In the report, Cushman identifies the confluence of factors which have supported the allocation to alternatives, including hotels, student living, residential, healthcare, data centres, self-storage and car parks. These are:
- Lower for longer. Today’s low-yield environment makes finding high-quality, long-term income difficult, prompting investors to try new asset classes and strategies to meet their requirements. A recent survey by Bfinance found that 78% of 165 European investors had entered a new asset class or strategy in the last three years, with unlisted real estate one of the top choices. Indeed, real estate is in a better position to give investors the income they need than other asset classes, argues Cushman. The report states:
“Coming out of the financial crisis in 2009, the yields on student living, hotels and residential might have made them less attractive than the main property types. But in recent years, competition to buy into the main property types has been fierce. Average net yield ranges for all property types have settled around 5-6%, with prime yields between 4-5%. Now, these low-yielding alternatives look competitive based on the income they can deliver.”
- Long income. Institutions have increasingly invested in long lease-backed real estate to match long-dated liabilities. This steady, reliable rental income can be an attractive alternative to bonds with similar credit risk and often has a link to inflation, explains Cushman. However, finding properties with leases long enough to be a suitable match to liabilities is difficult. New leases signed in 2018 for commercial property averaged seven years, with 48% of leases being five years or shorter. The average lease length has shortened so much that liability-driven investment can no longer rely on properties with standard leases. Cushman explains:
“Today, long income investment is for specialists. Sourcing suitable assets needs experience, and good relationships with owner-occupiers can help originate deals. As a result, institutions often invest in dedicated long income real estate funds.
“Owner-occupiers of hotels, student accommodation, healthcare, as well as housing associations, have looked to free-up capital locked in their real estate portfolios. In turn, this has expanded the universe for institutional investment and increased investment in alternative real estate.”
- Gaining control. While long leases might suit some investors, they might hinder others wanting higher returns, says Cushman. For such investors, taking on operational responsibilities is another strategy – one rising in popularity.
“By buying, or taking a stake, in the company that manages the underlying real estate, investors can align interests all the way through to the end-users of the properties. Partnerships and joint ventures are other ways to combine capital and expertise, but with a more limited remit for a definite period.
“Further, investors can increase cashflow through platform growth and efficiency gains. The ability to control a platform provides more flexibility than buying individual assets and being a passive owner.”
- Driving demand. Real estate investors have always taken long-term positions on secular trends. Cushman explains:
“In the 1980s, the growth of the service industry, especially financial services, was the bet – the net share of GDP from financial services rose from 6% to 13% in this period.
“The UK’s ageing population, the increase in international study, and the increased tendency to rent rather than buy homes are the next secular trends. In addition, the growth in data creation and storage looks set to boost data centre demand, while self-storage needs are strongly linked to the increase in people renting accommodation.
“Changing demography, technology and lifestyles are the domestic catalysts. These diverse demand drivers are putting current supply under strain and new development is struggling to keep pace.”
Cushman’s analysis continues tomorrow.