative real estate. Indeed, over the decade covered by the report, 76 per cent of alternative investment transactions had an institutional buyer.
Secondly, in recent years competition to buy into offices and others prime assets has been fierce. Average net yield ranges for all property types have settled around 5-6 per cent, with prime yields between 4-5 per cent. As a result, low-yielding alternatives – which looked less attractive emerging from the financial crisis in 2009 – have looked competitive based on the income they can deliver particularly over the longer term.
The same factors have attracted overseas capital, with 53 per cent of alternative investment volumes over the decade involving a UK owner selling to a foreign buyer.
Greg Mansell, Head of UK Research & Insight at Cushman & Wakefield, says: “The investment trends of the last decade have permanently changed the UK real estate investment market. Alternative real estate is increasingly liquid, international and institutional. The low-yield environment, short leases in mainstream assets, and investors taking direct responsibility for asset management should ensure alternative real estate continues to develop in the same way it has done over the last decade. These secular trends have great inertia, which should ensure these specialist sectors can produce competitive total returns in the long run.”
Portfolio deals have been the preferred method for investors to achieve access to alternatives, accounting for 57 per cent of alternative investments – with an average value of GBP276 million across the decade. Of the total investment volume, London accounted for 40 per cent of investment and the favoured asset has been hotels – which have accounted for 43 per cent of overall volumes across the UK.
One of the investment strategy conclusions in the report is that investors need to focus on the sub-sectors of alternatives rather than seek a combined allocation approach.
David Haynes, International Partner, Capital Markets, Cushman & Wakefield, says: “Investors are seeking better yields and are increasingly prepared to consider a wider range of property types, different financing options and adjusted risk returns to achieve their goals. However, alternative real estate is a convenient catchall phrase and the property types included in this group are too diverse to justify a combined investment allocation. Investors should look at alternative property types as distinct specialist sectors that have varied demand drivers and investment traits.
“In the race for quality, portfolio deals have been the most common way to access the best assets
and strongest covenants and the shortening of commercial leases has shifted long income investment into alternatives. We are seeing investors acquiring, or partnering with, dominant operators to quickly gain specialist knowledge and economies of scale.”