The prospects of going ‘alternative’
Alternative assets are rapidly becoming ‘must have’ centrepieces in many global property portfolios due to their high returns, long-term leases and barriers to entry, says an Auckland CBD property specialist.
Colliers International investment sales broker, Simon Felton, says the global market for alternative asset investments has experienced enormous growth over the last few years.
As a result, many traditionally overlooked asset classes are becoming increasingly more mainstream.
“Alternative assets are highly specialised property assets that have been designed to fulfil a specific need within a sector,” says Felton.
“Anything that is different to standard office, retail or industrial products can be considered an alternative asset.”
The most widely recognised alternative assets are hotels, with the broad term also covering infrastructure, student housing, datacentres, retirement villages, healthcare, self-storage and other specialised property types.
“Why has this happened? Quantitative easing measures that were intended to protect the global economy following the 2009 GFC ended up flooding capital markets with cheap, available debt,” says Felton.
“Even though capital became much more readily available, asset managers were still required to meet performance related targets that were the same as, or better than, previous years. This environment created a culture of ‘yield chasing’ whereby companies were more willing to take on riskier assets to fulfil their investment mandates.
?This process led to a re-pricing of alternative asset classes across the board.”
Felton says that in a commercial property market where demand is rapidly increasing, alternative assets can start to become very attractive.
“These assets normally have barriers to entry which can create competitive advantages,” he says.
“Barriers to entry can include higher than average build costs, highly specialised fit out or design requirements and restricted land supply. These substantial upfront costs can help to protect original investment capital and reduce competition.”
Larger buyers are considering this sector because of demographic demand drivers, followed by stable income return, diversification and higher yields.
The Urban Land Institute’s
2017 survey on emerging trends in European real estate, co-authored with PwC, found
44 per cent of real estate industry leaders were interested in investing in alternative assets.
Of those active in alternatives, hotels were the top choice (26 per cent), followed closely by student housing (23 per cent), retirement/assisted living (12 per cent), healthcare (11 per cent), shared/serviced offices (9 per cent), data-centres (6 per cent), and self-storage (3 per cent).
The survey found student housing has been identified by asset managers as the class that they are most interested in acquiring moving forward.
“These assets often come with long head leases to the universities, and can often be purchased at higher yields compared with more generic asset types,” Felton says.
“This can make them attractive to offshore buyers as they may be viewed as more of a passive product. Due to this, the sector is deemed to have a very low-risk profile.”
Felton says New Zealand has already witnessed some flow-through of this demand, with numerous developments in the Auckland CBD.
“Several B and C grade office buildings in the Symonds Street learning precinct having been repurposed for a student accommodation use,” he says.
“Student accommodation developments are becoming increasingly common among development consent applications.”
With investors now looking to more unconventional avenues to generate higher returns, Felton says there are obvious dangers that need to be priced in accordingly. “History has shown that rapid rises in demand can lead to over-speculation.
“Some large buyers are investing in asset classes that they have had no previous experience in purchasing and/or managing, which produces its own unique set of challenges.”