Alternative assets have long been regarded as those that fall outside of a typical investment portfolio. Fine wines, art and other ‘treasure assets’ are considered ‘alternative’. Alternative assets are often hard to value and tend to be less liquid than traditional financial investments.
Traditionally, real estate has been regarded as an alternative asset, but within real estate itself, there is a diverse range of asset types. Some of these are considered mainstream, such as residential property in London. Meanwhile, alternative real estate assets include Micro Living, Purpose Built Student Accommodation and Care Homes. Some of these ‘alternative’ real estate sectors are now gaining mainstream attention due to their attractive yields and growth.
Yield compression and increasing competition for the best assets are making acquisitions in mainstream markets increasingly challenging. This has led more firms to start looking into ‘alternative’ real estate assets, in a bid to achieve their target returns.
What is considered an ‘alternative asset class’ in the world of real estate?
From the United States’ perspective, Healthcare and PRS buildings are well established institutional sectors. They have provided steady growth and returns for many years whilst Micro Living is supported by dedicated REITS and is an established asset class in its own right.
In Europe, the term is used somewhat broadly, encompassing such segments as Student Accommodation, Private Rental Sector (PRS), Hospitality, Care Homes, Data Centres, Micro-Living and Healthcare.
To take a view from the UK, Purpose Built Student Accommodation (PBSA) is now firmly establishing itself as a mainstream asset class, with strong yields in excess of 6% and a sustained undersupply to the market. Care Homes are well established whilst PRS is in its infancy.
However, German real estate, one of the most coveted asset classes in the European market, is considered entirely ‘alternative’ here in Asia. It is hard to understand why, especially considering that in 2016, as reported by JLL, mainstream German real estate investment totaled nearly EUR53bn, whilst the recognised ‘alternative’ real estate sectors such as Care Homes, Student Accommodation etc., benefited from over EUR7bn. This represents a significant (missed) opportunity for investors from this region.
To risk oversimplifying, ‘alternative assets’ could therefore be interpreted as being whatever investment asset a particular nation/region is unfamiliar with.
In Europe last year, a popular destination for outbound capital from Asia, RCA analysis shows that assets in the alternative real estate sector exchanged hands at a median yield of 6.5%, whereas the office sector, Europe’s most active, was at 5.9%.
The RCA asserts that over the last few years “specialist operators and investors” have been “developing platforms of scale in niche markets” and it is these segments that offer the greatest growth opportunities.
What are the Most Efficient Ways of Entering Alternative Overseas Real Estate Markets?
To enter a new market or new sector as efficiently as possible requires the investor to be willing to partner with a local expert. What may seem alternative in one market is mainstream in another.
In Hong Kong, where Fifth Element is headquartered, the Office, Retail, and Hospitality sectors are well-trodden paths. Many Family Offices and PE firms have established themselves through these sectors and have generated significant wealth, however, with growth slowing, they are faced with a challenge/opportunity paradox: the challenge to achieve higher yields and diversify into a new, unknown, sector versus the opportunities rewarded to those ‘early adopters’.
The natural choice is to enter into a joint venture, allowing the investor to diversify efficiently into a new sector, whilst simultaneously minimising risk.
For the clients of Fifth Element, Offices remain a core product, with solid NIY’s of 4%-6% achievable across our key markets.
Alternative assets, however, represent a significant, and growing, portion of our demand. UK Student Accommodation is very popular amongst our Singaporean investors whilst Healthcare is very attractive to mainland Chinese pension funds. Hotels are also increasingly popular, regularly appearing in institutional portfolios.
With a network of professional operators across multiple sectors, we enable our clients to enter new markets seamlessly and swiftly by working with our local partners, fulfilling (and often exceeding) yield targets whilst delivering diversification into the next generation of real estate assets.
Micro Living, PBSA and Care Homes are only as alternative as the individuals’ perspective, yet the yields and growth are gaining mainstream attention.
The Fifth Element outlook for 2017 is thus concluded on the basis that to meet the challenges of today’s competitive markets, a re-evaluation of what is considered alternative and what is considered mainstream can make a significant contribution to achieving targets.