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Cushman: investment in UK alternatives reaches highest allocation share on record

The allocation to alternatives – commercial property other than office, retail or industrial assets – in 2009, in contrast, was just 5% 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% of total UK investment.

Firstly, decreasing lease lengths in mainstream sectors have driven institutions to seek out alternative, sustained income streams. Now, 53% of long income funds’ assets are in alternative real estate. Indeed, over the decade covered by the report, 76% of alternative investment transactions had an institutional buyer.

Secondly, in recent years competition to buy into offices and other prime assets has been fierce. Average net yield ranges for all property types have settled around 5-6%, with prime yields between 4-5%. 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% 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, said:

“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.”

The growth in alternative real estate investment is clear. But what is still unclear is why alternatives have increasingly attracted investment? And how will investors access this market in future? Finding the answers to these questions is essential.

Within UK real estate funds, investment holdings beyond the largest property types – retail, office and industrial – typically averaged 3-6% from the 1980s to the early-2000s. But since then, holdings rose to 19% by 2018, as a direct result of rising investment levels among institutions, according to MSCI data.

Portfolio deals have been the preferred method for investors to achieve access to alternatives, accounting for 57% of alternative investments, according to new research from Cushman & Wakefield, with an average value of £276m across the decade. Of the total investment volume, London accounted for 40% of investment and the favoured asset has been hotels – which have accounted for 43% of overall volumes across the UK.

Cushman’s analysis continues tomorrow.

james.wallace@realassetmedia.com