Commercial property has faced well-documented difficulty in recent years. As shoppers have moved online, the trend has permanently dented the outlook for bricks and mortar retail premises; the Covid-19 pandemic has ripped up the standard working model, creating significant disruption in the office market (as well as further hurting retail businesses in cities), while the industrial sector has had to cope with shifting and disrupted supply chains.
However, each element of change has resulted in opportunities elsewhere. The rise of e-commerce, for example, may have constrained the market for shop space, but it has boosted demand for industrial facilities and logistics warehouses to meet just-in-time delivery patterns.
Changing working practices have created a need for flexible workspaces, as well as for alternative leisure facilities. At the same time, long-term trends such as the ageing population in Europe have seen care home provision expand rapidly.
Investing in what might increasingly be described as alternative property assets is becoming easier. Luxembourg has created new investment structures such as the reserved alternative investment fund (RAIF), which is well suited to real estate investment. The number of launches of RAIFs investing in property grew from 27 in 2018 to 63 in 2019.
Some of the investment characteristics of alternative property are similar to those of traditional property assets. They aim to offer inflation-adjusted income, capital growth and some defensive qualities at times of market turbulence, since returns are only loosely correlated with equity and bond markets. Advocates say this type of investment should boost diversification of investment portfolios.
However, there will be differences in the long-term growth, risk and income characteristics, depending on the particular strategy and assets targeted, and like other types of property investment, their risk levels may be unsuitable for many individual investors.
It is perhaps easier to think of alternative property in terms of broad megatrends – the evolution of technology and demographic shifts will affect demand in the real estate market. Growing dependence on technology, for example, has resulted the need for data centres and similar infrastructure. There are now funds specialising in data-related real estate, including companies focused on wireless infrastructure or telecommunications towers.
Demographic shifts are also altering demand for different kinds of property. The increase in retirement and care homes is one obvious response to ageing populations, but there are others: multi-generational housing is becoming more important as children live at home for longer and people increasingly support ageing relatives.
Millennials may be less inclined to buy their homes, but they are looking for more from rental accommodation. House-builders are being called on to adapt their conception of a family home to reflect changing living patterns.
Other changes are being driven by government policy. With students in countries such as the UK paying more for their university education, their expectations regarding accommodation are becoming more demanding. The student population is now more internationally mobile, with the number studying outside their home country increasing by 23% over the past five years.
From logistics to renewable energy
The OECD forecasts that the globally mobile student population will increase to 8 million by 2025, up from 5 million in 2019. Their priorities include decent internet access, exercise facilities and eating options, and demand is strong for property developers who can meet these needs at a reasonable cost.
A growing number of specialist investment firms now focus on European logistics, notably warehousing to facilitate speedy e-commerce delivery as the sector enjoys a renewed expansion spurt. The market is now estimated at €717bn, but this still only represents around 17% of overall retail sales, leaving plenty of room to grow. Consumers expect a reliable service as well as faster delivery times, boosting demand for warehousing on the edge of cities and near transport links.
Fiscal stimulus packages across Europe in response the Covid-19 pandemic may also be directing capital to different sectors of the property market.
Fiscal stimulus packages across Europe in response the Covid-19 pandemic may also be directing capital to different sectors of the property market. Healthcare infrastructure may become a greater priority for policymakers in the future as the pandemic has exposed the fragility of some aspects of healthcare provision.
Property development is likely to become greener, prioritising renewable energy use and sustainable building practices, which promises to create new opportunities for investors. Funds are being created to invest in wind farms and other renewable energy infrastructure, which, while different from conventional property assets, still shares many of the same investment characteristics.
The right mix of risk and return
The security of alternative property assets depends on the reliability of the end-user to pay rent. In some cases, this is a consumer – a student requiring university accommodation, or an elderly person with care needs. The investor will need to make an assessment on how likely those users are to default and how easy it would be to recruit new occupants in such cases. For student accommodation, there should be continued demand even if there are always students who drop out; care facilities are also used to a relatively predictable turnover of residents.
For industrial and retail property exposed to corporate occupiers, investors will need to be confident that the fund has an adequate diversity of tenants, rather than just one or two companies. They will also have to judge the resilience of individual businesses and sectors – a doctors’ surgery may be more resilient than a boutique fashion shop.
It can be worth taking a higher risk on a specific investment niche if the income is high enough to justify it. Assets that are subject to some development risk should deliver a higher income than property that already has tenants in place and generates steady revenues. Again, this may be a risk worth taking as part of a diversified portfolio, depending on the investor’s risk appetite.
Alternative property can be a useful means to obtain exposure to high-growth sectors without taking on greater risk than other types of real estate assets, although their characteristics – investment through closed-ended funds, long investment horizons and the inherent illiquidity of assets – mean that they are not accessible to some investors.
Even if the risk of default always exist, investors should here consider that inflation-adjusted income will in most cases be derived from a concrete asset. At a time when bond yields appear set to remain anaemic for the foreseeable future and company dividends appear less secure than in the past, investors with a strong level of expertise and risk appetite may look to alternative property to diversify sources of income and capital growth within their portfolios.
It is perhaps easier to think of alternative property in terms of broad megatrends – the evolution of technology and demographic shifts will affect demand in the real estate market.