Alternative property assets are on course to capture a record share of Europe’s commercial real estate transactions this year after data centres and retirement homes bucked the general trend of falling investment volumes, according to Real Capital Analytics (RCA).
A total of €30.1 bn of hotels, student residences, retirement and care homes, healthcare facilities and data centres exchanged hands in Europe during the first 11 months of 2016, RCA estimates, based on provisional data for completed deals. This represents 15% of all the transactions of income-producing commercial real estate that completed in the period and is 2% more than the alternative sector’s market share for all of 2015.
'For the past two years specialist operators and investors have been building platforms of scale in niche markets that offer growth opportunities, attractive returns and exposure to different macro-trends. We expect this momentum to continue in 2017 and for the hotel sector in particular to establish itself as a regular feature in the real estate portfolios of institutional investors,' commented Tom Leahy, RCA’s director of EMEA Analytics.
Higher yields
RCA’s analysis of transaction pricing shows that alternative property assets exchanged hands at a median yield of 6.5% compared with 5.9% for offices, the most actively traded real estate sector in Europe.
'The higher yields generated by alternative property reflect some of the additional tenant risk and relative lack of liquidity in alternative sectors versus the core segments of the market,' added Leahy. 'Another risk is that these properties may be purpose-built, notably in the field of healthcare, and would require significant capital expenditure for conversion into other usage. The quid pro quo to this is that tenants are generally happy to sign long-term leases.'
While data centre transaction volumes increased four-fold year-on-year to €5.6 bn, investor attempts to capitalise on Europe’s ageing population saw care homes attract €4.9 bn of transactions in the year to 30 November, double the investment volumes of all last year.
Brexit effect
This ensured that while overall investment in the alternative property sector was weaker than 2015, the decline was less pronounced than for income-producing commercial real estate as a whole.
RCA said that performance should also be assessed in the context of the reduced appetite for investing in the UK, Europe’s largest market for alternative property, following the June 23rd referendum vote to leave the European Union.
'Prospects that interest rates in Europe will remain low for a while longer mean that investors looking for income will increasingly look to the alternative property sector, which can offer attractive income returns, the benefit of diversification and the possibility of counter-cyclical performance,' noted Leahy. 'We expect this pattern to continue in 2017 as more capital flows into the niche sectors that some significant players are seeking to transform through the consolidation of these often fragmented and local markets.'