Investors see long-term value in alternative assets

As mainstream options appear less attractive, investors are increasingly turning to the likes of student accommodation, healthcare and hotels.

Mainstream investors are turning in growing numbers to alternative asset classes as part of a broad acceptance of real estate becoming a service industry rather than simply a bricks and mortar investment, according to Emerging Trends Europe.

Industry leaders believe that the likes of healthcare, hotels and student accommodation offer the best prospects for 2017, and 44 percent now say they would like to invest in such sectors, an increase of 16 percentage points over the previous two years.

Though the volume of capital flowing into alternatives is relatively low, real estate is nonetheless approaching a tipping point when nearly half of European industry participants want to venture beyond the traditional asset classes.

Diversification and stability

Alternatives certainly offer a measure of diversification and stability of income returns when mainstream real estate looks expensive and vulnerable to economic and geopolitical uncertainty. The true significance of this shift of capital, however, is that it appears to be a long-term rather than cyclical trend.

During the last cycle, investors went into alternatives due to the yield premium over offices, retail and logistics. But the search for higher yields is only the fourth most common rationale cited in Emerging Trends Europe’s survey, behind stable income returns, diversification and demographic drivers. The latter is top of the list by some margin, with 69 percent of respondents wanting to take advantage of the fact that alternatives, by and large, reflect how society is changing.

For those already active in alternatives, hotels lead the way. Not far behind lies student housing, which is destined to be the leader in 2017. Of the respondents considering investing, developing or lending to alternatives in 2017, 61 percent favour student housing and 51 percent hotels.

What is more, the interest in student housing is broadening. Not so long ago, it was seen as a viable sector mainly in the UK and perhaps Germany. This year, interviewees from Portugal and Spain to Central and Eastern Europe and the Nordics are all talking up its benefits.

Student accommodation is just one of several forms of housing that the industry believes offer the best investment and development prospects in 2017 – overshadowing mainstream commercial sectors, with the exception of logistics.

Notably, there is new-found interest in social and affordable housing. Such housing was once regarded as dull and too troublesome by institutional investors but at times of prolonged low interest rates and modest returns, it is evidently seen in a new light.

The pressures created by urbanisation and affordability, meanwhile, have boosted the investment potential of the private rented sector (PRS). As one fund manager claims: “You’ve never had such a good opportunity to build a pan-European residential portfolio than now. Residential is performing a very prominent role for investors because the cash-flow security in this sector is one of the highest you can achieve with real estate investment.”

Operational risk

Demographic trends, meanwhile, have helped enhance the investment prospects for healthcare although there is acknowledgement, too, that the long-term benefits must be balanced with operational risk in such sectors. “Investors forget at their peril that they need good asset management procedures in place to get the return,” says an investment banker. “It is not an asset class you can just sit on.”

Another global investor warns: “Undoubtedly we will see an expansion towards alternative property investments. Investors have to be careful because there’s a propensity to underestimate operational risk but fall in love with the yield.”

For a growing number of fund and asset managers canvassed by Emerging Trends Europe, however, alternatives represent a risk worth taking. “Investors have just got to get their minds around real estate becoming a more operational asset rather than just as a lease,” says one.