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How ‘alternative’ became ‘core’ in property investment

Near zero interest rates and ultra-loose monetary policy have had a ‘profound’ effect on commerical property investment, according to Royal Institute of Chartered Surveyors.

 
How ‘alternative’ became ‘core’ in property investment
 

Near zero interest rates and ultra-loose monetary policy have had a ‘profound’ effect on commerical property investment, according to the Royal Institute of Chartered Surveyors (Rics), which has warned investors not to forget the hard lessons of the financial crisis.

While commercial property transaction volumes were subdued in the years following the credit crunch, the turnaround was so great that by 2015 the global level of activity had climbed back to ‘within a whisker of its pre-global financial crisis high’, said Rics chief economist Simon Rubinsohn.

Investors have understandably been attracted by the property recovery and rental income in a low-yield world with demand outstripping supply in prime locations.

‘Property in many major markets is now trading on yields well below historic averages and in some cases, close to all-time lows,’ said Rubinsohn.

As confidence in the property market grows, investors have placed more money into international real estate markets and domestic markets have become global.

As a result there has been a shift in what are considered to be ‘core’ property investments, Rics said in a report of real estate investment managers .

‘Beyond returns, property use classes are also changing, and with it the definitions of what is ‘core’,’ it said.

One interviewee noted that student housing used to be seen as an ‘alternative’ investment a few years ago but is now being treated as a traditional property investment. Global investment in student housing has more than doubled from $3 billion in 2007 to $7 billion in 2015.

‘Investment managers are seeing stronger demand from their investors to move into these alternative assets,’ said the report.

‘Compressed yields in other parts of the market appear to be accelerating the move to alternatives. And the competitive environment means it can’t be ignored that some investors will likely take higher risks by moving into alternatives without first establishing in-house expertise.’

While new alternative property investments, such as data centres and hotels, provide new opportunities for investors the fast pace of change in the global real estate market is also presenting risks.

Of most concern to investment managers were changing occupier habits, with the introduction of co-working, flexible spaces, and the rise of Airbnb-style models.
‘As a result, leases are becoming shorter and more flexible, with covenant strength being tested in new ways,’ said the report. ‘For investors, the opportunity to acquire assets with long-term tenants in place is becoming less prevalent.’

It is not only the types of lease that are changing, but also where businesses are renting office space. Corporate occupiers are increasingly moving outside of central business districts in order to lease space that offers more flexibility and local amenities and leisure facilities for staff.

‘This is having an impact on the risk profile of some older, built-up central business districts,’ said the report.

While there are a number of new challenges for property investors, there are also the long-standing one of getting accurate valuations of properties both in rising and in falling markets, because of the time lag between transactions being agreed and completed.

‘This can be particularly challenging for investors looking for exits during times of volatility,’ said the report.

The Rics report encourages a great focus on risk management, including benchmarking data, consistent bases for property market data, and sharing of best practice within the industry and with younger employees to ensure the mistakes of the past do not happen again.

‘The real estate investment management business has been accused in the past of making long term investments with short term memories. The increased focus on risk management...will hopefully be the start of addressing this criticism,’ commented Philip Barrett, global chief investment risk officer at PGIM Real Estate, in the report.

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