Research (Professional Only)
What's the alternative: five reasons to move away from the mainstream
Investing in alternative property is not a new idea; the composition of the UK property market has always been more than just a commercial trio of offices, retail units and industrial assets.
1 July 2014
Investing in alternative property is not a new idea; the composition of the UK property market has always been more than just a commercial trio of offices, retail units and industrial assets. From students to seniors and bowling alleys to bingo halls, exposure to a tenant base outside of the mainstream has never been completely off the radar of institutional investors. This paper makes the case for investing in these assets and outlines five reasons for why investors should look to move away from the mainstream.
Investors have been rewarded by long-term outperformance
Demand for alternative property assets from institutional investors has increased over the last 25 years, with the weighting towards ‘other’ in the IPD Annual Index rising steadily from 1% in 1988 to reach 8% in 2013. Historically, those prepared to take on the additional risk inherent in these assets have been rewarded with outperformance. As illustrated in Figure 1, total returns from the sector have exceeded the market average over three, five and ten years. The absence of any yield impact illustrates how performance has predominately been derived through the market fundamentals of income and rental growth as opposed to a shift in pricing.
The alternative market underperformed the all property benchmark in 2013 (total return: 8.9% v 10.7%) as investor sentiment towards the core sectors improved, overseas capital targeted London assets and the recovery continued in the mainstream occupier markets.This is clearly reflected in the re-pricing of the commercial sectors, where the average equivalent yield ended the year at 6.66%, down from 7.01% at end 20121
We believe that over a medium and long-term horizon alternative properties should outperform once again, particularly on a risk-adjusted basis. Detailed below are five reasons why this dynamic and diverse sector should be on every investor’s radar.
1. Alternatives are not as risky as you think they are
Investing in any property market exposes the purchaser to a range of risks, such as obsolescence, over-renting and illiquidity. Whilst there is additional due diligence required on alternative assets, such as the regulatory requirements of a medical centre or the reputational risk associated with a care home, the fundamental drivers behind this sector make it less risky than it would first appear.
Perhaps of most interest to prospective landlords is the stability of the rental cycle, which is a result of exposure to demographic and social structural forces that make the sector counter or even anti-cyclical. The alternative tenant base is largely composed of GPs, students and care home residents and thus is relatively decoupled from the usual economic drivers that fuel, and reduce, demand for commercial property. In addition, the latest economic cycle has also engendered long-term behavioural changes that have benefitted the sector. For example, in the face of fiscal austerity there has been increased footfall at local leisure attractions and chain restaurants as consumers economised on luxury goods and services. This is illustrated in Figure 3 where rental values did not depreciate to the same extent as recorded in the commercial sectors during the latest downturn.
The ability of the alternative sector’s rental cycle to withstand economic fluctuations ultimately feeds into the stability of investment performance. This can be seen in Figure 2, where the volatility of returns from different groups of alternative assets is lower than those from traditional commercial property. Returns from student accommodation, GP surgeries and care homes all exceed the all property average and are closer to the y axis, providing more consistent – and thus less risky - returns. Whilst the performance histories for the segments are relatively short compared to the core markets, we do not believe this is just a statistical anomaly.
1 Annual Digest 2013’. IPD, 2013
The views and opinions contained herein are those of Eleanor Jukes, Senior Property Research Analyst, Schroders and Nick Barker, Head of Alternatives, Property, Schroders and may notnecessarily represent views expressed or reflected in other Schroders communications, strategies or funds.
For professional investors and advisors only. This document is not suitable for retail clients.This document is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Schroder Property Investment Management Limited (Schroders) does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. This does not exclude or restrict any duty or liability that Schroders has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Schroders has expressed its own views and opinions in this document and these may change. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions. Use of IPD data and indices: © and database right Investment Property Databank Limited and its Licensors 2014. All rights reserved. IPD has no liability to any person for any losses, damages, costs or expenses suffered as a result of any use of or reliance on any of the information which may be attributed to it. Any forecasts in this document should not be relied upon, are not guaranteed and are provided only as at the date of issue. Our forecasts are based on our own assumptions which may change. We accept no responsibility for any errors of fact or opinion and assume no obligation to provide you with any changes to our assumptions or forecasts. Forecasts and assumptions may be affected by external economic or other factors.Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them can go down as well as up and may not be repeated. Issued by Schroder Property Investment Management Limited, 31 Gresham Street, London EC2V 7QA. Registration No. 1188240 England. Authorised and regulated by the Financial Conduct Authority. For your security, communications may be taped or monitored.
Important Information: The views and opinions contained herein are those of Schroders’ Investment team, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a reliable indicator of future results. The value of an investment can go down as well as up and is not guaranteed. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Schroders has to its customers under any regulatory system. Regions/ sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The opinions in this material include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change. UK: Schroder Investment Management Limited, 31 Gresham Street, London, EC2V 7QA, is authorised and regulated by the Financial Conduct Authority. For your security, communications may be taped or monitored. Further information about Schroders can be found at www.schroders.com US: Schroder Investment Management North America Inc. is an indirect wholly owned subsidiary of Schroders plc, a SEC registered investment adviser and is registered in Canada in the capacity of Portfolio Manager with the Securities Commission in Alberta, British Columbia, Manitoba, Nova Scotia, Ontario, Quebec and Saskatchewan providing asset management products and services to clients in Canada. 875 Third Avenue, New York, NY, 10022, (212) 641-3800. www.schroders.com/us