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The Continuing Rise of Alternative Investments

Rising interest in alternative assets has been a prevailing trend over the last five years. Many now see student accommodation as a mainstream asset class – with nearly £6bn of investment last year. Meanwhile, the emerging build-to-rent sector will also receive its first tenants this year as schemes by Essential Living, Westrock and HUB open to the public.

Service stations, data centres and other such assets blur the lines between property and infrastructure. And what’s clear is that as investors continue to diversify from retail, office and industrial property, more opportunities will arise.

Since 2003, investment in alternatives has increased from 4.2% to 11.3% of investors’ property allocations.

In its 2015 report, ‘What Constitutes Real Estate for Investment Purposes? A Review of Alternative Assets’, the Investment Property Forum (IPF) said that since 2003, investment in alternatives had increased from 4.2% to 11.3% of investors’ property allocations. Many funds, such as L&G, have predicted this will rise to 20%.

The Risks of Diversification

Most investors agree that diversification is increasingly important for success. This is one of the main drivers of the increasing appetite for alternatives. But it isn’t without risk.

Although the office sector historically displays far more volatility than sectors more dependent on demographics and social factors, such as student housing, as an asset class, it is well understood. The lot sizes are also huge which makes them attractive for institutions who see little benefit in smaller scale transactions. This lack of stock has been one of the key barriers in establishing the Build to Rent sector, for example.

Unlike niche assets – such as marinas – the market for prime office or retail is also relatively liquid. That said, one of the biggest portfolios of marina changed hands last May when the Wellcome Trust acquired Premier Marinas from BlackRock for an undisclosed sum.

Irrespective of whether it’s a hotel, housing block or leisure park, operational risk is a much higher consideration across alternatives.

The IPF’s report said it was “a major distinguishing feature of alternative real estate assets” and indeed, it stands to reason that an office block rented in its entirety as a single bank will be simpler in many respects than a student housing block with 300 beds. Indeed, the skill sets for managing operational risk are entirely different from traditional asset management. This is why many investors – such as Round Hill and M3 Capital Partners – partner with premium operators who specialise in managing the company at the end of the chain.

The boundaries between operators and their investors routinely crossover. Yet the skill sets and management structures employed have a crucial role to play in defining just how much risk is acceptable.

Protecting Against the Risks

From an insurance perspective, there is an increasingly sophisticated market for protecting both the operational risk and the development or construction risk of alternatives.

Looking at insurable risks from a property owner’s perspective, insurers are generally comfortable with alternative asset classes as long as there is a clear dividing line between the operator’s and owner’s exposures.  For example, faced with student accommodation, insurers operating in the specialist real estate arena would expect any risks associated with the provision of pastoral care, leisure facilities and anything similar to be catered for under an operator’s policy.

Clearly, a high level of due diligence, focused research and market benchmarking is essential before entering new territory. But as demand drives up investment in new areas, the knowledge-base and familiarity we have will only grow. It’s worth remembering for instance, that retail parks never existed before the 1980s. Could there be a more familiar experience for many than a Sunday-morning drive to a local DIY emporium?

1 Comment

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