Cushman: the alternatives ranked by investment share in the UK

However, investment in residential is growing rapidly as institutions add housing to their portfolios. In 2018, UK residential was 8% of all investment, which compares to around 2-3% of total investment on a 10-year average, according to Cushman.

Car parks, data centres and self-storage are small, but can produce big deals. For example, the bump in data centre investment in 2016 was largely down to the UK portion of Equinix’s takeover of TelecityGroup, estimated at £933m of the £2.6bn total.

Figure 3 above shows there is not a distinct break in volume sizes between offices, retail and industrial versus the rest. Dividing these property types into two groups, mainstream and alternative, based on investment volumes would, therefore, be subjective. Cushman explains:

“Beyond liquidity, typical asset values, or lot sizes, are also important. Assets need to be a suitable size for the investor’s portfolio. Buying large assets can concentrate an investor’s capital in too few investments and undermine diversification. Meanwhile, investing in small assets could be inefficient and unnecessarily increase transaction and management costs.

“Typical lot sizes can vary by location, especially between London and the rest of the UK. And London can be a large part of the total stock. Residential investment shows a high share of London investment, although the lot sizes are large across the UK. Hotels and student living offer a similar profile to office deals – London is a key part of the market, London’s lot sizes are large, and assets are far smaller in the regions.

“Car parks stand out in a similar fashion, but fewer London assets transact. Those that did were high value (average of £37m) thanks to strong incomes, high land values and some had potential for redevelopment into other valuable uses. At the other end of the scale, healthcare and self-storage are like industrial based on these characteristics – regional investment dominates, and lot sizes are small.

“Buying individual properties is one of many routes to real estate ownership. Portfolio deals, either buying the assets directly or buying the entity that owns the assets, are an especially popular entry point into alternatives.

“Managing alternative real estate needs specialist knowledge. Investors usually need to expand their asset management teams or use specialist partners. Buying portfolios can give immediate access to these specialist management teams. A portfolio also creates a large platform in keeping with the steep costs of investing in a new property type for the first time. And with a platform in place, subsequent asset-level purchases would benefit from economies of scale.”

Cushman’s analysis continues tomorrow.

james.wallace@realassetmedia.com